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based on the indisputable fact that their assets reflect, in the case of many policyholders, more than a liberal minimum provision for life insurance needs; the excise tax is levied only on the capital stock of corporations for profit, and does not affect purely mutual companies. From neither of these levies is there any logical escape. The income tax on individuals presents the weak side of the law in its most pronounced form. It offers no relief from the tax for income spent on insurance and annuities and thereby fails to give desirable encouragement for supplying these socially important needs; and in the relief which it grants to persons in receipt of the proceeds of insurance policies it violates the necessary distinction between large and small incomes, and opens the way for evasion of taxation by persons of wealth who invest large sums in insurance or annuity contracts.

State taxes are equally unscientific in their incidence on life insurance. The easy solution, to allow the states to collect taxes equal to the cost of supervision and to retain all general taxation for the federal government, neglects the fact that the states are already taxing the companies in amounts far greater than the cost of supervision, that they will not relinquish their present hold on the companies, and that they are performing general governmental functions in only lesser degree than the federal government. It would be desirable, were it possible, for the states to confine license, premium and asset taxation to the payment of supervision costs and to use income and inheritance taxes for general taxation purposes. This would give greater opportunity than exists under the present system to introduce scientific tax methods.

THE TAXATION OF LIFE INSURANCE IN ENGLAND

English practice in the taxation of incomes furnishes points of contrast and points of similarity to the situation in the United States. Life insurance companies in England are taxed upon their "profits or gains" and these may be assessed upon "trade profits" or upon interest on investments. The Crown has the right to elect under which method to assess, and usually selects the latter as most profitable because of the large reserves held. The assessment on trade profits is, of course, possible only with stock companies, since the members of mutual companies do not trade between themselves. Trade profits may include the dividends paid on participating poli

cies, but where the tax is levied on the investment income of a mutual company no part of the surplus accruing from premiums is taxable (Last v. London Assur. Corp'n 1885, 10 App. Cas. 438; Equit. Life Assur. Soc. of U. S. v. Bishop 1900, 1 Q. B. 177; New York Life Ins. Co. v. Styles 1889, 14 App. Cas. 381). The English method of taxing the income of companies is thus similar to the American, with the exception that the latter does not tax dividends in any case.

The English law furnishes its great contrast to ours in the method of taxing individual incomes. In addition to complete relief for incomes under £130 and a sliding scale tax for incomes from £130 to £700, an allowance is made for life insurance premiums. It covers annual premiums paid by the insured for insurance or deferred annuities on his life or the life of his wife; and the annual sums paid by a person or deducted from his salary under any act of Parliament for a deferred annuity for his widow or for provision for children after his death.. Three limits are set to the amount of income thus exempt from tax-premiums up to one-sixth of his income; premiums up to seven per cent of the sum insured; and premiums not totalling more than £100. The last two limitations form part of the Finance Act of 1915. With complete personal exemption for all incomes up to £130, the English Act thus allows additional relief to £100, if spent on necessary life insurance protection. The method of relating this relief to needs (covering protection to self, wife or dependent children) is noteworthy. Were the American Act to do the equivalent, on the basis of the $4,000 exemption for married men, it would enable them to spend nearly $3,100 more in insurance premiums before they were taxed.

The term "annuity" is used with many different meanings in the English Act and in court decisions. Thus annuities purchased are distinguished from annuities by will or settlement, or annuities in the nature of a pension. The latter two classes are taxed to their full amount as income. The word "annuity" in the former case is sometimes used in an ambiguous sense: it may represent the repayment of a debt by installments, or the conversion of capital into income. In a much quoted decision in which this distinction is made, this statement appears: "An annuity, in the ordinary sense of the word, means the purchase of an income. It generally involves the conversion of capital into income, and reasonably enough, when the buyer places himself in that position the act taxes him; he is

taken at his word, he has got an income secured in the way mentioned."9 This decision unquestionably covers annuities purchased from life insurance companies, and in conformity with it, such annuities are taxed in England in the same way as other income.

In its taxation of personal incomes the English law thus stands in striking contrast to our own; for it allows the holders of large annuity contracts no opportunity to evade their just share of tax burdens, and it tends to encourage the purchase of insurance protection by those who need it.

'Secretary of State for India v. Scoble 1903, 4 Tax Cas. 622, quoted from Pratt & Redman's Income Tax Law (ed. 1916), p. 156.

FIVE YEARS OF PROGRESS IN DISABILITY

PROTECTION

BY BRUCE D. MUDGETT, PH. D.,

Instructor in Insurance, Wharton School of Finance and Commerce,
University of Pennsylvania.

The disability clause furnishes one of the most astonishing developments of recent life insurance history. Its phenomenal success is indicative of a service rendered to policyholders of such real value that it cannot lightly be disregarded. It is perfectly true that novelties enter the life insurance contract, and the disability clause has been one; but many of the most substantial provisions of that contract have at some time been novelties. That they have endured proves them to have been of real worth. If this be the character of the disability clause, there must be a definite need for the protection it offers and it will be perfected until the insurance it furnishes is adequate. As a policy "trimming," its coverage has been more or less haphazard; in its more recent developments, however, there is discernible a tendency to make a sound insurance measure of it.

The risk of disability is just as real and the consequences of its occurrence may be as disastrous as death or old age. No man fully conscious of the hazards of life can safely undertake responsibilities which it will require years of income earning to satisfy without making provision by life insurance for the cessation of that income at his death, just as no sane man would think of operating a large industrial plant without fire insurance. Expressed in terms of its consequences, therefore, the hazard he faces is cessation of income. Now, income may stop because of death or old age; and it may also stop because of permanent and total disability. Still other disasters might overtake one and cause a cessation of earning power. For instance, there is sickness or unemployment. But because the last two are temporary in character they do not have the same importance as a catastrophe from which there is no recovery.

Since, then, the regular life insurance contract furnishes protection against the cessation of income through death or old age, the proceeds of life insurance should be available only when these

hazards occur, granted there is the necessary connection between needs to be satisfied and the amount of insurance carried. Disability protection to be adequate, therefore, should not encroach upon the "death fund," but should fill the income gap between the time of disability and the time of death. That protection of this nature is not furnished in any way outside of the life insurance contract is well known. The personal accident insurance companies give total disability protection but, with few exceptions, it is given in one-year term contracts, renewable only at the option of the insurer. A greater objection to these contracts is the fact that to obtain the required protection against loss of income by total disability it is necessary to purchase so many "trimmings" that the contract becomes top-heavy. With permanent disability protection there goes protection against death and against all sorts of temporary ills, many of them important, to be sure. The death coverage is a duplicate of the life insurance protection and the temporary disabilities are not in a class with the important permanent ones. Hence it is not surprising that the disability clause, which first appeared as a frill in the life insurance contract, has begun gradually to lose its decorative character and to take on the appearance of a real insurance measure.

The developments of the last five years are little short of phenomenal. The writer made a previous study of the disability clause, based on contracts used in 1912, which on the whole revealed tendencies of growth, but which in far too many cases revealed conditions uncomplimentary to life insurance. Many clauses were frankly adopted as talking points for agents; some were trimmings of such filmy character as to appear to offer much but give little; and a few, under the guise of benefits, actually took from the insured what was rightfully his at death.

In this short period of five years no less than twenty-six companies have revised their clauses, almost without exception for the better; and forty-seven entirely new clauses have entered the field. Of the latter, twelve are from companies organized since January 1, 1912, eight from those organized prior to 1870. That old, long established companies introduce the clause indicates that it has

1 "The total Disability Provision in American Life Insurance Contracts," Supplement to The Annals of The American Academy of Political and Social Science, May, 1915.

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