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 THE IMPROPRIETY OF TAXING 
 RETURNS TO LIFE INSUR¬ 
 ANCE POLICY-HOLDERS 
 
 BY 
 
 ROBERT LYNN COX 
 
 General Counsel and Manager Association of Life Insurance Presidents 
 
 
 
 An address delivered at the Twenty-sixth Annual Banquet 
 
 of the 
 
 BOSTON LIFE UNDERWRITERS’ ASSOCIATION 
 at Boston, Mass., February 16, 1909 
 

 
 

 THE IMPROPRIETY OF TAXING RETURNS TO LIFE 
 INSURANCE POLICY-HOLDERS 
 
 By Robert Lynn Cox 
 
 General Counsel and Manager Association of Life Insurance 
 
 Presidents 
 
 AN ADDRESS DELIVERED AT THE TWENTY-SIXTH ANNUAL BANQUET OF 
 THE BOSTON LIFE UNDERWRITERS’ ASSOCIATION AT 
 BOSTON, MASS., FEBRUARY 16, 1909 
 
 Whatever may be said in favor of having the general business 
 of this country conducted by persons instead of corporations, as 
 those who contend for a return to the methods of our forefathers 
 sometimes advocate, the argument falls short of being applicable to 
 life insurance companies. Their business can be conducted by cor¬ 
 porations only. 
 
 A life insurance company to perform the function for which it 
 contracts with every policy-holder must outlive all of its policy¬ 
 holders. Its life must not be contingent upon any human life or 
 group of human lives, for ultimately they must end. Being a corpo¬ 
 ration it may not possess a soul, but in a business sense it must be 
 immortal. It must be made not only legally immortal, but it must be 
 managed in a way to make certain that it will not fall a victim to any 
 of the diseases which lead to corporate death. 
 
 The insuring public wants to know that the life insurance com¬ 
 pany with which it contracts not only can live but that it will live 
 indefinitely. Life insurance contracts cannot be performed by corpo¬ 
 rations in process of dissolution. Bitter experience has taught us 
 this. 
 
 In order to make certain of its own life, a life insurance corpo¬ 
 ration should grow and expand. The very law of its being is the 
 law of average, and this cannot be brought into play except by 
 achieving a fair size and covering a considerable area of territory. 
 
2 
 
 Up to that point its business is speculative and its existence pre¬ 
 carious. 
 
 The needs of the business and its relation to the nation were 
 never stated in better form than by Judge Bradley of the United 
 States Supreme Court when he said: “The business of insurance par¬ 
 ticularly can only be carried on with entire safety by scattering tbe 
 risks over large areas of territory so as to secure the benefits of tbe 
 most extended average. The needs of the country require that cor¬ 
 porations—at least those of a commercial or financial character— 
 should be able to transact business in different States.” (Doyle vs. 
 Continental Insurance Company, 94 U. S. 535.) 
 
 But unfortunately insurance corporations were not within the 
 purview of the framers of our Federal Constitution, and failed to 
 obtain the interstate rights so carefully secured to the individual 
 citizen by that compact. Therefore, you and I as individuals are 
 guaranteed the right to do what you and I as a corporation may not 
 do. As individuals we would have the right to transact insurance 
 business in any State of the nation, if the nature of the business 
 made it practicable for us to do so. But as a corporation we may 
 not enter States other than that in which we are domiciled except 
 under whatever terms and conditions such foreign States may choose 
 to impose. This right on the part of foreign States to set up bar¬ 
 riers against the entry of insurance corporations has led to the im¬ 
 position of many onerous conditions, not the least among which is 
 excessively heavy taxation. To a consideration of this subject I 
 am assigned upon your programme to-night. 
 
 Let me state at the outset that I shall not attempt to discuss 
 it at length nor shall I speak of taxation by the several States of 
 their domestic life insurance companies. What I shall say will be 
 solely from the standpoint of foreign corporations, and, of course, 
 all of the large life insurance companies are foreign to most of the 
 States in which they do business. 
 
 By approximate uniformity of statutes, the tax imposed upon 
 foreign life insurance companies by the several States and Territories 
 is measured by premium receipts, either gross or after deduction of 
 various items therefrom. There is but one exception to the rule and 
 that is the exception afforded by the State of Massachusetts. Its 
 tax is based upon reserves. I see no reason to criticise the use of 
 premium receipts as the basis for measuring whatever tax the State 
 
3 
 
 may deem it equitable to impose upon foreign life insurance com¬ 
 panies, and since we have practical uniformity in this respect I would 
 like to see Massachusetts follow the example of the only Chinaman 
 who lived in a village in one of the Western States and who on 
 leaving it was said to have “moved to make it unanimous.” 
 
 Legislators have, I think, rather confused themselves by assum¬ 
 ing that the tax imposed upon foreign insurance companies is a tax 
 upon property simply because the language of the various statutes 
 professed to say that the tax was imposed upon premium receipts. 
 In every instance where the question has come before courts for 
 their determinations, they have held that no matter what the words 
 of the statute, the tax imposed on foreign insurance companies was 
 merely a franchise tax and that the nominal imposition of it upon 
 premium receipts was simply the use of those receipts as a measure 
 of the tax. 
 
 It therefore seems to follow that being a franchise tax and not 
 a property tax any convenient method of measuring it might be 
 adopted. I cannot see why the amount of the net premium receipts 
 within a State is not as fair a measure as any other. 
 
 Of course I would not dare to stand in this presence and 
 criticise severely any law of the State of Massachusetts, for I recog¬ 
 nize as clearly as you must that this State is and always has been 
 a leader in the matter of fair and intelligent supervision and regula¬ 
 tion of the life insurance business. Nor would I care to take the 
 position of the man who said that you “can always tell a man from 
 Boston, but you cannot tell him much.” I say merely that Massa¬ 
 chusetts stands alone in its method of taxing life insurance, and that 
 in the interests of uniformity I would bring Massachusetts over to 
 the position taken by some fifty other taxing jurisdictions rather than 
 bring the fifty over to the position taken by Massachusetts. Strange 
 as it may seen, I should regard it as being easier to do so. 
 
 I would have you understand that I complain of the franchise 
 tax imposed by the States upon foreign life insurance companies 
 largely because of the widely differing rates of the several States and 
 the enormous total of the tax. ^ 
 
 As you have been told repeatedly, the life insurance companies 
 of this country contribute annually toward the expenses of the several 
 State governments in which they do business an amount aggregating 
 about $11,000,000. In some States the tax constitutes the largest 
 
4 
 
 single item of the resources of the State. From the standpoint of the 
 companies the item amounts to almost as much as the entire salary 
 account of their home offices. 
 
 In view of the fact that life insurance consists merely of a dis¬ 
 tribution among the many of the financial loss caused by the death 
 of the few, there would seem to be many reasons why it should not be 
 taxed at all. As was said by Charles Sumner, many years ago, life 
 insurance is itself a tax and is none the less so because it is self- 
 imposed. It is not a business involving the creation of wealth with 
 possible profit to those who supply the capital, but is merely a method 
 of saving the helpless and dependent from possible want and penury. 
 
 But it must be admitted that the taxes imposed upon life insur¬ 
 ance companies are very widely distributed among the people of the 
 country, because of the number of policy-holders, and that perchance 
 the bearing of this burden to a reasonable degree is necessary and 
 as equitable as it would be to carry it in some other form. Further¬ 
 more, it is idle to protest when States have come to rely so largely 
 upon life insurance policy-holders for the support of State govern¬ 
 ments. It is doubtless more practicable for us to discuss a method 
 of improvement and a measure of partial relief that lies within the 
 bounds of accomplishment. 
 
 Belief in this policy has led the Joint Committee representing 
 the three associations of life insurance companies of the United 
 States and Canada to recommend that States which have hitherto 
 taken from policy-holders more than their fair share of tax money 
 shall reduce their toll to at least the average rate taken by all States. 
 The method they suggest brings into play an argument, the potency 
 of which is impressive. They ask that we be permitted to deduct 
 from our gross premium receipts of the year the returns we have 
 made to citizens of the State during the year under our policy con¬ 
 tracts. In other words, they ask for us the privilege of deducting 
 from our gross receipts death losses and other payments made to 
 policy-holders in order that the rate of taxation shall be applied to 
 the remaining net receipts. 
 
 There are many reasons for asking for this privilege aside from 
 the reasons which lead us to believe that taxation should be reduced. 
 In the first place the States, without exception, are committed to the 
 policy that the mere transaction of life insurance in its simplest form 
 should not be taxed at all. No State imposes a franchise tax upon 
 
5 
 
 the fraternal and assessment life insurance corporations whose busi¬ 
 ness consists merely in collecting and distributing each year money 
 enough to meet current death losses and the expenses of conducting 
 the business. 
 
 Though all States recognized the unwisdom of taxing the insur¬ 
 ance contract or transaction itself, they were led to do so by a desire 
 to reach the large accumulations of funds necessarily incident to pro¬ 
 viding life insurance on the level premium plan. That these accumu¬ 
 lations were represented by securities which were already taxed, 
 was a fact not generally known. Furthermore, the taxation of these 
 companies seemed to be encouraged by the belief that such com¬ 
 panies were temporarily, at least, depleting the taxable wealth of 
 the State from which premiums were being collected. In fact the 
 same argument is being used to-day not only in justification of taxa¬ 
 tion, but as affording a reason why foreign life insurance companies 
 should be required by statute to invest their reserve funds or a 
 considerable portion of them within the State. 
 
 Without stopping here to point out some of the fallacies of this 
 line of reasoning, nor the error of fact as to where such reserves 
 are invested now, let me suggest that whatever may be said in favor 
 of taxing the portion of the premiums which the law says must be 
 set aside and held as a reserve fund, there is no reason why the 
 portion of premium receipts which is returned to policy-holders at 
 once should be subjected to taxation or should be included within the 
 measure used to determine the amount of the tax. As to this portion, 
 there is and can be no distinction between it and the funds collected 
 and immediately distributed by fraternal insurance companies. This 
 portion of the transaction at least constitutes in effect nothing but a 
 transaction between citizens of the State. 
 
 In accordance with the basic principles of life insurance the 
 many policy-holders who continue to live, pay to the representatives 
 of the few who die the indemnity furnished by the insurance contract. 
 As this transaction appears from the standpoint of the State we 
 note first that there has been no withdrawal from the State of any 
 of its taxable wealth. No profits have resulted to any one, but, on 
 the contrary, there has been merely a wide distribution of an indi-, 
 vidual loss. From the economic standpoint the State is better off 
 because of this distribution of loss, for in cases where it is lacking 
 there is danger that the State itself may have to assume the burden 
 
6 
 
 of caring for those who are left without means of support or ability 
 to earn a living. For the State to burden the transaction with a tax 
 is to discourage that which its own interests require it to give 
 encouragement. 
 
 Should any one say that the method we favor might in some 
 cases permit a life insurance company to escape taxation altogether I 
 would reply that this can only occur if death losses and fulfilment of 
 other policy contract obligations require the company to pay into 
 the State within a given year more money than it is withdrawing 
 from it as premium receipts. And I would ask why should not a 
 company in this situation be exempted from taxation. I am sure 
 that most States would grant exemption under such conditions very 
 willingly. It is such a “balance of trade” that not only individual 
 States but nations are trying to bring about. If it be true that the 
 withdrawal and retention of the wealth of a State constitutes a 
 menace to its welfare, it must be equally true that the extent of the 
 menace is measured by net balances only. And if a balance against 
 the State is a matter of grave concern, why should not a balance in 
 favor of the State be a cause for congratulation and meet with an 
 appropriate reward? 
 
Gaylord Bros. 
 Makers 
 
 Syracuse, N. V. 
 PAT. JAN 21, 1908