Taxation Problems of Life Insurance

Abstract

The basic principle on which life insurance is founded is that of mutual co-operation. Many persons co-operate to assume and to share risks which the individual could not afford to bear alone. This cooperation takes the form of contributions to a common fund, from which claims are paid as they occur. In the modern form of life insurance the contributions are “level” and dependent chiefly on the age of the contributor at entry to the fund. Since the life insurance risk increases with increasing age it will be obvious that level contributions sufficient to meet all risks will more than suffice to meet the lighter risks of the early years and will be insufficient to meet the heavier risks of the later years. Accordingly, the early excess contributions must be accumulated in the fund to make good the later deficiencies. It is these excess contributions accumulated to meet the future risks that are invested and form the assets of the life companies. These assets are not the property of the companies in the commonly accepted sense of the word, but instead represent the accumulated savings of the individual policy-holders, to whom they are ultimately to be returned. The companies are simply acting as trustees or custodians of these savings, and, in common with other trustees, the assets in which these savings may be invested are prescribed and limited by law. There exists, of course, in most of our Canadian companies a shareholders' interest which, however, is small and of little account, while in the large American companies the shareholders' interest is entirely negligible or non-existent. Since the life insurance business is of a quasi-public nature there has developed a close government supervision over its affairs, with the result that the companies are subjected to regular extensive examinations and also are required to prepare and file periodically complete detailed reports of their business.