1939 BTA LEXIS 925">*925 While in good health and not in contemplation of death, decedent, who was then 80 years of age, and an insurance company on December 6, 1935, entered into two separate contracts, one a single premium life insurance policy for the face amount of $25,000 and the other a single premium life annuity. The decedent was not required to take a medical examination and the company would not have issued the insurance policy without the purchase by the decedent of the annuity. Both contracts were on the regular standard form used by the company in writing life insurance and annuities, respectively. The decedent died January 1, 1936, before any payments had become due on the annuity contract, and no payments were ever made by the insurance company to anyone with respect to that contract and upon decedent's death it had no further value. Upon proof of her death, the beneficiary named in the insurance policy requested the company to retain the face value of the policy under one of the modes of settlement provisions contained therein. Held, the amount of $25,000 receivable by the beneficiary represented "insurance" as that term is used in section 302(g) of the Revenue Act of 1926, as amended, 1939 BTA LEXIS 925">*926 and, not being in excess of the exemption of $40,000, should not be included in the decedent's gross estate. Estate of Anna M. Keller,39 B.T.A. 1047">39 B.T.A. 1047, followed.
39 B.T.A. 1134">*1135 The respondent determined a Federal estate tax deficiency in the amount of $3,875.29. The sole question is whether a certain amount of $25,000 hereinafter more fully described is includable in the decedent's gross estate under either subdivision (a), (c), or (d) of section 302 of the Revenue Act of 1926, as amended, or whether the amount is excludable under subdivision (g) thereof as representing "insurance" not in excess of $40,000 receivable by other beneficiaries.
FINDINGS OF FACT.
Cecile Le Gierse, a resident of New York City, hereinafter sometimes referred to as the decedent, died aged eighty years, seven months, and fifteen days, January 1, 1936, of paralysis or cerebral apoplexy, with which she had been stricken on December 24, 1935. Though she had had chronic arthritis for eight or ten years and had been taking treatment1939 BTA LEXIS 925">*927 for the latter since March 1934, she had never had a paralytic stroke before, and during the last few years of her life she had suffered no other illness or disease. The disease never reached the "acute" stage as distinguished from the "chronic" stage. Her physician had not attended her from March 1935 to December 24, 1935. In March 1935 her physical condition was reasonably good, her blood pressure normal for her age, and she was very cheerful. There was no connection between the arthritis and her death. Though she was very alert, she was not able to get out of her home much, was practically confined to it, for the last several years of her life by the arthritis, and she participated in no outside activity. She got about in the house with a cane. She never discussed with her physician fear of death. She had a musicale at her home on the 10th of December 1935 and a dinner on the 16th of December. She was herself in attendance at both affairs and appeared to be in excellent health and in good spirits. Another musicale was planned for the 28th of December, but the invitations thereto were recalled on the 26th of December because of her illness. During the summer of 1935 the1939 BTA LEXIS 925">*928 decedent had a conversation with a friend as to the necessity of moving her residence. It had been unofficially announced that her home, the Rockingham, would be condemned and the building torn down and she was wondering and talking about where she was going and was looking for an apartment. The building was torn down in the spring of 1936.
In the fall of 1934 she began to discuss life insurance with a friend who was an insurance agent. She was worried about her investments, 39 B.T.A. 1134">*1136 which she had seen dwindle from about $100,000 to about $25,000. She had Moody's statistical service and knew a great deal about her investments and spent a great deal of time in study. She was upset about the dwindling of her investments. She asked her friend if there was anything in life insurance whereby she could conserve her principal if she sold the securities and liquidated them for their value. She subsequently liquidated the securities, realizing between $25,000 and $30,000 from them.
On December 6, 1935, the decedent executed a contract with the Connecticut General Life Insurance Co. of Hartford, Connecticut, sometimes hereinafter referred to as the company. On its face the1939 BTA LEXIS 925">*929 contract was designated "Single Premium Life Annuity. Non-Participating." It was numbered 20348 and was on the regular standard form used by the company for writing annuity contracts. The material provisions were as follows:
CONNECTICUT GENERAL LIFE INSURANCE COMPANY * * * HEREBY AGREES TO PAY at its Home Office in Hartford, Connecticut: to CECILE LE GIERSE (hereinafter called the Annuitant) A LIFE INCOME OF Forty-Nine and 15/100 DOLLARS Monthly beginning on the 6th day of January, 1936, provided the Annuitant be then living.
The consideration for this contract is the application, a copy of which is attached hereto and made a part of this contract, and the payment in advance of the Single Premium of $4,179.00.
* * *
General Provisions. This contract and the application therefor constitute the entire contract between the parties and all statements made in the application shall, in the absence of fraud, be deemed representations and not warranties. * * *
Reserve. The reserve on this contract is based on the Modified American Annuitants' Tables with interest at the rate of 3 1/2% per annum.
The application for the contract was made by the decedent on December 6, 1935, and1939 BTA LEXIS 925">*930 was headed "Application For An Annuity Contract in Connecticut General Life Insurance Company."
On the same day that the annuity contract was executed, December 6, 1935, the decedent also executed a policy or contract with the company for the face amount of $25,000 which was numbered 478327 and was designated on its face as "Single Premium Life Policy - Non-Participating." The policy was on the regular standard form used by the company for writing life insurance policies, and among other things provided:
CONNECTICUT GENERAL LIFE INSURANCE COMPANY * * * HEREBY INSURES THE LIFE OF Cecile Le Gierse (hereinafter called the Insured) and agrees to pay at its Home Office in Hartford, Connecticut: Twenty-Five Thousand DOLLARS to Edyth Legierse, daughter of the Insured, if she survives the Insured, (hereinafter called the Beneficiary), upon receipt of due proofs of the death of the Insured during the continuance of this contract. The right is reserved to the Insured to change the Beneficiary from time to time as hereinafter provided.
39 B.T.A. 1134">*1137 The consideration for this insurance is the application, a copy of which is attached hereto, and made a part of this contract, and the payment1939 BTA LEXIS 925">*931 in advance of the single premium of $22,946.00.
This policy is issued and accepted subject to all the conditions and privileges set forth on the subsequent pages hereof, which are hereby made a part of this contract.
The "conditions and privileges" referred to in the preceding paragraph in so far as they are material to this proceeding are as follows:
Payment of Premium. The single premium is due and payable in advance * * *.
This policy shall not take effect until the policy has been delivered, and the single premium paid as above provided, during the lifetime and good health of the Insured.
Non-participation. This policy is not entitled to share in surplus distribution.
Incontestability. This policy shall be incontestable after it has been in force during the lifetime of the Insured for two years from its date of issue * * *.
Suicide. If within two years from the date of issue of this policy, the Insured shall die by his own hand or act, whether sane or insane, the liability of the Company shall be limited to the premium paid.
Rights reserved to the Insured. * * *
Beneficiary. * * *
Assignment. * * *
Loans. At any time during the continuance of1939 BTA LEXIS 925">*932 this policy the Company will loan, upon the sole security and satisfactory assignment of the policy and the execution of proper loan agreement, a sum which with interest shall not exceed the cash value at the next policy anniversary. Interest on the loan shall be at the rate of 6% per annum payable annually on each anniversary date of the policy. * * *
Cash Value. Upon legal surrender of the policy at its Home Office, the Company will pay a cash value of the amount set forth in the Table of Cash or Loan Values. * * *
General Provisions. This policy and the application therefor constitute the entire contract between the parties and all statements made in the application shall, in the absence of fraud, be deemed representations and not warranties. * * *
The policy contained a "Table of Cash or Loan Values" for each $1,000 of face amount for a period of 14 years as follows:
| Years | Cash Value |
| 1 | $782 |
| 2 | 816 |
| 3 | 862 |
| 4 | 871 |
| 5 | 880 |
| 6 | $889 |
| 7 | 897 |
| 8 | 905 |
| 9 | 912 |
| 10 | 919 |
| 11 | $926 |
| 12 | 932 |
| 13 | 937 |
| 14 | 942 |
The above values are based upon the American Experience Table of Mortality with interest at the rate of 3 1/2 percent per annum.
Policy No. 4783271939 BTA LEXIS 925">*933 further provided for four different options or modes of settlement at maturity. The application for the policy was made by the decedent on December 6, 1935, and was headed 39 B.T.A. 1134">*1138 "Part I of Application for Insurance in Connecticut General Life Insurance Company."
No physical examination was taken by the decedent, and the application for insurance did not answer additional questions to be answered when the applicant was a woman. The main reason given by the decedent for entering into the two contracts on December 6, 1935, was her desire to preserve the principal of her estate from further shrinkage, although the estate tax situation came up in the discussion between the decedent and the life insurance agent. The decedent knew a great deal about taxes and was getting practically no income from her investment in securities. One of the reasons and one of the factors for her action was to provide her daughter with cash to take care of estate taxes, but the primary factor was the conservation of the principal of her estate.
A regular form for proof of death was submitted and upon receipt thereof the proceeds of the life insurance in the amount of $25,000 were available to1939 BTA LEXIS 925">*934 the beneficiary, Edyth Le Gierse, although upon proof of death the company was requested by the beneficiary to retain the proceeds under one of the additional modes of settlement included in the life insurance policy issued.
The company treated the two contracts as separate and issued a separate receipt to the decedent as to each, for the amount above referred to. The company maintains separate reserves for insurance and annuities. The $22,946 premium paid for the life insurance policy was credited to the insurance account and the $4,179 paid for the annuity was credited to the annuity account. The company is required to report, to the state commissioner of insurance, insurance policies issued and canceled, also annuities issued and canceled, and the two contracts were reported under the two groups, one under life insurance and one under annuities. In computing the single premium paid for the life insurance policy, no adjustment was made for the amount to be received as a premium for the annuity policy. Likewise, in computing the amount charged for the annuity policy, no adjustment was made for the single premium to be received on the insurance policy. The company would not1939 BTA LEXIS 925">*935 have issued the insurance policy without the annuity, considering the age of the decedent. It would have issued the annuity contract without the insurance policy.
The reason the company would not have issued the life policy without the annuity is because it involves underwriting, and the older the person is, the more difficult it is. There is, however, the possibility of a combination which can relieve that underwriting problem. Such a combination is the single premium life annuity policy and the single premium life insurance policy which were written in the instant case. The amount payable by the insured as premiums on a combination of the two contracts depends upon the age of the individual. On the 39 B.T.A. 1134">*1139 average of a group of life insurance and annuity policies at the age of the decedent, the company would not pay out as principal an amount in excess of the amount of the premiums charged therefor. At the time of writing the two contracts it could be stated with almost certainty that upon decedent's death the company would pay out a maximum amount, including all amounts already paid out in pursuance of the annuity contract, less than the aggregate premiums charged1939 BTA LEXIS 925">*936 for both contracts; and the $49.15 monthly payment under the annuity contract was less than the amount of the return realized by the company on the amounts of the two premiums less expenses, taxes, and various charges in connection with the contracts.
The only way the decedent could have received any money under the life insurance policy during her life was to surrender it for its cash value or borrow on it under the terms thereof as in case of any other single premium life insurance policy of the same type.
The premium charged for the life policy was the actuarial equivalent of the rates charged people of other ages, and was determined on the same actuarial basis as would have been the premium for a person of another age to whom it would have been issued without having issued an annuity contract, but it could not be accurately stated that the premium charged was the regular schedule premium because the policy would not have been issued without the issuance of an annuity contract. On an actuarial basis, in the determination of premiums, the company must go by broad averages so far as mortality, expenses, etc., are concerned, and the regulation of the premium is on the same type1939 BTA LEXIS 925">*937 of broad averages as would be the case for any other ages. Insurance rates depend upon interest, mortality, and expenses. In a rate calculation, it is necessary to make a complete expense investigation, get a mortality basis to follow, and then try to anticipate what interest may be expected. The actuary must obtain the interest rate from the investment department. On a life annuity similar investigations are made with relation to interest, mortality, and expenses.
The highest age at which single premium ordinary life insurance is issued by the company without physical examination is 70 years. Group insurance would be written at any age. Physical examination is not required in certain types of life insurance policies. A person of 80 years has an expectancy under the American experience tables of about four or five years.
The decedent had no insurance on her life other than the contract with the Connecticut General Life Insurance Co.
In a statement attached to the deficiency notice the respondent advised petitioners in part as follows:
The estate listed in the return, Form 706, under insurance two policies issued by the Connecticut General Life Insurance Company numbered1939 BTA LEXIS 925">*938 478327 naming 39 B.T.A. 1134">*1140 Edyth LeGierse as the beneficiary and numbered 20348 straight annuity for the life of the decedent payable $49.15 monthly. The policy numbered 478327 was returned at a value of $25,000.00 but was reduced by a specific exemption of $25,000.00 to no value. Both policies were purchased at the same time and as one transaction. It is believed that the decedent was far beyond the age at which any insurance company could or would have written insurance on her life. The Bureau holds that the above transaction represents a transfer made to take effect at or after death in accordance with the provisions of section 803 of the Revenue Act of 1932, which amended section 302(c) of the Revenue Act of 1926.
The amount of $25,000 which was receivable by the beneficiary named in the insurance policy numbered 478327 is not includable in the decedent's gross estate as a transfer made in contemplation of death or otherwise or as any interest in property of the decedent at the time of her death. The amount so receivable represents "insurance" as that term is used in section 302(g) of the Revenue Act of 1926, as amended.
OPINION.
1939 BTA LEXIS 925">*939 BLACK: Although the facts are somewhat different, the question involved in this proceeding is the same as was recently decided by this Board in the case of , and is, of course, controlled by our decision in that case.
When Mrs. Le Gierse died on January 1, 1936, she was the owner of a life insurance policy of $25,000, payable to her daughter, Edyth Le Gierse, in which policy she had reserved the right to change the beneficiary. It was a regular life insurance policy, taken out by decedent upon her own life within the meaning of section 302(g) of the Revenue Act of 1926.
As we pointed out in the Keller case, we have no cause to treat the insurance payable under the policy as anything else other than insurance, merely because decedent was required to purchase a life annuity policy at the same time she purchased the insurance policy. Although Mrs. Le Gierse was 80 years of age when she purchased the two policies, she was in good health for one of her years and had a life expectancy of between four and five years and both the life insurance premium and the annuity premium were calculated in accordance with this life expectancy.
1939 BTA LEXIS 925">*940 What might be the situation if someone known to himself and to the insurance company to be suffering from a mortal disease with only a short while to live should take out a life insurance policy together with a life annuity policy principally to get the life insurance policy for the purpose of availing to his estate the $40,000 life insurance exemption provided in section 302(g), we do not decide. We have no such case before us.
No other beneficiaries were entitled to receive any amount as insurance under any policy taken out by the decedent upon her own 39 B.T.A. 1134">*1141 life, and the $25,000, if insurance, was the only insurance receivable by Edyth Le Gierse as the beneficiary under a policy taken out by the decedent upon her own life. We hold that the $25,000 was "insurance taken out by the decedent upon her own life", as that term is used in section 302(g) of the Revenue Act of 1926 as amended by section 404 of the Revenue Act of 1934. It follows that the respondent erred in including the amount of $25,000 in the decedent's gross estate.
Decision will be entered for the petitioners.