REVENUE RULING 69-270
1969-1 C.B. 185

[IRS Annotation]
Treatment of gross unearned premiums not included in life insurance reserves and advance premiums on noncancellable accident and health insurance policies in determining whether a stock insurance company is a "life insurance company."

Rev. Rul. 69-270
Advice has been requested whether, with respect to the noncancellable health and accident contracts issued by the taxpayer, the gross unearned premiums not included in life insurance reserves are to be taken into account without reduction for the loading factor in determining whether the taxpayer insurance company is a "life insurance company" as defined by section 801(a) of the Internal Revenue Code of 1954. Advice also has been requested whether advance premiums on noncancellable accident and health insurance policies may be taken into account as part of unearned premiums for that purpose.

The taxpayer is a stock insurance company as defined in section 801 of the Code. It has issued each year noncancellable (and cancellable) accident and health policies.

Section 801(a) of the Code defines a life insurance company as follows:

"For purposes of this subtitle, the term 'life insurance company' means an insurance company which is engaged in the business of issuing life insurance and annuity contracts (either separately or combined with health and accident insurance), or noncancellable contracts of health and accident insurance, if—

"(1) its life insurance reserves (as defined in subsection (b)), plus

"(2) unearned premiums, and unpaid losses (whether or not ascertained), on noncancellable life, health, or accident policies not included in life insurance reserves,

comprise more than 50 percent of its total reserves (as defined in subsection (c))."

Section 801(c) of the Code states that the term "total reserves" means (1) life insurance reserves, (2) unearned premiums, and unpaid losses (whether or not ascertained), not included in life insurance reserves, and (3) all other reserves required by law.

From the foregoing statutory definitions it will be noted that the qualification of an insurance company as a "life insurance company" depends upon a qualification ratio or fraction in which the numerator is the company's life insurance reserves plus its unearned premiums and unpaid losses on noncancellable life, health, or accident policies not included in life insurance reserves and the denominator is the company's total reserves.

Section 1.801-3(b)(2) of the Income Tax Regulations states that an insurance company writing only noncancellable life, health, or accident policies and having no "life insurance reserves" may qualify as a life insurance company if its unearned premiums, and unpaid losses (whether or not ascertained), on such policies comprise more than 50 percent of its total reserves.

Section 1.801-3(c) of the regulations defines a "noncancellable life, health, or accident insurance policy," in pertinent part, as a health and accident contract, or a health and accident contract combined with a life insurance or annuity contract, which the insurance company is under an obligation to renew or continue at a specified premium and with respect to which a reserve in addition to the unearned premiums (as defined in section 1.801-3(c)) must be carried to cover that obligation.

Section 1.801-3(e) of the regulations states that the term "unearned premiums" means those amounts which cover the cost of carrying the insurance risk for the period for which the premiums have been paid in advance. Such term includes all unearned premiums, whether or not required by law.

The term "unearned premiums" has long been established as being the full amount of the pro rata unearned premiums, unreduced by "loading." National Protective Insurance Co. v. Commissioner, 128 F.2d 948 (1942), certiorari denied, 317 U.S. 655 (1942); Utah Home Fire Insurance Co. v. Commissioner, 64 F.2d 763 (1933), certiorari denied, 290 U.S. 679 (1933); Massachusetts Protective Ass'n v. United States, 114 F.2d 304 (1940), Ct.D. 1483, C.B. 1941-1, 383.

The definition of "unearned premiums" in section 1.801-3(e) of the regulations is substantially similar to that considered in the cases cited above where the courts, in discussing unearned premiums, considered them to be the full pro rata gross unearned premiums.

Accordingly, it is held that with respect to the noncancellable health and accident contracts, the unearned premiums not included in life insurance reserves are to be included in both the numerator and denominator of the qualification ratio under section 801(a) of the Code without reduction for loading.

The second question involved in this case is whether the insurance company may include advance premiums on noncancellable accident and health insurance policies as part of unearned premiums in the qualification ratio.

"Unearned premiums" as defined in section 1.801-3(e) of the regulations are those amounts that cover the cost of carrying the insurance risk proportionate to the unexpired period of the policy term, the coverage of which began on a premium due date that is already past. On the other hand, "advance premiums" are amounts that have been received but are not yet due. Thus, "advance premiums" are in a sense like a bank deposit that become available for the future payment of premiums when the date of payment falls due at the beginning of a new policy term. See Revenue Ruling 67-180, C.B. 1967-1, 172, that indicates that the term "unearned premiums" excludes amounts held on account of matured obligations as well as amounts that do not represent insurance in existence during the taxable year for the reason that in one case the reserve [186] has served its purpose and the amounts held had become pure liabilities and, in the other case, there being no insurance in existence there could be no reserve attributable thereto.

Therefore, it is further held that the insurance company may not include advance premiums on noncancellable accident and health policies as part of unearned premiums in the qualification ratio under section 801(a) of the Code.