Sn 302-00 Taxation Of Life Insurance Companies

Front 1

The Types of Taxes On Life Insurance Companies

Back 1

 Income Taxes (focus of this study note – described below)
 Premium Taxes (State; Provincial)
 Capital Taxes (Canada)
 Large Corporations Tax
 Federal Capital Tax
 Distribution Taxes (USA and Canada)
 Consumption Taxes
 Sales Tax (USA)
 Goods-And-Services Tax (GST) (Canada)

Front 2

CONSIDERATIONS IN THE TAXATION OF A LIFE INSURANCE COMPANY
Cash Accounting or Accrual Accounting
Cash Basis:

Back 2

 Net Income = money received less money paid.
 growing companies pay high taxes (income > claim pmts)
 declining companies pay low taxes
 effect strongest for LTD and LTC.

Front 3

Accrual basis:

Back 3

 Net Income = earned premiums less incurred claims.
 claims reserves are tax-deductible
 income and outgo are closely matched

Front 4

The Definition of a Life Insurer

Back 4

 precise def’n needed, since it is advantageous

Organizations that Qualify as Life Insurers:
 Firms with 50% LI or Guar. Renewable HI contracts


Criteria used to test HMO’s:
 Risk-taking entities
 services provided
 UW use / CR use
 risk transferred
 amount of reinsurance used

The Distribution (Pro-ration) of Taxes by Line of Business
Taxation of Multinational Companies by country

Front 5

AN INSURANCE COMPANY’S INCOME STATEMENT COMPONENTS

Back 5

Receipt:
R = Reserves
E = Expenses
C = Claim payments
E = Experience Refunds
I = Interest
P = Premiums
(T = Taxes)

Front 6

THE TAX TREATMENT OF THE INCOME STATEMENT COMPONENTS
Actuarial Reserves

Back 6

 most vital part of the tax system

Problems:
 original reserving assumptions go out of date, e.g.:
 interest rate
 mortality/morbidity
 persistency
 difficult to regulate
 Statutory, GAAP, and Tax reserves are all different (USA)
 (Tax Reserve smallest)

Front 7

Expenses

Back 7

 Accrual Accounting basis used, except:
 The DAC Tax: (USA)
 1st year expenses high
 capitalized asset created, and taxed.

Front 8

Claims

Back 8

Claims
 IBNR reserve is a key component, but:
 subject to error:
 measurement errors
 discount rate assumed
 The error may be deliberate
 auditors must check reasonability

Front 9

Experience Refunds and Dividends

Back 9

 two components:
 retrospective experience refund (should be tax-deductible)
 refund of taxable profits [dividends] (should be taxed)
 formula for which is which.

Front 10

Interest and Investment Income

Back 10

 Accrual accounting basis used
 discount/premiums on bonds is amortized
 gain/loss upon sale is:
 immediate income (USA)
 amortized (Canada)

 complicated when the ins co invests in foreign securities, or does business abroad
 currency gain loss vs. asset gain/loss

Front 11

Premiums

Back 11

 Accrual accounting basis used
 unearned premiums not taxed until due
 increasingly being applied to self-insuring ers.

Summary: Premiums, Claims, Interest, and Expenses are taxed on an accrual (incurred) basis.


Done.