G.R. No. L-2910, 29 June 1951, 89 Phil. 351

FACTS:

Manufacturer Life Insurance Company was engaged in such business in the Philippines for more than five years before and including the year 1941. But due to war it closed the branch office at Manila during 1942 up to 1945.

Plaintiff issued a number of life insurance policies in the Philippines containing stipulations known as non-forfeiture clauses.

Since the insured failed to pay from 1942 to 1946, the company applied the provision of the automatic premium loan clauses; and the net amount of premiums so advanced or loaned totaled P1,069,254.98. On this sum the defendant Collector of Internal Revenue assessed P17,917.12. The assessment was made pursuant to section 255 of the NIRC which put taxes on insurance premiums paid by money, notes, credits or any substitutes for money.

Manufacturer contended that when it made premium loans or premium advances by virtue of the non-forfeiture clauses, it did not collect premiums within the meaning of the above sections of the law, and therefore it is not amendable to the tax provided.

ISSUE:

1. Whether or not premium advances made by plaintiff-appellant under the automatic premium loan clause of its policies are “premium collected” by the Company.

RULING:

Yes.

“A person secures a 20-years endowment policy for P5,000 from Manufacturers and pays an annual premium of P250. He pays the first ten yearly premiums amounting to P2,500 and on this amount plaintiff-appellant pays the taxes. Also, the cash value of said policy after the payment of the 10th annual premium amounts to P1,000.” When on the eleventh year the annual premium fell due and the insured remitted no money within the grace period, the insurer treated the premium then overdue as paid from the cash value, the amount being loan to the policyholder who could discharge it at any time with interest at 6 per cent. The insurance contract, therefore, continued in force for the eleventh year.”

Under the circumstances described, did the insurer collect the amount of P250 as the annual premium for the eleventh year on the said policy? In effect the Manufacturers Life Insurance Co. loaned to the person P250 and the latter in turn paid with that sum the annual premium on his policy. The Company therefore collected the premium for the eleventh year.

“How could there be such a collection when insurer becomes a creditor, acquires a lien on the policy and is entitled to collect interest on the amount of the unpaid premiums?”.

Wittingly, the “premium” and the “loan” have been interchanged in the argument. The insurer “became a creditor” of the loan, but not of the premium that had already been paid. And it is entitled to collect interest on the loan, not on the premium.
The insured paid the premium for the eleventh; but in turn he became a debtor of the company for the sum of P250. This debt he could repay either by later remitting the money to the insurer or by letting the cash value compensate for it. The debt may also be deducted from the amount of the policy should he die thereafter during the continuance of the policy.
There was new credit for the advances made. True, the company could not sue the insured to enforce that credit. But it has means of satisfaction out of the cash surrender value.

Here again it may be urged that if the credit is paid out of the cash surrender value, there were no new funds added to the company’s assets. Cash surrender value “as applied to life insurance policy, is the amount of money the company agrees to pay to the holder of the policy if he surrenders it and releases his claims upon it. The more premiums the insured has paid the greater will be the surrender value; but the surrender value is always a lesser sum than the total amount of premiums paid.”
The cash value or cash surrender value is therefore an amount which the insurance company holds in trust for the insured to be delivered to him upon demand. It is therefore a liability of the company to the insured. Now then, when the company’s credit for advances is paid out of the cash value or cash surrender value, that value and the company’s liability is thereby dismissed. Consequently, the net assets of the insurance company increase.

*Case digest by Terence Eyre B. Belangoy, LLB-4 (Refresher), Andres Bonifacio College School of Law, SY 2018-2019