For affirmance -- Chief Justice Weintraub, and Justices Jacobs, Francis, Proctor, Hall, Schettino and Haneman. For reversal -- None. The opinion of the court was delivered by Weintraub, C.J.
The Director of the Division of Taxation determined that the proceeds of certain life insurance policies paid to named beneficiaries were transfers intended to take effect upon the death of the insured and hence were taxable under the transfer inheritance tax law. We certified the taxpayers' appeal before the Appellate Division acted upon it.
In 1937 the decedent, age 52 and uninsurable at normal rates because of a "low pulse rate," purchased combinations of single-premium life insurance policies and single-premium, non-refundable annuity contracts. Such combinations were obtained from three insurance companies. The total life insurance coverage was $150,000, and the premiums paid for these policies and the companion annuity contracts were 110% of the face amount of the insurance, i.e., $165,000. The annual yield to decedent from the annuity contracts totaled $4,241.02, which is somewhat less than 3% of the total cost of the life insurance and the annuity contracts. No benefits were payable under the annuity contracts after the decedent's death.
In form the insurance policies were independent of the annuity contracts. The premiums paid for the annuity contracts were the same that would have been payable for the annuity contracts alone, and the premiums paid for the life insurance were at standard rates. But none of the companies would have sold the insurance policy to the insured at standard rates because of the state of her health unless the enhanced risk of loss were offset by an annuity contract, the benefits of which would cease upon the insured's death. Hence the companies insisted upon a tie-in between the insurance policy and the annuity contract at the moment of sale. The companies
had no interest in the continuation of that tie-in because the annuity contract could not be surrendered and the company would gain if the insurance policy were. But the insured, having a diminished life expectancy, was much concerned with the continued subsistence of the life insurance. Just as the company wanted the annuity contract to offset its increased risk under the life insurance policy, so the insured would want the life insurance policy to remain to compensate for the poor bargain the non-refundable annuity contract would be if it stood alone. Thus as a practical matter the tie-in persisted. And, of course, again at the level of the economic reality, if both contracts were continued as sensibly they had to be, the life insurance benefits of $150,000 would be payable out of the $165,000 paid for both the insurance policies and the annuity contracts.
Thus the transactions involved no life insurance risk, i.e., a risk of loss because of death. A loss to the insurer under the life insurance policy because of early death would be offset by the gain to it under the annuity contract. The hedge was perfect. The only hazard to the company was that its own investments might yield less than what it had to pay under the annuity contract, a risk typical of an investment transaction rather than of life insurance. The cost of selling the contracts and the administrative expenses presumably were covered by the 10% charge made by each carrier over the face amount of the insurance.
In 1941 decedent assigned to the beneficiaries all of her rights in the life insurance policies. She died in 1959.
Our statute, N.J.S.A. 54:34-1c, makes taxable a transfer "by deed, grant, bargain, sale or gift made in contemplation of the death of the grantor, vendor or donor, or intended to take effect in possession or enjoyment at or after such death." We are not here concerned with the phrase "made in contemplation of the death" of the transferor because of the time
limitation in the statute. The question is whether there was a transfer "intended to take effect in possession or ...