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November 7, 1934


The opinion of the court was delivered by: KIRKPATRICK

The order of the referee here for review directs the trustee to turn over to the bankrupt three "deferred annuity" contracts purchased by the letter. The order was based upon the referee's conclusion that all money realizable upon the contracts was wholly exempt from the claims of creditors by virtue of the Pennsylvania statutes relating to the exemption of life insurance policies or annuity contracts and by section 6 of the Bankruptcy Act (11 USCA § 24). The three contracts involved are all alike and may be treated as one for the purpose of this review.

The Pennsylvania legislation upon this subject was fully considered by this court in Re Lang, 20 F.2d 236, and in Re Rose, 24 F.2d 253, both of which decisions were affirmed by the Circuit Court of Appeals, 24 F.2d 254. It was held in those cases that the cash surrender value of all such policies and contracts as well as the amount payable upon the death of the insured was exempt, and this although the insured reserved the right to change the beneficiary at will and could collect the cash surrender value without the beneficiary's consent, thus entirely destroying the latter's interest.

 The only question in this case is whether or not the contract here involved comes within the terms of the Pennsylvania exemption laws. The Act of June 28, 1923, P.L. 884 (40 PS Pa. § 517), is the last of the statutes dealing with the subject, and it provides that "the net amount payable under any annuity contract upon the life of any person, heretofore or hereafter made for the benefit of or assigned to the wife or children or dependent relative of such person, shall be exempt from all claims of the creditors of such person arising out of or based upon any obligation created after the passage of this act, whether or not the right to change the named beneficiary is reserved by or permitted to such person."

 The bankrupt purchased these contracts by making three lump-sum payments aggregating $18,000, the last one approximately a year before his adjudication. The trustee does not contend that he was insolvent at the time and no question of fraudulent transfer of the money is raised.

 The contract bears a superficial resemblance, at least in some of its features, to a policy of life insurance. It describes itself as a "deferred annuity with life or refund annuity beginning at optional age. Benefit payable in case of death before annuity begins. Single premiums. Annual dividends." The terminology used is that of life insurance contracts. The money paid by the bankrupt for the purchase of the contract is called a "single premium * * * representing * * * premiumunits." The owner of the contract is called "the annuitant"; his wife "the beneficiary."

 The contract gave the bankrupt the following rights:

 (1) If and when he reached the age of sixty-five (he was thirty-seven when he took the contract), he would be entitled to receive an annuity in a fixed amount, payable to him in monthly installments, for the rest of his life.

 (2) At any time after the first contract year before reaching the age of sixty-five he might surrender the contract and receive back a sum of money (fixed by Schedule C and called "cash surrender value"). This amount was, for the first two years, slightly less than the amount deposited, but it increased with the age of the policy. After the second year it would be the amount deposited plus a trifling amount of interest.

 Obviously, neither of these provisions was for his wife's benefit. Her interest in the transaction was:

 (3) If, and only if, the annuitant died at any time before age sixty-five (when his life annuity began), she would receive a "death benefit" which, during the first five years the contract was in force, was a little larger than the cash surrender value and thereafter exactly the same. See note 1 *fn1"

 Thus, as things stood at the date of the adjudication, the bankrupt, if he lived to age sixty-five, would get a life annuity beginning at that age, and upon his death thereafter his wife would get nothing. See note 2 *fn2" If he died before he reached age sixty-five his wife would be paid an amount somewhat less than that which he had paid for the contract, with interest.

 Was this contract within the meaning of the statute a policy of life insurance or an annuity contract, for the benefit of the wife? It was, of course, an annuity contract but, so far as that feature is concerned, it was clearly not for the benefit of the wife and so not within the statute. And I do not think that the incidental so-called death benefit feature brings it within the statute, because, fundamentally, it is not a contract or policy of life insurance at all.

 The basic principle upon which life insurance is written is the distribution of liability for losses among a large number of persons subject to like risks who contribute, through the payment of premiums, to a common fund. The contribution required of each is in theory proportionate to the risk of loss which he imposes upon the common fund. In no individual instance can the actual risk of loss be determined accurately, but in a sum total composed of many risks the effect upon the entire fund of certain constant factors (present in individual cases) can be accurately estimated, and consequently the proper contribution of each policyholder be fixed. Such factors are the age and state of health of each insured and, to a lesser degree, his occupation, habits, and character. By them is determined the amount of the consideration or premium which each insured pays for his protection. The insured's contribution usually consists of ...

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