Indianapolis Life Insurance Company and Subsidiary v. United States

EASTERBROOK, Circuit Judge.

Life insurance companies invest their premium income. Some of the earnings are held in reserve to pay the death benefits or annuities promised in the policies. Earnings in excess of the amounts needed for these purposes may be distributed to holders of whole life or “participating” policies as dividends. These dividends are not taxed at the insurance company level; the insurer is treated like a mutual fund, which passes income through to the investor. For mutual insurance companies, some of the dividends may not be what they seem. Policyholders of a mutual insurer…