State Tax Considerations for Travel Insurance Premiums

By John Forni, Andy Koutroumanis and Sam Fowler

Travel insurance has been around for over a century. However, its popularity has expanded over time and has been steadily increasing in recent years. In 2020, consumers spent approximately $1.72 billion on travel insurance policies according to the U.S. Travel Insurance Association.1 Travel insurance policies are priced based on trip length, destination, and the age of the policyholder, and typically cost between 4-8% of a trip’s total price.2 In general, travel insurance policies protect against financial loss that may arise before or during a trip, such as trip cancellations, interruptions, or delays, medical emergencies, and lost, damaged, or stolen luggage, among other things.

John Forni—Insurance Tax Leader, Andy Koutroumanis—State Tax Director, and Sam Fowler—Tax Manager at Grant Thornton in Chicago have more than 50 years of combined experience with multistate and multinational tax matters, including reporting, compliance, controversy, planning, audits, and corporate income, sales, and premium taxes.

Although travel insurance policies vary, some of the most common policy exclusions include pre-existing health conditions, pregnancy and childbirth, pandemics, civil and political unrest at the traveler’s destination, and coverage for those engaging in extreme or high-risk activities (e.g., bungee jumping).3 For reference, approximately 47% of trip cancellations were due to coronavirus in 2020.4 However, in many instances, if a policy was purchased after the World Health Organization declared coronavirus a pandemic (March 11, 2020), resulting claims for cancellation or trip interruption were likely excluded from coverage. Today, most insurers consider coronavirus a foreseeable risk and exclude it from coverage.5

Over the last decade, the insurance industry has been promoting the development of a regulatory framework based on travel insurance products not fitting into standard interpretations of current state insurance laws. Travel insurance has often been classified as a “limited line” of insurance. A limited line of insurance is a line of insurance other than one of the six major (or general) lines defined by the National Association of Insurance Commissioners (i.e., life, property, accident, casualty, variable life, and personal lines of insurance). It is often offered with non-insurance services, such as lost luggage assistance, concierge services, travel reservation services, transportation arrangement services, translation services, and lost passport assistance.

In 2018, the NAIC created a Travel Insurance Model Law (Act) based largely off of a version that was being developed by the National Council of Insurance Legislators.6 The NCOIL is a legislative organization composed principally of legislators that serve on state insurance and financial institutions committees across the United States.7 The NCOIL often works in tandem with the NAIC.8 The NCOIL helps to develop state policy when it comes to insurance and educate state legislators on current and perennial insurance issues. 9The Act was developed to protect the public welfare and outlines rules regarding policy coverage and licensing for those that wish to offer such coverage.10 The Act classifies travel insurance as an inland marine line of insurance for purposes of form and rate filings.11 Some consumer protections outlined in the Act include prohibiting opt-out sales, instituting a look-back period for full refunds, requiring consumer disclosures to ensure the consumers understand what they are purchasing, and clarifying the type of information provided to consumers.12 The Act also includes consumer disclosure and sales practice requirements which support the prohibition against deceptive insurance policies, opt-out sales formats, and blanket travel insurance policies that are marketed as free, among other things.13

Since the adoption of the Act, a common legislative trend among a large number of states has been to revise their travel insurance rules and regulations, modeled in full or in part on the Act. These states have formally included travel insurance as part of their premium tax statutes. In general, these laws provide definitions, require insurers to pay tax on certain travel insurance premiums paid by (1) an individual primary policyholder who is the resident of the state; ( 2) a primary certificate-holder who is the resident of the state and elects coverage under a group travel insurance policy; and (3) a blanket travel insurance policyholder that is a state resident or has its principal place of business or the principal place of business of an affiliate or subsidiary that has purchased blanket travel insurance in the state for eligible blanket group members.14

For state tax purposes, insurers are typically taxed on the amount of premiums written and will pay premium tax based on the state tax rate established for such premium. Some states impose a fire premium tax that may use the line of business (inland marine) for purposes of allocating taxable premium as part of their allocation formula for reporting fire premium and calculating the associated fire premium tax. An increase in fire premium tax may result in states adopting the Act in whole, which classifies travel insurance as part of the inland marine line of business as opposed to another line of business not subject to fire premium tax. Under the Act, a travel insurer must document the state of residence or principal place of business of the policyholder or certificate holder.15 Only the amount allocable to travel insurance and not any amounts received for travel assistance services or cancellation fee waivers are reported as premium.16 If a travel protection plan is offered for one price, it must clearly describe and delineate that the price includes the travel insurance, travel assistance services and cancellation fee waivers, as applicable.17 Travel assistance services are those services for which a consumer is not covered if an event occurs, and where providing the service does not result in a transfer or shifting of risk that would constitute the business of insurance.18 These services are not insurance or related to insurance and are not intended to be subject to the premium tax. With numerous states adopting travel insurance legislation, insurers should be aware of potential state taxation issues.

For example, in Texas, a premium tax is imposed on each insurer that receives gross premiums.19 A tax rate of 1.6% is applied to the insurer’s taxable premium receipts for a calendar year.20 Taxable premium receipts include the total gross amounts of premiums, membership fees, assessments, dues, revenues, and any other considerations for insurance written by the insurer in a calendar year from any kind of insurance written by the insurer on each kind of property or risk located in Texas.21

In a recent Texas administrative decision, an insurer was assessed premium and maintenance tax on travel insurance services.22 In this petition, the taxpayer was audited for insurance premium and maintenance tax compliance for the audit period 2014 through 2017.23 During the period at issue, the taxpayer was an underwriter of property and casualty insurance coverage, including travel insurance policies.24 In the transactions at issue, the taxpayer sold travel protection plans, which included travel insurance and travel assistance services for a single lump-sum charge.25 The taxpayer reported as premium only the amount of the total charge that it argued was allocable to travel insurance (i.e., taxable premium).26 It did not report as taxable premium the portion of the charge that it argued was allocable to travel assistance services.27

The auditor determined that the total amount of the lump-sum charge should have been reported as a premium subject to insurance premium and maintenance tax and performed an estimate to determine the additional fees.28 The auditor reviewed one sample policy and calculated an error percentage by taking the difference between the total charge and the amount reported and then divided the difference by the amount reported.29 The error percentage was multiplied by reported premiums to calculate additional taxable amounts.30

In support of its petition, the taxpayer raised three arguments.31 First, the taxpayer argued that it could only be taxed on premiums received, not simply written.32 However, the administrative law judge noted that property and casualty insurance premiums are reported and taxed on a premium written basis, not on a premium received basis. Tax is due on insurance written regardless of whether the premium is collected or received.33

Second, the taxpayer argued that the travel insurance model acts adopted by the NAIC/NCOIL make a distinction between travel insurance and travel assistance services.34 However, the judge determined that Texas is not bound by model acts and must follow the requirements set forth in the Texas Insurance Code.35 Additionally, the instructions for the Texas Annual Insurance Premium Tax Report state that when completing tax reports using NAIC information, any reported information must be complete and consistent with Texas tax statutes and rule requirements.36

Finally, the taxpayer argued that Texas House Bill 2587, which took effect September 1, 2019 and was enacted as new Chapter 3504 to the Texas Insurance Code, provides a comprehensive regulatory framework for travel insurance based on the NAIC/NCOIL model acts.37 The taxpayer noted that Section 3504.0004 requires that a travel insurer is to pay premium tax under Section 221.002 on travel insurance premiums, and that it shall report as premiums only the amount allocable to travel insurance and not amounts received for travel assistance services or cancellation fee waivers, regardless of whether these are offered separately or for a combined price.38 However, Chapter 3504 of the Texas Insurance Code was not in effect during the audit period, and is not retroactive.39 Thus, the judge found this new chapter was not applicable to the petition.40

Ultimately, the judge found that the auditor did not err in determining as taxable gross premium receipts the portion of the premiums written with respect to the travel assistance services. Prospectively, insurers should be aware that many states are adopting travel insurance rules based on the Act and this trend will likely continue based on the volume of states having enacted such legislation in the last few years. Insurers should review these new state rules, premium classifications, and invoicing procedures, to ensure premium tax is only being reported and paid on taxable premium and not for other items such as travel assistance services. 

Endnotes

1Consumers Spend $1.72B on Travel Protection in 2020, According to New UStiA Study, U.S. Travel Ins. Ass’n, https://www.ustia.org/ consumers-spend-172b-on-travel-protection-in-2020-according-tonew-ustia-study.html (last visited Aug. 12, 2022).

2FAQs, U.S. Travel Ins. Ass’n, https://www.ustia.org/faqs.html (last visited Aug. 12, 2022).

3Travel Insurance, NAIC, https://content.naic.org/cipr-topics/ travel-insurance (last updated June 23, 2022).

4Id.

5See, Coronavirus (COVID-19) and Travel Insurance FAQs, New York State Dep’t of Fin. Servs, https://www.dfs.ny.gov/ consumers/coronavirus/travel_insurance_faqs, (last visited Aug, 12, 2022).

6Travel Insurance Model Act (#632), (NAIC 2018).

7History & Purpose, NCOIL, https://ncoil.org/history-purpose/, (last visited Aug. 12, 2022). 8