Reply to Wall Street Journal article on life insuranceArticle added by Julius Giarmarco on November 18, 2010
Julius Giarmarco

Julius Giarmarco

Troy, MI

Joined: July 07, 2008

On October 4, 2010, the Wall Street Journal (WSJ) published an article by Mark Maremont and Leslie Scism titled "Shift to Wealthier Clientele Puts Life Insurers in a Bind." The article states that, while the original role of life insurance was to serve as a “safety net” to lower and middle income families, there has been a shift in the insurers' base away from middle-class to wealthier Americans, who use it as part of their complex estate tax plans. The article goes on to suggest that Congress could revisit the tax advantages of life insurance "amid gaping budget deficits."

While anything is possible, I don’t think it’s likely that Congress will attempt to tax either a policy’s inside build up of cash value or its death benefit. Why would Congress want to discourage high-net-worth individuals from purchasing life insurance to create liquidity to pay estate taxes? And why would Congress want to make it more difficult for business owners to successfully transition their businesses (with the resultant loss of jobs)? Certainly, the IRS wants to collect cash — not illiquid assets — when a high-net-worth person dies.

The WSJ article provides quotes from those who support tax-advantaged life insurance for the wealthy:
  • The tax breaks “encourage wealth accumulation that helps feed capital formation and job creation;" and

  • The tax breaks help those who save and accumulate their wealth.
I suspect most Congressman would agree with those principals, particularly with income and capital gains taxes likely to increase in the future.

The Association for Advanced Underwriting (AALU) suggested to its members that if they wanted to post a personal comment on the WSJ website or other news sites where the article appears, they could reinforce the following points:
  • Thanks to the wisdom of Congressional leaders to encourage responsible savings by not taxing the proceeds of life insurance, 75 million American families count on life insurance as a foundation for their financial security.

  • Life insurance helps ensure families are not placed in additional hardship when they lose a loved one. Businesses of all sizes, especially job-creating small businesses, use life insurance to ensure the doors stay open when an owner or key employee passes away. These life insurance benefits help the entire U.S. economy.

  • At a time when many Americans do not have adequate financial protection with the help of life insurance products, now is not the time to make it even harder by considering new taxes on these products.
Significantly, the WSJ article points out that “[t]here is no proposal in Congress this year to curb the tax breaks for life insurance.” Two reasons are (1) there would be “heavy opposition from insurers and agents,” and (2) higher taxes are not popular when the economy is weak (or at any time, for that matter). In addition, although not mentioned in the article, it’s noteworthy that the President’s FY 2011 budget does not include any proposal to tax life insurance.
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