Life Insurance Becoming 'Tax Shelter For The Rich'

[n2doc]

By MARK MAREMONT And LESLIE SCISM

The life-insurance industry has enjoyed beneficial tax treatment for its products for nearly a century. Whenever Congress tried to change that, insurers always had a mantra at the ready: We protect widows and orphans.

Life insurance needs to be free from income taxes, the industry said, because of its special social function. It keeps survivors from a life of penury when a chief breadwinner dies.

But in a development all but unnoticed outside the industry, life-insurance companies gradually have shifted away from their broad historical base of middle-class households. Instead, statistics show, an increasing portion of insurers' business consists of selling large policies to wealthier Americans, often as part of complex estate-tax plans.

The shift means that a growing proportion of the tax benefits of life insurance goes to the well-off, not to the middle class that once was the industry's backbone.

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http://online.wsj.com/article/SB10001424052748703435104575421411449555240.html?mod=WSJ_hpp_MIDDLETopStories

[Scuba]

1. I'm not sure tax on life insurance is a good idea...

Finding some better way to protect widows and orphans, yes.

But a sales tax on life insurance? Maybe, but I would need more to be convinced.

[Lyric]

2. What about taxing only "whole life" policies worth more than $2 million?

Since I am not a life insurance expert, let's start with this layman's premise: the tax-free death benefit is what protects "widows and orphans", right? The savings and investment aspect of whole life insurance is what attracts the wealthy to come game the system. If we smack a tax on the value of whole life policies worth more than $2 million (per individual), that particular game would no longer be so attractive. The "widows and orphans" who need to be protected are working- and middle-class people. Those people aren't using their life insurance policies as a tax dodge for investment money, and their policies are almost never worth more than $2 million because they couldn't afford the premiums for a policy that enormous.

I don't know all the details for how something like this could work, but I'm sure that someone else here does. Would it be possible to arrange a tax that would only affect the wealthy, and would leave alone the less-wealthy people who buy policies primarily for the death benefit?

[Scuba]

3. There you go. I think you're on to something.