1983 0510, 0511 and 0728 - GOV (House) - Tax Treatment of Life Insurance

  • (p12) - Pete Stark (D-CA) - Traditionally, the investment aspects of a life insurance contract have been secondary to the insurance component. In today's financial marketplace, however, it is no longer the case.
    • All financial intermediaries, including life insurance companies, are in stiff competition for investment dollars; and the investor has become much more sophisticated. (p12)
  • In response to the increased investor sophistication, life insurance companies have been changing their products in a number of ways
    • First, they will now pay close to a market rate of return to the policyholder even though the minimum rate of return guaranteed in the contract is still fixed well below market.
    • Second, in many new policies the traditional link between insurance protection and the savings component of a policy has been broken.
    • Third, a type of insurance now available, known popularly as universal life, allows the policyholder discretion as to the timing and the amount of premiums he pays.
  • (p15) - John E. Chapoton - The fact that the tax benefits afforded cash value life insurance are greatest when the investment aspects are highest shows that the policy reasons underlying the current tax system include clearly the encouragement of savings through life insurance policies.
    • Other tax-preferred investments such as qualified pension plans and individual retirement accounts have significant limitations on the timing and amount of contributions, withdrawals, loans and the like.
    • Comparable financial investment of vehicles without these limitations generally do not receive the tax-free or at least tax-deferred status which is afforded to savings through life insurance.  (p15)
  • (p27) - John E. Chapoton - A policy which endows at age 95 or later is called a "whole life" policy. 
  • (p36) - John E. Chapoton - The first attempt to limit the investment orientation of a life insurance contract was made in section 101(f), added by TEFRA, which deals only with "flexible premium life insurance contracts" such as universal life insurance.
    • Section 101(f), is a temporary measure, designed to allow sellers of universal life insurance to compete on a equal basis with sellers of more traditional policies while providing some limits on the extent to which universal life could be used as an investment vehicle.
  • Hence, the precise combination of limitations contained in this statute may not be appropriate for a permanent general definition of life insurance.
    • For example, we believe that it is appropriate to examine whether single premium policies and policies which endow at an early age should be treated as life insurance for tax purposes.
  • Nevertheless, the requirements contained in section 101(f), give some indication of the kinds of tests which might be incorporated into such a definition. 
  • (p356) - The Stock Company Information Group proposes to retain the 1959 Act (Part I of Subchapter L, Chapter 1 of the Internal Revenue Code of 1954, as amended), making use of appropriate temporary revisions introduced by TEFRA and making certain other changes to take into account inflation as well as new products which have entered the market since 1959.
    • This would ensure that all life insurance companies, whether mutual or stockholder-owned, remain taxed on a fair basis, in a manner consistent with sound general tax principles. In particular, it would appropriately take into account the differences in the underlying nature of mutual and stock life insurance enterprises
  • The basic assumptions in each of these examples is the individual buying the insurance is 35 years old; the insurance company is guaranteeing a return of 4 percent, and that is the assumed rate on each of these examples.

--  John E. Chapoton, Assistant Secretary for Tax Policy, Department of the Treasury

  • (p448) - Alan Richards, president and chief executive officer of E. F. Hutton Life Insurance Co. - In fact, it is accurate to describe Universal Life as a generalized version of the actuarial formulas underlying traditional life insurance products.
    • In other words, it is possible to produce any traditional plan of insurance from the generalized formulas underlying universal life.