Inside Buildup

  • These two meetings, plus the announced intention of some members of Congress and the Treasury Department to consider taxing the inside buildup of cash values, adds a note of uncertainty to our discussion today. 

--  Paul J. Overberg

1983 - SOA - Individual Life Insurance, Society of Actuaries - 22p

JULY 19, 1985
Impact of Tax Reform on Insurance Industry
Witnesses testified on the effects that President Ronald Reagan’s proposed tax reform will have on the Life insurance industry.
https://www.c-span.org/video/?125556-1/impact-tax-reform-insurance-industry

1985 - GOV - Comprehensive Tax Reform: Hearings Before the Committee on Ways and Means, House of Representatives - Part 7

  •  (p133-134) - Amounts earned by policyholders on the cash value of life insurance (the "inside buildup") generally escape income tax under present law.
    • As a result, income earned on investments in life insurance policies is treated substantially more favorably than interest on deposits in banks and thrift institutions, which is taxed currently.  
  • (p134) - In order to make the taxation of income flowing through financial institutions more neutral, the Treasury Department proposes that the exclusion of the inside buildup in life insurance be repealed.  
  • (p165) - 3. Insurance investment income.
    • The exclusion of investment income ("inside" buildup) on life insurance policies and annuities is one of the major excluded sources of income.
    • Interest income on savings held with other financial institutions is subject to tax whether or not the interest is currently distributed to the taxpayer.
    • The tax-preferred treatment of the inside buildup encourages individuals to save through life insurance companies and perhaps to purchase life insurance that they would not buy except to gain access to the favorable tax treatment.
    • All three proposals will tax the annual investment income earned on life insurance policies and annuities. 

1984 11 - DOTT / Treasury - Tax Reform for Fairness, Simplicity, and Economic Growth - The  Department Report to the President - Volume 1 - 275p

  • 1977 0923 - President Carter - Overview of Tax Reform Option Papers - 135p
  • 1985 - President Reagan's tax proposal [11], released in May, 1985
  • 1994 - iret - Tax Treatment of Inside Buildup in Life Insurance
    Products, By Michael A. Schuyler, Sponsored by Savers & Investors Foundation - 48p
  • 2005 11 - DOTT - Simple, Fair, and Pro-Growth: Proposals to Fix America’s Tax System, Report of the President’s Advisory Panel on Federal Tax Reform - Department of the Treasury - 290p
  • 2009 - SOA - What’s on the Shelf? A Proposal to Tax the Inside Buildup,  by Brian G. King, Society of Actuaries - 5p
  • 2013 1113 - CBO - Include Investment Income From Life Insurance and Annuities in Taxable Income (Inside Buildup), Congressional Budget Office - [link]
  • 2016 0922 - GOV (House) - Financial Stability Oversight Council 2015 Report, Lew
    • [PDF- , VIDEO-CSPAN]
    • 2:29:00 - Bruce Poliquin, Taxing Retirement Savings -
      • Lew - What proposal are you talking about?
      • <Inside Buildup??>
  • 1977 0923 - Letter - to President Carter - Memorandum for the President - Option Paper No. VII: Tax Treatment of Interest - FROM: Stu Eizenstat, Bob Ginsburg ( ) - 126p
    • 2. Interest Buildup on Life Insurance and Annuity Contracts.
    • Treasury originally recommended to you that the interest earned on the savings element of cash value life insurance and on annuity contracts (issued after the date of our tax reform statute) be taxed to the policyholders.
    • Treasury has withdrawn that recommendation in the face of strong industry opposition and the concern that policyholders might join with insurance agents to oppose this measure.
      • (Of course, the proposal would only apply to future insurance policies.)
      • Treasury also notes that interest on an insurance policy, unlike savings account interest, cannot be withdrawn without borrowing against or cancelling the policy.
  • Inappropriate risk amounts also can occur with increasing death benefit contracts.
    • For example, it is possible to have "insurance policies" where the initial cash value is $1 million and the initial death benefit is $1 million plus $1.
    • In succeeding years, both death benefits and cash values increase at a guaranteed 4 percent rate.
    • ⇒  Clearly this is an abuse. (p194)

1983 - SOA - Universal Life and Indeterminate Premium Products and Policyholder Dividends, Society of Actuaries, by Thomas G. Kabele - 96p

  • If life insurance policies lose the tax deferment advantage so all interest earned on the cash value is taxed currently, universal/variable life insurance policies would become unmarketable.

1985 - AP - Universal / Variable Life Insurance: Policy Purchase Decisions, by Stephen P. D’Arcy and Keun Chang Lee - 58p

  • According to an August, 1977, Wall Street Journal article, the Treasury Department is considering, as a part of President Carter's comprehensive tax reform legislation, taxation of the "inside buildup" in cash-value life insurance policies.
    • Under this proposal the annual interest element on the "savings" portion of such policies would be taxed as income to policyholders.
    • The ACLI submitted a memorandum opposing the proposal strenuously to Treasury Secretary Blumenthal and White House officials. - <WishList>
    • Needless to say, implementation of any such proposal
      would have profound repercussions on the life insurance industry.

1977 - SOA - Report of the Historian, Society of Actuaries - 22p

  • In the early years of Single Premium Life (endowments), producers sold the heck out of them.
    • It took a while before the feds figured out they were being used as tax-shelters.
    • That epiphany led to the resurrection of the decades old debate about taxing the inside build-up in a life insurance contract, a war NAIFA has been fighting since 1913.  ---  And won every battle.

2017 0803 - NAIFA-Washington - IFAPAC and MEC - [link]

  • Some life insurance policies and annuities allow for nearly unlimited tax-free savings.
    • Currently, there is no taxable income until the policy is cashed in, even though the policyholder is receiving the benefit of increases or “inside build-up” in the value of the policy or annuity. In addition, withdrawals from policies are taxed favorably.
  • Under the Simplified Income Tax Plan, the increase in value in those policies would be treated as current income, and therefore would be subject to tax on an annual basis, just like a savings account.
    • As with other financial investments, such as stocks or bonds, whole-life insurance policies and deferred annuities could be purchased through tax-deferred Save for Retirement and Save for Family accounts, subject to the same dollar limits.

2005 11 - DOTT - Simple, Fair, and Pro-Growth: Proposals to Fix America’s Tax System, Report of the President’s Advisory Panel on Federal Tax Reform - Department of the Treasury - 290p

  • Cecil Heftel - (D-HI)
    • .....unfortunately, I think that we are misunderstanding what will happen from taxing the build-up because I think the product will disappear, and so I don't understand where Treasury comes up with revenue figures based on the fact that people will continue to buy the product and that sales people will continue to sell the product.
    • It is my assumption that the product simply won't be sold.
      • Sales people I have talked with indicate that they just simply will sell something else, but they won't be selling whole life.
  • Robert BECK, Prudential, Chairman and CEO:  That is right. (p6069)

1985 0719 Impact of Tax Reform on Insurance Industry, Pete Stark (D-CA)  ---  [BonkNote]

  • 2005 - AP - Beating the 'Wrap': The Agency Effort to Control Wraparound Insurance Tax Shelters, by Charlene Luke - 73p
    • The owners of cash value life insurance and annuity contracts
      have long been able to defer paying tax on the income accruing inside these products - that is, on the "inside buildup."1

      • 1 Although this treatment of inside buildup is well established, as Professor Pike has observed with respect to life insurance, "[t]he precise statutory basis for this exclusion is obscure."
        • Andrew D. Pike, Reflections on the Meaning of Life: An Analysis of Section 7702 and the Taxation of Cash Value Life Insurance, 43 TAx L. REV. 491, 493 n.2 (1988) - 98p
      • With respect to annuities, deferral is implied by section
        72(e), which governs the taxation of annuity withdrawals. See infra notes 186-88 and accompanying text;

        • <WishList> - see also Richard W. Skillman, The Impact of TEFRA and the 1984 Act on the "Inside Build-up" Under Life Insurance Products, 43 N.Y.U. INST. ON FED. TAX'N 40-1, 40-30 (1985) (describing the similarly obscure origin for the deferral applying to annuities).
  • (p24) - Chairman Bob Packwood (R-OR): Bill, I have a question. You want to encourage savings.
  • Senator William ROTH (R-DE):  Right.
  • The CHAIRMAN. You have a provision in here to tax the inside buildup on life insurance, which to me seems contra to the encouragement of savings.
    • I am curious why you put in the Susas, which indeed will encourage it but tax the inside buildup.
  • Senator ROTH. Mr. Chairman, that is not part of my proposal.
  • The CHAIRMAN. Oh, isn't it?
  • Senator ROTH. I understand that Treasury is going to do so, but it is not included as part of ours.
  • The CHAIRMAN. Then my information is wrong. I thought you were taxing it. I apologize.  

1985 0509 - GOV (Senate) - 1985 Tax Reform - [PDF-210p]