The life insurance fiscal cliff: The end of a tax-preferred product class?

(AP Photo/Carolyn Kaster, File) (AP Photo/Carolyn Kaster, File)

The potential elimination of many tax preferences currently afforded life insurance is one facet of today’s fiscal cliff discussions that is often overlooked. Current proposals include provisions that could result in the imposition of taxes and elimination of deductions for both individual and corporate-owned life insurance policies, the proceeds of which are received tax-free under existing law. Clients today assume that the tax-free status of life insurance is a given and may have even engaged in fiscal cliff planning that involves the purchase of life insurance to provide a source of tax-free investment income. Given today’s political climate, it is important for clients to realize that no tax preference is safe and that the tax benefits they have come to expect from life insurance are no exception.

The life insurance fiscal cliff

With the fiscal cliff looming, no tax preferences are immune from congressional scrutiny. Various proposals to impose taxes on life insurance proceeds and policies are circulating, and while it is unlikely all of the proposals will become law, it is entirely possible life insurance will not escape the fiscal cliff discussions unscathed.

For example, while taxing the interest that accrues within a policy would not completely eliminate its tax-preferred status, it would provide substantial revenue. Today, when a life insurance policy earns interest, that interest typically increases the cash value of the policy tax-free, accumulating to provide a fund from which the policyholder can borrow tax-free.

Many business owners and high net-worth clients purchase life insurance specifically because it provides a tax-free investment that accumulates during many years and can be withdrawn without worrying about capital gains or the new investment income taxes at some point in the future.

In the case of corporate-owned life insurance, corporations often borrow to purchase or pay the premiums on a life insurance policy. An exception to the general rule allows a corporation to deduct the interest paid on any related debts if the policy covers the life of an officer, director, or employee of the corporation — essentially providing a double tax motivation for corporations to purchase life insurance. However, eliminating this exception could generate an estimated $7.3 billion in tax revenue over ten years.

Another proposal would impose reporting requirements on any transfer of a life insurance policy that provides a death benefit of at least $500,000. Usually, when a policyholder sells his life insurance policy, he must pay taxes on the difference between the value of the insurance proceeds collected and the amount that the investor paid for the policy. The goal of the reporting requirements is to aid in the elimination of transactions structured to avoid the tax that must be paid on any gain realized when a policy is transferred.


Essentially, clients should be prepared for the reality that in today’s world, no tax preferences are certain. Even though it is likely that the primary tax preferences afforded life insurance policies will not be eliminated any time soon, certain benefits could fall victim to the year-end compromise discussions. It is therefore important to remind clients that substantial non-tax reasons exist for purchasing life insurance — of course, the primary purpose is to provide liquidity to the policy beneficiaries upon the insured’s death — but the steady returns typical of a life insurance contract can also provide a conservative investment option for clients


This content originally appeared on National Underwriter Advanced Markets, a LifeHealthPro partner.

For more on threats to life insurance tax benefits, see:

Taxing life insurance benefits would be bad—up to a point

5 things that scare me about the future of life insurance

Is life insurance the next Big Bird?

About the Author
Robert Bloink

Robert Bloink

Robert Bloink worked to put in force in excess of $2B of death benefit for the insurance industry’s producers in the past five years. His insurance practice incorporates sophisticated wealth transfer techniques, as well as counseling institutions in the context of their insurance portfolios and other mortality based exposures. Robert Bloink is a professor of tax for the Graduate Program of International Tax and Financial Services, Thomas Jefferson School of Law.

Previously, Robert Bloink served as Senior Attorney in the IRS Office of Chief Counsel, Large and Mid-Sized Business Division, where he litigated many cases in the U.S. Tax Court, served as Liaison Counsel for the Offshore Compliance Technical Assistance Program, coordinated examination programs audit teams on the development of issues for large corporate taxpayers, and taught continuing education seminars to Senior Revenue Agents involved in Large Case Exams. In his governmental capacity, Mr. Bloink became recognized as an expert in the taxation of financial structured products and was responsible for the IRS’ first FSA addressing variable forward contracts. Mr. Bloink’s core competencies led to his involvement in prosecuting some of the biggest corporate tax shelters in the history or our country. He can be reached at

About the Author
William H. Byrnes

William H. Byrnes

William Byrnes is the leader of Summit Business Media's Financial Advisory Publications, having been appointed July 1, 2010. He has been an author and editor of ten books and treatises and seventeen chapters for Lexis-Nexis, Wolters Kluwer, Thomson-Reuters, Oxford University Press, Edward Elgar, and Wilmington, as well as numerous commissioned, peer-reviewed, and law review articles. He was a Senior Manager, then Associate Director of international tax for Coopers and Lybrand, which subsequently amalgamated into PricewaterhouseCoopers, practicing in Africa, Europe, Asia, and the Caribbean.

He has been commissioned and consulted by a number of governments on their tax and fiscal policy from policy formation to regime impact. He has served as an operational board member for companies in several industries including fashion, durable medical equipment, office furniture, and technology. Since 1994, he has been a professional trainer for professional association conferences, government workshops, and financial service institutions in-house meetings.

Before Associate Dean Byrnes joined the administration of Thomas Jefferson School of Law, he was a tenured law faculty member at St. Thomas School of Law. He serves on the Academic Committee of the American Academy of Financial Management. He created the first online graduate program offered to wealth managers and life insurance producers without any legal background—see (Graduate Program of International Tax and Financial Services, Thomas Jefferson School of Law).


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