Tax on Insurance Buildup
8 Pages Posted: 9 Dec 2009
Under current law, earnings from an investment in a life insurance contract are exempt from tax. The proposal would tax the investor annually on the internal earnings on the life insurance policy, including earnings to pay for insurance coverage. Life insurance companies would be required to report and withhold tax on the increase in cash surrender value plus the cost of the insurance, less the premiums paid. Actuarial gain — the outcome of a bet without any time value or earnings element — would continue to be tax exempt, however.
The proposal is made as a part of the Shelf Project, a collaboration by tax professionals to develop and perfect proposals to help Congress when it needs to raise revenue. Shelf Project proposals are intended to raise revenue, defend the tax base, follow the money, and improve the rationality and efficiency of the tax system. The tax community can propose, follow, or edit proposals at http://www.taxshelf.org. A longer description of the Shelf Project can be found at ‘‘The Shelf Project: Revenue-Raising Projects That Defend the Tax Base,’’ Tax Notes, Dec. 10, 2007, p. 1077, Doc 2007-22632, 2007 TNT 238-37.
Keywords: tax reform,life insurance
JEL Classification: H20
Suggested Citation: Suggested Citation