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

  • Mr. STANLEY: First I wanted to comment on that inside build-up question. Jim Anderson’s original paper on Universal Life proposed that the company just consider it interest paid and 1099 the policy-holder. I do not think that is unreasonable. If excess interest was declared not fully deductible, there might well be a large market that you can forward 1099 information to regarding the interest paid over deposit.
  • MR. CHAPMAN: Just to supplement that, imagine a second generation Universal Life product that is in a money market fund. We then have a tax privileged money market fund competing with money market funds on which interest is taxable. Look at this from the stand point of the securities industry. By slapping the term insurance on it, which costs pennies in relationship to the amount that is going into the fund, suddenly you have an enormous competitive advantage over the fund that is being marketed in a parallel way. The securities industry has some very powerful friends in Washington. When that product hits the streets in large numbers, I think you will see a real challenge to the taxation of inside build up.

1982 – SOA – Tax Parity for Individual Life Insurance Products, rsa82v8n319 – Society of Actuaries – 22p

  • Finally, I just would like to make a small pitch for the “mystique” of whole life.
    • If we come up with a retrospective approach for nonforfeiture, then we are hastening the viewpoint that life insurance, no matter what kind is nothing more than term insurance plus a side fund.
  • I think the industry has some vested interest yet in keeping the impression that there is more to it than that.
    • It is not just term insurance plus a side fund.
  • If it is strictly term insurance plus a side fund, then we weaken our arguments for favorable tax and regulatory treatment.

—  Douglas Doll

1989 – SOA – Status Report on Standard Nonforfeiture Law Revisions, Society of Actuaries – 14p

SOA – Society of Actuaries – Inside Buildup

1960s

  • 1960 –  SOA – The Life Insurance Company Income Tax Act of 1959, Society of Actuaries –  24p

1970s

  • 1977 – SOA – Report of the Historian, Society of Actuaries – 22p

1980s

  • 1981 – SOA – Federal Income Tax: United States, rsa81v7n420, Society of Actuaries – 16p
  • 1982 – SOA – Tax Parity for Individual Life Insurance Products, rsa82v8n319 – Society of Actuaries – 22p
  • 1982 – SOA – U.S. Federal Income Taxes, rsa82v8n425 – Society of Actuaries – 20p
  • 1983 – SOA – Individual Life Insurance, Society of Actuaries – 22p
  • 1983 – SOA – Universal Life and Indeterminate Premium Products and Policyholder Dividends, Society of Actuaries, by Thomas G. Kabele – 96p
  • 1983 – SOA – U.S. Federal Income Tax, rsa83v9n320 – Society of Actuaries – 14p
  • 1985 – SOA – United States Life Insurance Tax Law, Society of Actuaries – 58p
  • 1989 – SOA – New Tax Developments, Audit Issues and Alternate Minimum Tax – 16p
  • 1989 – SOA – Status Report on Standard Nonforfeiture Law Revisions, Society of Actuaries – 14p

1990s

2000s

  • 2009 – SOA – What’s on the Shelf? A Proposal to Tax the Inside Buildup,  by Brian G. King, tax-2009-vol5-iss3-king-03 – Society of Actuaries – 5p

1970s

  • 1977 0923 – President Carter – Overview of Tax Reform Option Papers – 135p

1980s

  • 1984 11 – DOTT / Treasury – Tax Reform for Fairness, Simplicity, and Economic Growth – The  Department Report to the President – Volume 1 – 275p
  • 1985 05 – President Reagan – The President’s Tax Proposals to the Congress for Fairness, Growth and Simplicity – 489p
    • Part B. Life Insurance Companies and Products 253
      • 10.06 Impose Current Taxation on Life Insurance Inside Build-Up ……………………….  254
  • 1985 MAY 30; JUNE 4, 5, 7, AND 11 [PDF-GooglePlay-Part 1 of 9 – 843p, VIDEO-?]
  • 1985 – AP – Universal / Variable Life Insurance: Policy Purchase Decisions, by Stephen P. D’Arcy and Keun Chang Lee – 58p

1990s

  • 1994 – iret – Tax Treatment of Inside Buildup in Life Insurance Products, By Michael A. Schuyler, Sponsored by Savers & Investors Foundation – 48p

2000s

  • 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
  • 2005 – AP – Beating the ‘Wrap’: The Agency Effort to Control Wraparound Insurance Tax Shelters, by Charlene Luke – 73p

2010s

  • 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?
      • [Bonk: Inside Buildup??]
  • 2017 0803 – NAIFA-Washington – IFAPAC and MEC – [link]
  •  (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 – Letter – to President Carter – Memorandum for the President – Option Paper No. VII: Tax Treatment of Interest – From: Stu Eizenstat, Bob Ginsburg – 126p
    • p34 – 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.
  • p45 – James A. Baker III, Secretary of the Treasury. I don’t think it has a generational bias when you consider that we are attempting here to lower the tax rates on all taxpayers. The younger people, I suppose if you adopt the analo- gy you have suggested, would enjoy the lower rates longer than the older people would. We recognize the life insurance industry talked to us about the taxation of inside buildup, which was a pro- posal in the original Treasury package.
  • We believe they have a valid point when they say you should not do that because people have bought the policies on the basis they would be tax free.
    • We recognize that but we don’t think that is good policy.
    • We don’t think it is good tax policy or fair that that source of income should escape taxation when we are taxing other sources.

1985 MAY 30; JUNE 4, 5, 7, AND 11 [PDF-GooglePlay-Part 1 of 9 – 843p, VIDEO-?]

  • 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

  • 1977 – SOA – Report of the Historian, Society of Actuaries – 22p
    • 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. – <WishList – Wall Street Journal article>
      • Under this proposal the annual interest element on the “savings” portion of such policies would be taxed as income to policyholders.
      • <WishList> – The ACLI submitted a memorandum opposing the proposal strenuously to Treasury Secretary Blumenthal and White House officials. 
      • Needless to say, implementation of any such proposal would have profound repercussions on the life insurance industry.
  • 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 – Report of the President’s Advisory Panel on Federal Tax Reform – Simple, Fair, and Pro-Growth: Proposals to Fix America’s Tax System – 290p

  • p119 – The Save for Retirement accounts would replace existing IRAs, Roth IRAs, Nondeductible IRAs, deferred executive compensation plans, and tax-free “inside buildup” of the cash value of life insurance and annuities.
  • Contributions would be made with after-tax dollars like current law Roth IRAs and earnings would grow tax free. 

2005 11 – Report of the President’s Advisory Panel on Federal Tax Reform – Simple, Fair, and Pro-Growth: Proposals to Fix America’s Tax System – 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]

  • (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, VIDEO-?]

  • 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).