Wall Street Journal, Shift to Wealthier Clientele Puts Life Insurers in a Bind:
The life-insurance industry has enjoyed beneficial tax treatment for its products for nearly a century. Whenever Congress tried to change that, insurers always had a mantra at the ready: We protect widows and orphans. Life insurance needs to be free from income taxes, the industry said, because of its special social function. It keeps survivors from a life of penury when a chief breadwinner dies.
But in a development all but unnoticed outside the industry, life-insurance companies gradually have shifted away from their broad historical base of middle-class households. Instead, statistics show, an increasing portion of insurers' business consists of selling large policies to wealthier Americans, often as part of complex estate-tax plans.
The shift means that a growing proportion of the tax benefits of life insurance goes to the well-off, not to the middle class that once was the industry's backbone.
The industry's safety-net role is eroding just as Congress is scouting for new revenue sources amid gaping budget deficits, raising concern among insurance executives that lawmakers could revisit the industry's tax advantages.
There is no proposal in Congress this year to curb the tax breaks for life insurance. Washington insiders say any such attempt would likely face heavy opposition from insurers and agents, as well as from the general resistance to any kind of tax increase at a time when the economy is weak. …
[Life insurance policies enjoy] a dual tax advantage: The death benefit isn't subject to federal income tax, and earnings in the investment-account part generally accrue tax-free. … Of the two main life-insurance tax preferences, the one that has faced the most scrutiny from Congress over the years is the provision that lets investment gains accumulate tax free within permanent-life policies. The CBO last year estimated that eliminating the tax preferences for investment gains inside permanent-life insurance and annuities would raise an additional $265 billion in taxes over a decade.
