Life insurance is a key component of Americans’ ability to take individual
responsibility for the financial futures of their families and businesses. It is unique
in guaranteeing the delivery of financial security at precisely the moment it is
needed, while contributing significantly to the nation’s storehouse of savings and
investment capital.
A big fear for many American families is the death of a wage-earner or caregiver,
leaving the surviving family members unable to cope financially. Life insurance
offers peace of mind through immediate financial protection for dependents.
Life insurance enables individuals and families from all economic brackets to
maintain independence in the face of financial catastrophe. In a recent study, more than three in four respondents strongly agree that life insurance is a critical part of a financial plan.1
By providing tools for protection and savings, life insurance is an efficient way
to promote personal responsibility and thus relieve pressure on government
programs. There continues to be strong public support for continuation of current
tax policy for life insurance products.
SUCCESS OF THE PRODUCT
Life insurance protects families against financial loss from the death of a loved
one. It provides a source of reliable liquid assets when the need arises to pay for
death-related expenses, including medical bills and funeral costs. It also can help
families cover daily living expenses, mortgage and tuition payments, and child
care. Two-thirds of American families are protected by life insurance.2
The amount of life insurance is determined by the financial needs of individuals
and families. Some experts suggest coverage should equal at least seven to 10
times annual income. It is impossible for most families to save enough money to
manage the financial consequences associated with the death of a wage-earner
or caregiver. Life insurance makes managing these risks affordable through the
pooling of risk. Industry data shows that in 2009 there were 153 million individual
life insurance policies in force.3
Permanent life insurance has an additional advantage—it is guaranteed to remain
in force for one’s whole life, regardless of age. By design, the level premiums
of permanent insurance are used to both pay for the term cost of a policy’s face
amount (death benefit) and to create a savings aspect (cash value), which helps
cover the rising cost of insurance as one gets older. In addition, the policy’s cash
value can be borrowed to pay important family expenses, such as those for tuition or long-term care. If an insured’s needs change and the death benefit protection becomes less acute, the cash value can be converted into a retirement income producing annuity that can guarantee regular payments for life or for a specified period of time, an option also available to beneficiaries of life insurance policies.
Some policies allow an insured to collect all or part of the death benefit if he or
she becomes terminally or chronically ill. An insured also can cancel (surrender)
the policy and receive the cash value as a lump sum. Fifty-seven percent of
respondents in a 2009 survey said that one of the most important benefits of life
insurance is its cash value because it is a built-in reserve for emergencies.4
Businesses use permanent life insurance to protect against financial uncertainty
and secure their employees’ futures. By owning life insurance on key employees,
businesses have a secure funding source to pay for important employee and
retiree benefits and to protect jobs and families from financial loss and instability
that can result from the death of an owner or key employee.
CURRENT TAX TREATMENT
Policy-makers have long-recognized the important social policy served by
encouraging individuals and families to protect themselves against financial risks,
rather than depend on government to do so. Since its inception in 1913, the tax
code has provided that death benefits—and the cash value in permanent life
insurance—are not subject to income tax.
Premiums are paid with after tax dollars—there is no deduction for premiums paid. Earnings on a permanent life insurance policy’s cash value are not taxed as long as the policy remains in force. However, if a policyholder gives up his or her insurance protection, earnings in excess of the total premiums paid are subject to tax.
There are strict limits on the savings aspect of life insurance to ensure its tax
treatment is not abused. Contracts that do not comply with these limits are
denied the tax treatment entitled to life insurance.
The protection afforded by life insurance is an important societal benefit that
public policy has consistently validated. This policy has been reviewed several
times over the last century, and each time Congress has chosen to preserve the
current tax treatment of permanent life insurance.
CONCLUSION
The current tax treatment of permanent life insurance encourages individuals,
families, and businesses to efficiently manage risk and prepare for long-term
financial needs, despite a general environment that focuses more on the shortterm.
Americans are facing greater hurdles than ever before when planning for
financial security. Any changes to public policy must encourage Americans to plan
for their financial futures.
Key Facts
• 75 million American families count on life insurers to protect their financial
futures.5
• American families have more than $18 trillion worth of life insurance protection
through individual policies and group certificates.6
• In 2009, life insurance beneficiaries received $59 billion in death benefits.7
• At the end of 2009, 153 million individual life insurance policies were in force.
Of the 10 million policies issued in that year alone, 59 percent were permanent
life insurance policies.8
• 78 percent of respondents to a recent survey believe that it is important for the
government to encourage people to protect their families with life insurance.9
1 American Council of Life Insurers, Monitoring Attitudes of the Public 2009.
2 Federal Reserve Board, 2007 Survey of Consumer Finances, February 2009.
3 American Council of Life Insurers, Life Insurers Fact Book 2010.
4 American Council of Life Insurers, Monitoring Attitudes of the Public 2009.
5 ACLI calculations based on U.S. Census, Current Population Survey, and Federal Reserve Board, 2007 Survey
of Consumer Finances, February 2009.
6 American Council of Life Insurers, Life Insurers Fact Book 2010.
7 Ibid.
8 Ibid.
9 American Council of Life Insurers, Monitoring Attitudes of the Public 2009.