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Tax Reformers Targeting Life Insurance

March 11, 2011 | Filed Under Insurance, Retirement Savings, Tax Articles | Comments Off

Is the cash value in your life insurance policy on its way out with tax reform?

In an attempt to tackle the federal deficit and increase revenue, Congressional members are tossing around ideas to alter the tax treatment in insurance policies and retirement plans.  House Budget Committee chairman and a leader of the tax reform effort, Republican Paul Ryan, R-Wisconsin., said in January to the National Press Club, that he would not rule out removing the tax treatment policyholders receive on the cash that is built up in their life insurance policies.

This comes in the wake of a Congressional defeat of similar proposals offered by the President’s National Commission on Fiscal Responsibility and Reform in December 2010.  Mr. Ryan voted against that commission’s proposals.  But a month later, in a response to questions regarding tax reform and the favorable tax treatments in insurance policies, Mr. Ryan said, “We’re looking out for the American people,”  “We’re looking out for the American economy. We’re not looking out for this narrow special interest that has a little piece of the tax code carved out which serves as a direct barrier to entry against….competitors.”  He stated, however, that it is too early to tell whether he and his GOP colleagues will eliminate the tax benefits in insurance policies through future tax reform.

In defense of it’s policyholders, the insurance industry will fight against any attack on the tax-deferred buildup of cash value in life insurance policies, and the tax-free death benefit.  Terry Headley, president of the National Association of Insurance and Financial Advisors, said “What we don’t want to do is for the American public to be disinclined to provide for their own financial security and, therefore, creating a greater dependence on government.”

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