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Will Tax Change Make Traditional Life Insurance Obsolete?

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Going forward, there will be much analysis of the recently enacted federal tax legislation and its impact on the life insurance industry.

The predictors of doom will declare that estate tax repeal will cause the end of sales of traditional cash value life insurance products. Others will look at the enhancements to qualified retirement plans as a wonderful opportunity to sell annuity products.

All this rhetoric may cause us to lose sight of the fundamental reasons for purchasing life insurance: insuring human life values.

In recent years, the two of us seem to be attending more funerals of friends and loved ones than when we were younger. Our emotions are always bittersweet–feelings of sadness coupled with hopes the survivors can adapt and get on with the remainder of their lives. Above all, were concerned that the survivors have adequate financial security already in place. Such security is far more important for most of us than tax avoidance.

Thats where life insurance comes in. Regardless of whether the estate tax stays repealed (and we question anyone who thinks that five more Congresses will leave the “repeal” of the estate tax in place), traditional life insurance will still provide financial security to the loved ones of those with enough foresight to purchase it.

No other financial product can provide the average person (including the “average” well-off person) with the same degree of financial security as traditional cash value life insurance provides.

Traditional products help to provide affordable protection that can weather all sorts of financial storms, be it death, disability, retirement or emergency needs.

We do not question the legitimate need for term insurance. Nevertheless, term insurance provides only a temporary solution for financial needs planning. The inescapable increases in cost as the insured ages do not make it a permanent solution for an aging population.

Regardless of what happens to the estate tax, even old people still need traditional cash value life insurance–if for nothing else, to supplement retirement.

This insurance will also remain essential to the succession planning for family businesses, particularly when some of the children do not desire to work in the business.

We do not believe the estate tax is a fair tax. It causes avoidance of too many artificial constructions to be consistent with sound public policy. (Indeed, there is a good reason why it has long been called the only “voluntary” tax–because only those who are unwilling to do some effective planning end up paying it.)

Moreover, this tax engenders a type of “economic class warfare,” in that it is assessed only against a small percentage of the population. These are the people who have been inordinately successful in financial terms.

It almost seems the tax should be termed the “envy” tax, because it is only levied against the handful of citizens who have amassed the amount of assets that are subject to the tax. Average earners are not sympathetic to such individuals and so have been willing to allow an unfair tax to be levied against them!

Despite the lack of fairness, the estate tax has been a boon to the life insurance industry. It has been such a boon, in fact, that we have heard some successful insurance agents predict their practices will end if the estate tax does disappear for good.

Yet, the life insurance industry confronts a far greater threat, and so do our fellow citizens who seek the ability to secure the financial futures of their loved ones.

This threat is the potential for loss of tax-favored treatment of the investment buildup inside of life insurance products.

And, as bad as the loss of tax-deferred or tax-free inside buildup would be, the loss of income tax-free insurance proceeds would be even worse. It would destroy the ability of people to effectively plan their futures and would make the federal government even more ghoulish than it is now with the estate tax.

In the past 25 years of tax bill after tax bill, the government has tried repeatedly to float changes in the tax status of life insurance products. It seems as if Treasury Department officials do not like the tax treatment afforded life insurance products, and so they attempt to terminate it with each new tax bill.

In past articles, weve identified one reason why support is lacking for continuing the favorable tax treatment of life insurance products. This is a perception that our products are only used to benefit the wealthier strata of society. Therefore, the “envy” tax factor becomes an element when our elected officials and Treasury bureaucrats consider the tax future of the products.

This “envy” tax factor also makes it harder to sell the life insurance story to fellow citizens–because marketers are under attack via a threat to the tax status of the products.

This is an excellent time to renew our commitment to the concept of using traditional life insurance products to insure human life values–separate and apart from any tax considerations.

These products are unique. They afford a level of security that is unparalleled by any other financial planning product. They protect against unforeseen eventualities and also protect against the normal passage of life.

More concern to the fundamentals of these products, and less concern about tax matters, can only strengthen the story the industry has to tell the public. It can also make the industrys case much more effective with elected representatives and fellow citizens.

Norse N. Blazzard, JD, CLU, and Judith A. Hasenauer, JD, CLU, are principals in the Westport, Conn., and Ft. Lauderdale, Fla., law firm of Blazzard, Grodd & Hasenauer, P.C. You can e-mail them at [email protected]

Reproduced from National Underwriter Life & Health/Financial Services Edition, July 20, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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