The article,“The perfect tax-favored investment vehicle,” featured in LifeHealthPro’s daily e-newsletter on Dec. 3rd, mischaracterizes life insurance attributes from a tax policy perspective. While it’s fair to say that the product is more tax efficient than the bonds mentioned in the article, it’s important to note that life insurance products are taxed appropriately.
There is no provision in the Internal Revenue Code that excludes, exempts, or deducts inside buildup from gross income. Life insurance is purchased with after-tax dollars, and the gains on inside buildup are not taxed when held within the contract—consistent with treatment of appreciation on stocks or home values. Furthermore, unlike other capital assets, should policyholders receive the proceeds upon surrender from their policies, they pay ordinary income taxes, not the preferred capital gains tax rate.
The article is correct that life insurance is a unique asset in that it is extremely stable — and that stability enables it to provide the guarantees and protections that Americans desperately need.