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February 02, 2024 at 01:57 PM
What You Need to Know
- The federal government has $25 trillion in debt.
- Analysts say taxing life and annuity investment income could raise more than $200 billion over 10 years.
- Carmi Margalit says a political problem would probably slash the actual increase in tax revenue.
Congress could find new ways to tax the buildup of value inside cash-value life insurance policies this year, but it probably won’t.
Carmi Margalit, the life insurance sector lead at S&P Global Ratings, made that prediction Thursday at an S&P Global insurance hot topics conference in New York.
Margalit and other speakers avoided the hottest topic of all — what U.S. insurance policy might look like if Donald Trump returns to the White House in 2025 — but Margalit did touch on why he thinks inside insurance buildup might continue to be safe, in spite of pressure on Congress to cut the federal budget deficit.
Once lawmakers look at how taxing inside buildup would really work, “it’s not that attractive anymore,” Margalit said.
What it means: The life insurance policies that ultra-high-net-worth clients use to pass on wealth and the life insurance in the arrangements that executive clients use to save for retirement are probably safe this year.
The backdrop: The United States is set to report a $1.8 trillion deficit for this year on $5 trillion in receipts, and the federal government’s debt could increase to $25 trillion.
That compares with U.S. gross domestic product, or national income, of $27 trillion, and total national net wealth of $142 trillion, according to Federal Reserve Board analysts.
Life insurers have $9.1 trillion in financial assets.
Analysts at the White House Office of Management and Budget now estimate that the exclusion of life insurance death benefits from taxable income for federal income tax purposes will cost the Treasury $209 billion over the 10-year period from 2023 through 2032. The 10-year impact estimate is 31% higher than the 10-year impact estimate the analysts posted a year earlier for the period from 2023 through 2031.
The Congressional Budget Office predicted in 2013 that including life and annuity investment income in taxable income would add $210 billion in tax revenue over a 10-year period.
Tax policy considerations: An attendee asked about the status of inside buildup during a question-and-answer period.
“Congress really wants some tax revenue,” the attendee said.
Interest in taxing life insurance inside buildup “is not new,” Margalit said. ‘It’s a risk that’s always been there.”
Life insurers seem to think that proposals for taxing inside buildup could come from either Democrats or Republicans, he added.
What has protected inside buildup tax rules so far is that imposing new tax rules retroactively would be very difficult, Margalit said.
If an executive has put retirement savings in a life insurance policy under the current tax rules, “I would like to see the politician that’s going to take that away from you,” he said.
When lawmakers see that they can only tax inside buildup for new policies, and how low the increase in revenue from that would be, “that usually kills it,” Margalit said. “All that doesn’t mean it isn’t going to happen, but I don’t think it’s necessarily just around the corner.”
