In this Section:

A Century Of Protection

In response to this passage in Section II, Part B of the 1913 Tariff Act, this language was included:

"Provided, that the proceeds of life insurance policies paid upon the death of the person insured or payments made by or credited to the insured, on life insurance, endowment, or annuity contracts, upon the return thereof to the insured at the maturity of the term mentioned in the contract, or upon surrender of contract, shall not be included as income."

Also known as the Underwood Act after the bill’s author, Alabama Congressman Oscar Underwood, the bill was introduced in response to the passage of the 16th Amendment, which established the federal revenue system. Section B outlined the types of revenue subject to taxation and it specifically excluded inside buildup of life insurance and annuity contracts. The Tariff Act was passed by the 63rd Congress in the summer of 1913 and signed by President Woodrow Wilson on Oct. 3, 1913. Life insurance as the foundation of financial protection was affirmed.

Fast-forward to January 1990. At that time, the General Accounting Office submitted a report to the Senate Finance and House Ways and Means Committees, titled “Tax Treatment of Life Insurance and Annuity Accrued Interest” (GAO/GGD-90-31). The report focused on how much revenue is lost by not taxing the interest on cash value of life insurance, the potential effects such a tax might have on insurance sales and the justification for such a tax.

At the time of the report, it was estimated that the federal government had forgone approximately $5 billion per year in revenue. The amount of revenue lost is now estimated to be about five times that much, according to the latest Joint Committee on Taxation (JCT) report on tax expenditures. The report concludes that Congress should weigh the potential revenue loss to the government against the social good that is provided via tax-free inside buildup. According to the GAO, such a tax is worth considering.

One of the findings of the GAO report was that middle- and upper-class families benefited the most from the tax-free treatment of inside buildup. If tax-free internal buildup were eliminated, the impact will more likely to be felt by lower- and middle-class Americans, should they withdraw or borrow against a policy to supplement retirement, offset college costs for children or use as an emergency fund. One has to wonder if the reality of that impact is worth it, regardless of the advantages afforded those in a more affluent economic class.

The GAO did find one argument against taxing inside buildup: Taxing it would reduce the amount of insurance coverage and leave policyholders with less retirement income. At a time when most studies show that Middle America is woefully underinsured – if insured at all – this alone should be a compelling reason to cause great concern over modifying life insurance’s tax status. But, think about it. We’re also reminded constantly that Social Security is underfunded and may not be there for many of our populace to access benefits, or that benefits might be severely compromised relative to what we’ve all come to somewhat take for granted. Is this a time when we should be eliminating opportunities to supplement potential Social Security shortfalls?

NAILBA is part of a coalition of peer associations called Americans to Protect Family Security. Their website is I urge you to bookmark that site. For many years, the LIFE Foundation ( has done a yeoman’s job at presenting the abstract of life insurance and its financial impact on the family and small business. Think of the SecureFamily site as a legislative version of the LIFE site. It provides educational information about the statutory underpinnings of life insurance for professionals, consumers, and legislators. It provides detail on pending legislation and regulatory issues that most of our clients simply aren’t aware of.

Congress continues to look for all potential sources of revenue, including taxing the internal cash value buildup of life insurance policies. We as life insurance professionals have a responsibility to alert our clients and our own members of Congress. While it is important to the country’s economic stability to update the tax code, taxing life insurance benefits could lead to decreased usage and lessen the viability of life insurance as a vehicle to offset retirement shortfalls and provide access to cash values to soften other financial blows as it has for a century. We must tell our story of our community involvement, and how our products have helped our clients maintain and enhance their financial health. Our representatives in Washington need to know that any revenue increases gained from the taxation of life insurance benefits is not worth the risk to the financial security of 75 million American families.

Congress saw the value of life insurance 100 years ago and deemed it important enough to protect death benefits and inside buildup from taxation. Over the last century, society has grown and evolved. Very often, it has been the tax-favored structure of cash value life insurance that has fueled and helped in that growth and evolution. Modifying that structure at this time, in this economic environment, could have disastrous effects on the American family, the small-business owner and the overall life insurance industry.

CLU, LTCP, is the president of Pittsburgh-based The Brokers Source, Ltd., and the 2013 NAILBA Chairman of the Board. [email protected].

More from InsuranceNewsNet