Bushs Tax And Saving Vehicles: Bad Public Policy
By David F. Woods
Something has been missing in reports by the media and other industry analysts on President Bushs tax proposals. These reports have concentrated on the effect the proposals could have on sales of annuities and retirement plans. And while this is correct as far as it goes, it is dangerously incomplete since it overlooks an equally major threat to permanent life insurance.
There is little question the Bush administrations proposed savings vehicles would adversely affect current savings and retirement vehicles as well as threaten long-term savings for retirement. But they would also have a devastating impact on the sale of permanent life insurance. The result would be that millions of people, who, because of the new vehicles, bought term insurance and invested the difference in the new Lifetime Savings Accounts (LSAs), would be without the insurance they need and want as they enter their senior years.
Heres the problem. With an LSA anyone can save or invest up to $7,500 per year with the assurance that dividends and capital gains, as well as any distributions, are tax-free and can be used at any time for any purpose.
In other words, the LSAs have all the advantages of permanent life insuranceplus one. When a permanent life insurance policy is surrendered any excess of cash surrender value over premiums paid is taxable as ordinary income. This is not true in an LSA. Distributions are tax-free. The LSAs offer more favorable tax treatment than permanent life insurance.
This represents an historic reversal of Congressional intent. The "inside buildup" of a permanent life insurance policy has always received favorable tax treatment because Congress wants to encourage people to provide their families with lifelong protection, even into their later years. The LSA proposal is a virtual mandate to "buy term and invest the difference" in an LSA.
So what happens later in life when the term insurance becomes too expensive? People will drop it whether they want to or not because they cant afford it. In my 42 years of experience, I have seen very few people who wanted to get rid of their life insurance as they got older. Those who still had term insurance usually were forced to do so because of cost. Those with permanent insurance most often had relatively low premiums or premiums that could be reduced or fully paid by dividends.
Additionally, only very infrequently did the "buy term and invest the difference" folks have enough invested to take care of their families the way they wanted.
