Billions of Dollars Are Involved in Taxation of the Life Insurance Industry--Some Corrections in the Law Are Needed

Highlights

GAO examined the provisions of the Internal Revenue Code under which life insurance companies are taxed to determine whether the provisions, which were enacted in 1959 and have not been reviewed since, were in need of revision.

Recommendations

Matter for Congressional Consideration

Matter	Status	Comments
Congress should determine the extent of any abuses of reinsurance and examine Section 802 of the Life Insurance Company Income Tax Act of 1959 as it refers to modified coinsurance in any evaluation of the Act.	Closed	Please call 202/512-6100 for additional information.
Congress should amend Section 805(b)(4) of the Life Insurance Company Income Tax Act of 1959 to clarify the definition of assets.	Closed	Please call 202/512-6100 for additional information.
Congress should consider amending Section 804(c)(1) of the Life Insurance Company Income Tax Act of 1959 to provide a specific definition of investment expenses.	Closed	Please call 202/512-6100 for additional information.
Congress should consider amending Section 801(b) of the Life Insurance Company Income Tax Act of 1959 which defines life insurance reserves.	Closed	Please call 202/512-6100 for additional information.
Congress should amend the language of Section 801(a) of the Life Insurance Company Income Tax Act of 1959 to define a life insurance company.	Closed	Please call 202/512-6100 for additional information.
When considering the issue of deferred annuities, Congress should decide the issue of taxation at the corporate or individual level.	Closed	Please call 202/512-6100 for additional information.
Congress should amend the legislation to allow only $15 per thousand dollars of the amount at risk in revaluing reserves for permanent insurance plans.	Closed	Please call 202/512-6100 for additional information.
Congress should amend Sections 802(b) and 815(c)(2)(A) of the Life Insurance Company Income Tax Act of 1959 to reflect the current condition of the life insurance industry. There should be no automatic deferral of half the excess of gain from operations over taxable investment income for all life insurance companies. However, eliminating this deferral should be gradual and indexed according to the age of the individual company.	Closed	Please call 202/512-6100 for additional information.
Congress should consider selecting as an alternative to replacing the 10 to 1 rule for adjusting reserves one of the following: (1) substituting the interest based on assumed rates for the 10 to 1 adjustment, the free interest method; (2) replacing the 10 to 1 rule with a reserve deduction based on a geometric approximation that provides a larger reserve deduction in the current economic environment; or (3) substituting a 4.5 percent maximum for the average earnings rate with either the 10 to 1 reserve adjustment or with the geometric reserve adjustment.	Closed	Please call 202/512-6100 for additional information.

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