Taxation of Single Premium Life Insurance

GAO discussed: (1) the sales, features, and tax treatment of single-premium life insurance; and (2) potential approaches for changing the tax-favored status of single-premium life insurance products. GAO found that single-premium life insurance policies: (1) allow one large premium prepayment; (2) combine death benefits with earnings, which accumulate tax-free; (3) allow loans against the policies at little or no cost because the income on the funds offsets the interest charges; and (4) increased 850 percent between 1984 and 1987, from $1 billion to $9.5 billion because of the tax and investment features. GAO also found that: (1) premium sales on new periodic-pay policies grew 20 percent during the same period, from $8.3 billion to $10 billion; (2) because recent legislation resulted in the loss of traditional tax shelters, single-premium life insurance products make good alternatives to certificates of deposit and money market holdings; and (3) these policies seem inconsistent with congressional efforts to constrain tax advantages for investment-oriented life insurance products. GAO believes that Congress may wish to consider legislative remedies to eliminate tax advantages on investment-oriented insurance products that would either tax loans from single-premium policies as income in the year withdrawn or remove favorable tax treatment from policies if loans reduce the death benefits below certain levels.