Syndicated Financial Columnist, Host of the weekly talk show Steve Savant's Money, the Name of the Game, Scottsdale Arizona
In general terms, the death benefit proceeds are paid to the beneficiaries of life insurance policy tax free. There may be some tax exposure in business and estate scenarios. But the government made a decision quite some time ago that life insurance presented a social good that warranted the tax preference.
When Congress created an income tax in 1913, it exempted life insurance because life insurance was seen as a safety net for widows and orphans. Life insurance has expanded in its uses since then, from protecting businesses if a key employee dies, to being part of a financial plan for high wealth individuals. But at its core, life insurance protects people and businesses from financial loss as a result of death. And death is still one area that people hate to see exploited.
President, The Firm of Steven H. Kobrin, LUTCF, 6-05 Saddle River Rd #103, Fair Lawn, NJ 07410
As best as I can understand it, the core reason for not taxing life insurance is that the tax perks give people an extra reason to buy the product. “Free money,” has quite an appeal. With an income – tax free benefit and the potential for tax-deferred cash growth and tax-free distributions, life insurance represents a lot of free money.
It is very much in the government self-interest to have people purchase life insurance. Think about how high the demand for government benefits would be if families did not have private money to sustain themselves when a dear loved one was lost? How about all the businesses that would fail – with the subsequent increase in unemployment – if businesses didn’t sure against the loss of partners and key employees?
And don’t forget all the charities that do tremendous political, spiritual, medical, and civic work for the nation. If you reduce the amount of life policies that are gifted to these groups, many would have a very hard time surviving.
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It is very much in the government self-interest to have people purchase life insurance. Think about how high the demand for government benefits would be if families did not have private money to sustain themselves when a dear loved one was lost? How about all the businesses that would fail – with the subsequent increase in unemployment – if businesses didn’t sure against the loss of partners and key employees?
And don’t forget all the charities that do tremendous political, spiritual, medical, and civic work for the nation. If you reduce the amount of life policies that are gifted to these groups, many would have a very hard time surviving.