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advantages of converting to a permanent plan of
insurance. (Veterans Administration pamphlet
29-76-1, May 1976, reprinted April 1980).

new

Thus, term insurance is not a viable alternative for many people. Permanent life insurance overcomes this problem; however, the Administration would impose a cost problem by imposing progressively higher taxes as policyholders grow older. An illustration of the additional imputed taxable income under the Administration's proposal is shown below for selected ages. The calculations are for a typical $40,000 whole life policy originally issued to a male, age 35 for a $535 level annual premium. The cost of insurance protection is based on the "P.S. 58" rates published by the Internal Revenue Service.

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The illustration does not include the imputed taxable income from the excess of the policy dividend over the policy premium. The dividend exceeds the policy premium when the policyholder reaches age 49.

It cannot be denied that Americans need insurance

protection over their lifetimes. Continuing needs include provision for spouses who outlive a breadwinner and provision for non-self-supporting children (e.g., mentally or physically handicapped) who survive the breadwinner as well as continuation of small businesses and family farms through the purchase of the decedent's interest. Lifetime insurance protection is essential for Americans who are marrying and starting families later. In all these situations, no other generally available insurance product can provide the protection of permanent life insurance.

The Administration's proposal would penalize future generations of older Americans who would use permanent life insurance to guarantee that their dependents are protected financially after the insured's death and who would either not purchase life insurance or would be forced to surrender their policies as they grew older to avoid paying increasingly large amounts of tax.

Currently, 24 million people aged 55 and over own cash value policies to protect their dependents; they represent 35 percent of the cash value policyholders. Enactment of the Administration's proposal would interfere with the financial self-sufficiency of future generations of older Americans and would, eventually, result in greater demands

being placed upon the Social Security system. Older

Americans will face a serious loss of financial protection if permanent life insurance is taxed and becomes too expensive to own. Many survivors depend on life insurance proceeds to provide income during their remaining years. For example, a member company study showed that approximately one-third of all widows rely on life insurance proceeds and Social Security to live. One-fourth of these widows have only their life insurance proceeds to pay for the last illnesses and funeral expenses of their husbands.

The adverse impact which taxing permanent life insurance would have on future generations of older Americans in terms of cost and financial security makes it unacceptable.

The proposed new tax would confuse and upset millions
of taxpayers. Most Americans believe taxing life
insurance is unfair.

6.

A dimension of any tax proposal, including the Administration's base broadening proposal, is the matter of

taxpayer perception.

In order for a change to be widely

accepted, it must be understood by the average taxpayer.
If the Administration's proposal is adopted, policyholders
will not understand how and why they have additional income
when they purchase life insurance.

Theoretically, broadening the tax base could include imputing rent on owner-occupied homes as taxable income. Most taxpayers, however, understandably do not grasp the subtle arguments behind this concept. Therefore, only a few theoreticians would recommend taxing imputed rent in order to broaden the tax base. The increase in the value of a life insurance policy presents the same situation. The idea that one receives taxable "income" from the increase in the value of a permanent life insurance policy and that this income should be taxed annually is a suggestion that few people would view as logical or acceptable.

One of the arguments given by the Administration to support its tax reform proposals in general is that taxpayer morale is undermined by the perception of tax loopholes enjoyed by others. While this may be true, morale is affected more adversely when taxpayers are told that their taxable income includes something they do not understand to

be income.

According to a recent survey by Yankelovich, Skelly and White, commissioned by the ACLI, four out of five Americans oppose the Administration's plan to tax individual life insurance policies. Seventy-five percent agree that the tax would penalize people who are trying to protect the financial security of their dependents and that it would

tax people on money they do not actually receive.

Significantly, ninety-one percent said purchasing permanent life insurance would be less desirable than it is now.

7.

Since 1913, Congress has recognized the enormous social
good provided moderate- and middle-income American
families by permanent life insurance.

The enormous social good provided by permanent life insurance protection should not be ignored in considering whether a new tax is appropriate. In 1983, $7.0 billion was paid in death benefits with 63% going to wives and children. Of the remaining amount, portions went to preserve existing small businesses, family farms and for other purposes. were for less than $25,000. In 1983, 66% of the permanent life insurance policies were purchased on the lives of individuals with an income under $25,000 a year. These numbers clearly demonstrate that the benefits associated with life insurance go primarily to moderate- and middleincome families.

Two out of three death benefit payments

The Administration's proposal includes a chart showing the distribution of the ownership of cash value life insurance by levels of income. The chart indicates that on the average, higher-income families have more cash value insurance than lower-income families. The Administration

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