Who Buys Life Insurance?

Most people in places like Arlington, Grand Prairie, Dallas, Fort Worth, Mansfield, Benbrook, Burleson, Crowley, Granbury, and other places in Texas will have some sort of life insurance. But how true is that statement?
The Wall Street Journal published on article on October 3, 2010, titled, “Shift to Wealthier Clientele Puts Life Insurers in a Bind”. The article was written by Mark Maremont and Leslie Scism.
This article tells how the life insurance industry has enjoyed beneficial tax treatment for its products for most of the century. Whenever Congress tried to change the tax treatment enjoyed by beneficaries of the policies the life insurance companies could always holler: We protect widows and orphans.
The industry pointed out that life insurance benefits kept these survivors from becoming wards of the State when the primary breadwinner died.
The article points out that these life insurance companies have shifted away from their broad historical base of middle class households. Instead, statistics show, an increasing portion of live insurance business consists of selling large policies to wealthier Americans, often as a part of complex estate tax plans.
What this means is that the tax benefits are not going to the middle class the way they use to, rather the tax benefits are going to the wealthy in our society. The result of this is that a cash strapped Congress is rubbing its hands together at the idea of going after these life insurance policies and removing its tax free status.
Pointed out by the article is that high end policies for $2 million and up, which can carry annual premiums of $20,000 or more, made up nearly 40% of the face value of whole-life and universal-life policies sold in 2007. Such policies accounted for just 10% a decade earlier, and 1% two decades ago.
Meanwhile, the percentage of American families owning life insurance continues to fall. Thirty percent have no life-insurance coverage of any kind. This is a four decade high according to the research group, Limra.
Instead of helping those left behind when the primary bread winner dies, life insurance has become a tax shelter for the rich.
Most middle class families tend to purchase “term” insurance, which provides coverage just for a designated period and doesn’t involve a tax advantaged investment account. With term insurance, the only tax break is an untaxed death benefit, and this break comes into play infrequently. That’s because most buyers are in their 30s or 40s and remain alive at the end of the policy’s term.
The president of the American Council of Life Insurers, Frank Keating, says the favorable tax treatment of assets accumulated within insurance policies is justified even if the affuent are big beneficiaries, because “it is good public policy” to encourage weath accumulation that helps feed capital formation and job creation.
The Congressional Budget Office last estimated that eliminating the tax preferences for investment gains inside permanent life insurance and annuities would raise an additional $265 billion in taxes over a decade.
Some of the largest life insurers, seeing the trend, are concerned about a failure to meet what some consider the industry’s social mission to ensure that families have life coverage.
Prudential Financial Inc., which historically has focused on the middle class, says 31% of its new policy sales in 2009 were to its most affluent slice of customers, households with investable assets over $250,000. That puts them in roughly the top 15% of U.S. households measured by financial holdings, according to Fed figures. A decade earlier, 19% of its policies in force were in that high end segment.
A focus on upscale customers was evident at the national conference of the Association for Advanced Life Underwriting, a group of high end life insurance agents. “Bullet proofing Estate Plans Against (Successful) IRS Attacks” was the title of one presentation at an April event in Washington, D. C.
While taxing incomes inside of life insurance policies and annuities may not be a terrible idea, much like taxing capital gains, the idea of taxing life insurance policy proceeds is absolutely uncalled for and goes a long way toward defeating the purpose of life insurance.