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

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.

The Life Insurance Company Income Tax Act needs updating to reflect substantial changes in the industry and the economy. The act contained a number of controversial provisions. Also, many features of the act were written to tax the industry when it was dominated by mutual companies, whole life insurance was the predominant product sold, the rate of inflation was low, and earning rates on investments were much lower than current rates. Special features in the act recognized the competitive balance between mutual and stock companies, the importance of fostering the survival of small life insurance companies, and the long-term nature of the life insurance business. In the past 20 years, the balance in the industry has shifted, and mutual companies no longer dominate. The lines of business that life insurance companies write have shifted from whole life to term and group insurance. There has been a dramatic increase in the pension line of business and tax-deferred annuities. Policy loan provisions have induced unanticipated demands on life insurance company assets in recent years. Because of these factors, Congress should consider changing sections of the Act which deal with the method by which the reserve deduction, that portion of current income necessary to meet future obligations, is calculated. Taxable income should be redefined as well as the method for approximating those reserves that are computed on a preliminary term basis.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

Director: Johnny C. Finch Team: General Accounting Office: Program Analysis Division Phone: (202) 512-7824