Tax Reform

Retirement and Tax Reform

The Issue
With ten thousand people reaching retirement age every day for the next 16 years, it is important that public policy incentivizes and encourages families to save and plan for retirement.  Some in Washington believe the current tax code is complex, outdated, and in need of reform. Whether Congress considers a comprehensive approach or something more concise, it will be important for policy makers to ensure that families and workers can continue to protect against the risks of dying too soon or outliving their savings.  Life insurance and annuity products can help minimize these risks and are necessary to obtaining financial and retirement security.
 
Background
Insurance products and employer-provided benefits help Americans provide financial protection and security for themselves and their loved ones.  Whether it is the economic loss from dying prematurely, becoming ill or disabled, or outliving savings in retirement, most families do not have the resources to manage these risks on their own.
 
Life insurance products are unique in their ability to successfully and affordably transfer risk from the individual to a
larger pool of savers or insureds.  Policy benefits paid at the death of a breadwinner help families avoid the hardship of lost income.  Sometimes life insurance can be a back-up savings source to be used in emergencies.  Annuities pay a guaranteed, steady stream of income, protecting individuals from outliving their assets and can be purchased both in a qualified retirement plan or held personally.  Disability income insurance protects workers’ income by replacing a portion of their earnings if they cannot work due to accident or illness. Whether people seek protection and security products on their own or as part of a group with the assistance of their employer, our nation’s tax system should not discourage these actions.
 
There are more than 75 million families that currently rely on life insurance protection, but 58 million American families wish they had more1. Nearly two-thirds of American families rely on a 401(k) type defined contribution plan or a defined benefit plan, and 23 percent have an IRA. But unfortunately, nearly 15 percent of those between the ages of 45 and 59 have no retirement savings plan at all2. Changing the tax treatment of these products may result in less protection for families that currently have these products, and little or no coverage for those still needing protection.
 
Current tax rules do not tax earnings on life insurance policy values unless there is an actual distribution.  This tax treatment is consistent with general tax principles and is a necessary component of the affordable pricing structure of life insurance products.  Policy premiums are paid with after-tax dollars, and if taken, distributions are taxed at ordinary income tax rates.  Any changes to how products and product providers are taxed would have a negative effect on families and workers, making it more difficult and more expensive to properly manage risks or adequately plan for retirement.
 
NAIFA Position
Americans need public policy that continues to encourage them to plan ahead, protect their families’ financial security and adequately save for retirement. Well-prepared families will have adequate retirement savings accounts, life insurance, medical insurance, and guaranteed income annuities to supplement social security benefits. With the strain on federal entitlement programs as well as on state and local programs, now is not the time to make it more difficult or more expensive for families to plan for their long-term financial needs.

1. “Facts About Life 2013,” Life Insurance Marketing and Research Association (LIMRA), 2013, http://www.limra.com/uploadedFiles/limracom/Posts/PR/LIAM/PDF/Facts-Life-2013.pdf, (accessed October 30, 2014).

2. Board of Governors of the Federal Reserve System, Report on the Economic Well-Being of U.S. Households in 2013, Washington, D.C.:  Federal Reserve Board, July 2014, http://www.federalreserve.gov/econresdata/2013-report-economic-well-being-us-households-201407.pdf (accessed October 30, 2014).
 
Download this issue paper: PDF