Proposed Health Insurance Surtax on Unearned Income – Impact on Life Insurance?

Just prior to his health care summit in February, President Obama released his proposal for health reform.  The President's proposal draws from both the House and Senate health bills and includes some new ideas from the Administration. One new idea put forward by the President was to expand the Senate's proposed increase in the Medicare health insurance tax. 

Regarding life insurance industry products, the Administration’s proposal would specifically affect annuities, but it may also have an impact on life insurance policies.  As of this writing, the Administration proposal has not been put in statutory language, but observers have noted that it could well apply to income recognized from the surrender or sale of a life insurance policy. 

Two Internal Revenue Service revenue rulings issued last year (Rev. Rul. 2009-13 and 2009-14) discuss the tax consequences of surrender or sale of a life insurance policy and specify the portion of the taxable proceeds that will be treated as ordinary income or capital gain.  Because income from the surrender or sale of life insurance policies may be seen as functionally equivalent to other types of unearned income, it is conceivable that such income would be included in the reach of the 2.9 percent additional tax. 

Please note that, while the proposal to impose a health insurance tax on annuity payments—and possibly life insurance surrenders or sales—is alarming, there has been nothing to suggest that the Administration’s proposed 2.9 percent additional tax on unearned income would affect amounts that are not now taxable, such as life insurance death benefits or inside buildup on policies that have not been surrendered or sold.

It remains to be seen whether the Congress will include the Administration’s helath insurance tax on unearned income proposal in any compromise bill that may move forward.

NAIFA Staff Contact: Michael Kerley, Senior Vice President – Federal Government Relations, at (703) 770-8155; or Timothy Hanford, NAIFA Outside Consultant.