The Concept of the Level Premium Whole Life Policy. Re-Examined: Comment

Abstract

Listen

Translate article

Robert I. Mehr [3, pp. 428-431] has suggested that there is tax discrimination against cash value life insurance relative to installment debt. He argues that a consumer is entitled to deduct the service costs of installment debt, but is unable to deduct an interest component in life insurance (installment) premiums which services the cost of providing protection over the policy duration. Mehr, however, fails to identify or treat the very interesting question of how this interest component would be measured for tax purposes. He also alleges discrimination because gains over the net purchase price incurred on disposition of an asset acquired through installment debt are treated as capital gains, whereas gains realized at the surrender or maturity by endowment of a cash value life insurance policy are taxed as current income, subject to income averaging. Finally, he wonders why property taxes charged against some items acquired through installment purchases, such as a house, are deductible expenses although premium taxes (included in the expense loading of a life insurance policy) are not deductible. These arguments represent interesting counter-charges to conventional wisdom which holds the life insurance policy in a favored tax status that endows it with an economic subsidy-tax free inside interest buildup oln savings. However, Mehr's allegations do not seem to be consistent with the facts. Failure to pay installments due on debt would cause forfeiture of assets at least to the extent of the outstanding debt and reduce liabilities accordingly. Failure to pay life insurance premiums does not result in forfeiture of an asset. Furthermore, the use of installment debt involves the simultaneous creation of an asset (the item being financed) and a liability (the loan). The purchase of life insurance does not involve the formation of a liability. It is generally deemed desirable to allow tax deduction for the costs of servicing a liability while it is being extinguished. That is, the costs incurred in eliminating such liabilities, other than the principal sum of the liability itself, receive a tax exemption because these costs represent income earned by another factor and are taxed at that source. Savings, however, are distinguished as the accumulation of assets, where an asset, say cash, is