What’s New
A new bill proposal would call for a significant change in tax policy, effectively ending a tax loophole that allows the wealthy to shield billions of dollars from being taxed.
Why It Matters
Senate Finance Committee Chair Ron Wyden, a Democrat from Oregon, released draft legislation this week.
The bill, the Protecting Proper Life Insurance From Abuse Act, would effectively end the use of private placement life insurance (PPLI) contracts for tax purposes.
What To Know
PPLI policies operate similarly to hedge funds as a way for the wealthy to protect money from being taxed by the government. Currently, they make up just 0.003 percent of all outstanding life insurance policies.
A previous report from Wyden revealed that the PPLI industry saw more than $40 billion stored in policies held by just a few thousand people with net worths in the hundreds of millions and billions.
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What People Are Saying
Wyden said in a statement: “Life insurance is an essential source of financial security for tens of millions of middle class families in America, so we cannot have a bunch of ultra-rich tax dodgers abusing its special tax treatment to set up tax-free hedge funds and shelter oodles of cash.
“There’s a long tradition of Congress stepping in to prevent the abuse of the preferential tax rules for life insurance, and this bill is the next step in that process. Life insurance is too important to allow it to be twisted into another garden variety tax ripoff for the top.”
Alex Beene, a financial literacy instructor for the University of Tennessee at Martin, told Newsweek: it’s important for middle-class Americans to understand the difference between a standard life insurance plan and the private placement life insurance plans the law targets.
“A private placement life insurance plan is only available to high net worth individuals and has numerous tax benefits, from tax-deferred growth of the cash value to tax-free growth of dividends,” Beene told Newsweek. “This legislation would look to close some of the loopholes that allow for these tax advantages.”
Kevin Thompson, a finance expert and the founder and CEO of 9i Capital Group, told Newsweek: If the new bill does get underway in Congress, tax return reporting requirements could be significantly different.
“If new legislation were to move forward, it could require the reporting of PPLI ownership on tax returns,” Thompson told Newsweek. “This would address concerns about PPLI being used as a significant tax shelter due to the current lack of disclosure requirements and perceived tax avoidance.”
He added: “This would be an overall positive because it protects the broader insurance industry from abuse and unnecessary regulation caused by a few bad actors. Typical Americans with standard life insurance policies can continue to enjoy their current tax advantages without a sweeping overhaul.”
What’s Next
If the bill is passed, companies that sell PPLI policies will face new reporting requirements. If the companies failed to report, they’d face fines of $1 million or more.
While the law would not target taxes for the majority of Americans and only the highest earners would likely be impacted, it’s not clear if the bill will gain enough traction in Congress for approval.
“Its passage relies on how the incoming Congress and administration will view the current rules, but it’s hard to see them taking a proactive stance against them given past voting records,” Beene said.