Life Insurance Policies for the Rich Targeted in Wyden Tax Bill

Ultra-wealthy investors’ life insurance policies face new taxes under draft legislation unveiled Monday by Senate Finance Committee Chair Ron Wyden, the Oregon Democrat’s latest effort to expose the decades-old inheritance strategy to IRS oversight.

Wyden’s proposed legislative text would reclassify so-called private placement life insurance polices and similar annuities as “private placement contracts” if they meet certain criteria. The change would impact a sliver of outstanding life insurance policies, and raise taxes on earnings and losses and when the policies are paid out, according to summaries provided by Wyden’s office.

“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,” Wyden said in a statement. “Life insurance is too important to allow it to be twisted into another garden variety tax ripoff for the top.”

It also would impose reporting requirements for those companies that sell the policies, and slap fines starting at $1 million for those that fail to report.

Wyden is slated to lose the gavel of the Finance Committee in January when Republicans take the majority of the Senate, lessening his clout as the GOP direct tax policy through simple-majority procedures.

It’s the latest step in the Oregon Democrat’s long-running probe of the niche life insurance policies as the strategy gained popularity among rich investors. He released an investigation in February that found a few thousand millionaires and billionaires had policies with payouts totaling at least $40 billion largely shielded from IRS scrutiny.

The IRS is hamstrung in curbing abuse of the policies—which typically require a buy-in of at least $1 million—because of weak reporting rules.

The policies under current law can be used to hold investments in hedge funds or other financial products, shielding the wealth from income or estate taxes of investors who cut checks and largely relinquish control over how the funds are invested.

The proposed change would affect only 0.003% of all outstanding life insurance policies, according to Wyden’s office.

Companies selling those policies have been critical of efforts to treat them differently under the tax code, pointing to existing regulations at the federal and state level aimed at preventing tax avoidance.

“Taxing life insurance death benefits would upend 100-year-old federal policy and radically reduce the benefit payments guaranteed to policyholders,” Jack Dolan, a spokesman for the American Council of Life Insurers, said in a statement in September as Wyden’s probe was ongoing.