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Life insurance is more for the rich these days

If you go back into the history of insurance, you find it was traditionally pitched at protecting widows and orphans among the middle class and the poor who could afford the premiums. Because there was a clear social safety-net purpose, the government allowed insurance to be free from federal income taxes. So, from 1913 onward, premiums were deductible and any gains in the value of the policy were untouched. In smaller estates, the amount payable on death would escape estate tax as well. However, what was genuinely useful in 1913, is less relevant today as the state has rolled out Medicaid, Medicare and Social Security, not forgetting food stamps and low-cost housing for those in need. People can avoid the worst effects of poverty without having to rely on insurance. Even more important is the drop in the birth rate. One-hundred years ago, there were multiple children per couple as the waves of new immigrant families put down roots. Today, we have the lowest rate since records began with 13.9 children born per 1,000 adults. The risk of children being left destitute has never been lower.

Perhaps this explains another set of numbers. The sale of policies to families with children has dropped by 45% over the last 25 years. It seems families no longer think they are forced to carry insurance given the protections offered by the state. Looking a little more widely finds 30% of adult Americans do not have any life cover. This is not something produced by the recession although sales have been dropping over the last two years. This trend was clear during the previous boom years. Most people only carry term life. Permanent life policies are quite rare in the lower income groups.

So who is buying life cover? If you look at permanent policies worth more than $2 million, this was 1% of the market twenty years ago. Move forward ten years and these policies were 10% of the market. Today, they represent 40% of the market. So these policies are being used as legitimate tax avoidance vehicles for the wealthy. Indeed, if President Obama were to force a rise in the effective rate of income tax for the higher income groups, this would feed the market for insurance since the premiums are deductible. Indeed, once you add in the tax exemption for all gains on cash values, the policies are seen as one of the best ways of keeping the wealthy wealthy at the expense of the state.

If life insurance premiums had to be paid out of net income and all capital gains were taxable, the tax take would rise by billions a year. Yet the idea of increasing taxes on the rich is too socialist even for the Democrats. Any tinkering with estate taxes or the rules on the taxation of trusts would produce such a howl of anger in the media, no incumbent would be safe. Yet this would cut the deficit and improve the quality of life for all Americans. How can that not be good public policy? Perhaps if we got back to the original idea of life insurance as a safety-net for the less wealthy, we would get a better America.

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