Major Change to Insurance Plans Could Upend Tax Benefits

Oregon Democratic Senator Ron Wyden wants Congress to pass new legislation to reform the life insurance market that he claims has allowed the emergence of certain products that are only benefitting the wealthy.

A report released on Wednesday from the Senate Finance Committee that Wyden chairs looked into what are known as Private Placement Life Insurance, or PPLI. These are are life insurance products that are private and target high-net individuals.

The investigation into the business found that PPLI are currently owned by an estimated 3,000 Americans with average "death benefit" of $13 million. The net worth of those who own the PPLIs can be over $100 million and the report suggests that it covers only about 0.003 percent of folks in the American life insurance market.

"Policies are actively promoted to millionaires and billionaires as a way to transfer
significant wealth to their heirs while bypassing income, gift and estate taxes," the report noted.

Wyden said that wealthy Americans are using this market as a form of tax shelter and is worth $40 billion.

"When you subject these policies to even the slightest bit of scrutiny, it's clear that this is just a tax shelter for the investments of the mega-rich masquerading as life insurance. None of this is available to middle-class Americans," Wyden said in a statement.

Wyden alleged that the policies act as a way to protect wealthy Americans and called for Congress to change the law to plug the loophole.

"It's obvious that this is an abuse of the rules that are intended to protect typical American families, so Congress must change the law to put a stop to it," Wyden said.

A spokesperson from the senator's office told Newsweek that Wyden's "legislation will be out in the coming months."

The finance committee's report suggested that the bill will look to limit what it described as a "niche tax shelter for a small, elite group of wealthy Americans."

It added: "This legislation will not affect the tax treatment of the 99.9 percent of insurance policies used by typical families, but will instead strengthen guardrails against the use of PPLI as a tax-free piggy bank for multi-millionaires and billionaires."

The report suggests that the legislation will be guided by principles that include ways that will mean that PPLI products are viewed less as life insurance offerings and introduce "guardrails" that limit the offshoring of the products that now allow for the avoidance of taxes. The finance committee's report also wanted to give the Internal Revenue Service (IRS) more authority to demand transparency on PPLIs to be better able to "identify abuses".

"Legislation must impose a deterrent on purchasing offshore policies so that investors think twice before purchasing a contract from a foreign insurance company," the finance committee said. "Legislation needs to be effective no later than the date of enactment and apply not only to new policies issued after the date of enactment but to existing policies already in force on the effective date," the finance committee said.