William Byrnes' Tax, Wealth, and Risk Intelligence

Why is this Topic Important to Wealth Managers? Presents an introduction into the taxation of U.S. life insurance companies.  Provides insight for wealth managers considering advanced planning techniques involving the use of life insurance companies.

Congress has determined, generally, that insurance companies by issuing insurance contracts are serving the public good.  Moreover, Congress has determined that the tax accounting applicable to corporations does not adequately align to the operations of the insurance industry.  Thus, to distinguish insurance companies, Congress created a special chapter of the Internal Revenue Code (subchapter “L”) applicable only for them.  Subchapter L is divided into Section 801 to 848 of which 801 to 818 address the taxation of lile insurance companies.

By example, because of the nature of the life insurance business, in that liabilities carry long into the future, Congress has afforded special deductions to this class.  To avoid potential reserve deficiencies by recognizing income (and therefore incurring a present tax liability) when premiums are collected, Congress essentially allows underwriting gains to occur once the insurance liability obligations have expired.

Let’s take a look at the Code specifically to see how these mechanics actually work.  First and foremost, pursuant to IRC Sec. 801 a life insurance company is taxed at the same rates as other corporations.  These rates can be found in IRC § 11.

A life insurance company means under IRC § 816(a), “ an insurance company which is engaged in the business of issuing life insurance and annuity contracts”, generally, as well as accident or health contracts, so long as, the company’s “life insurance reserves, plus unearned premiums” on “noncancellable” policies, “comprise more than 50 percent of its total reserves.”

Read on about Subchapter L: Life Insurance Companies