Sen. Ron Wyden (D-OR) is calling for a crackdown on life insurance, arguing that the wealthiest people are using certain plans to dodge billions of dollars in tax liability.
Wyden, who is the chairman of the powerful Senate Finance Committee, claims that private placement life insurance plans — which are only available to high earners and people with large net values — are a “buy, borrow, die” tax shelter for the ultra-wealthy. His office recently released a report detailing the plans.
The report found that such plans are only held by a few thousand wealthy investors but up to $40 billion in policies.
Wyden contends that these PPLI plans are unfair because they allow the insurer to invest shares in hedge funds and private equity companies. The wealthy individual paying into the plan can then take out tax-free loans off the value of the plan. That could be a way to avoid capital gains taxes, which are taxes that accrue based on the profit of an investment.
The high-end insurance plans also help avoid taxes in death, according to Wyden. That is because the heirs of those who die with the plans don’t need to pay estate taxes on the money from the policy. Estate taxes are taxes on assets after a person dies and, unlike assets like stocks, insurance payouts are not subject to estate taxes.
PPLI products are different from the life insurance plans a middle-class worker might get. They allow participants, through a private offering, to pay into the plan, which then lets the insurer buy up shares in private equity companies and hedge funds. But because they are still life insurance policies, the IRS is not typically able to go after them.
“I’m a strong defender of life insurance as a source of financial security for hardworking American families and retirees, but that’s not what’s going on with these tax-dodging private placement policies that are available only to the ultra-wealthy,” Wyden said. “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 added in a statement, calling on Congress to pass legislation that would change the law surrounding these insurance policies.
Steve Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center, pointed out that life insurance is tax-favored, meaning that they allow people to take in some degree of profits without having to pay taxes on them.
Rosenthal said that some of the tax advantages that the PPLI plans offer are similar to those that “whole life” policies offer, which are available to those earning less than the ultra-wealthy. He also pointed out that multimillionaires aren’t doing anything illegal by taking advantage of the PPLI tax benefits.
“Private placement life insurance is for the big boys. You have to be an accredited investor, there is a minimum buy-in for a policy of a few million dollars,” Rosenthal said. “Private placement life insurance is similar to traditional kinds of insurance arrangements — whole life — but on steroids because it’s larger and the investment choices are wider and as a consequence the tax benefits are larger.”
Rosenthal noted that the demand for life insurance more generally has been dwindling over the years.
Alex Muresianu, senior policy analyst at the Tax Foundation, said that life insurance is like a savings vehicle at some level and mostly works like a Roth IRA where an investor doesn’t deduct the premiums that they pay. The cost of those premiums is taxable, but the payout later is exempt.
“In the case of these insurance plans, I think the idea is that they are able to create like a pseudo-Roth IRA tax treatment by using this sort of specific life insurance vehicle,” he said.
Crucially, the money in question in these life insurance accounts doesn’t have to stay closed out until the investor dies. Recipients can take out loans, which are tax-free, based on the value of their life insurance policy.
One group supporting Wyden’s calls for reform is Patriotic Millionaires. The organization was founded over a decade ago and is made up of high-net-worth people, including investors and business leaders, who believe the wealthy need to pay higher taxes.
Bob Lord, the group’s senior adviser for tax policy, told the Washington Examiner that the government’s treatment of life insurance for the ultra-wealthy is a “giant loophole in the tax code.”
“But look, what’s going on here is you have these permanent life insurance products, at the core are two things tied together — one is actual life insurance, a term policy, and the second is an investment account,” Lord said.
Lord noted that if that investment account was untethered from the life insurance policy, they would be taxed on the earnings.
“But somehow, because they tie them together, magically it becomes not taxable,” he said. “And I think what’s happening with these private placement policies is that the investment account side is getting closer and closer to being just an actual investment account.”
Richard Stern, director of the Grover M. Hermann Center for the Federal Budget at the Heritage Foundation, doesn’t support changes to the current structure of the life insurance system for the very wealthy. He said that the life insurance vehicle prevents multiple layers of taxation.
“It’s one of a few mechanisms that allow people to make investments and not have them be double taxed,” he said in an interview. “If you think of the way that these accounts work, the money that you’re putting into it is already taxed and then the money you’re taking out of it isn’t taxed, which means you tax the flow once.”
“If you taxed it on both ends you would be double taxing it, and even then by the way, the investments that we’re talking about that you can make in the insurance plans are investments in companies that are themselves paying taxes on profits before it gets to shareholders,” Stern added.
While Wyden and others might want to see legislative action on the matter, the politics might not be amenable to such a change.
Rosenthal said that politically, he doesn’t think there is too much support for massive life insurance reforms in Congress. He noted that Rep. Richard Neal (D-MA), the ranking member on the Ways and Means Committee, represents a district that includes some large life insurance companies.
“So I don’t think there is a lot of support for going very far in attacking life insurance companies and I also don’t think there is a lot of support for going after these private placement [plans] also,” Rosenthal said.
“The life insurance industry is pretty powerful and it will be hard for Wyden to go surgically after just the top end of these tax advantage life insurance arrangements,” he added.
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Wyden has been a major advocate of higher taxes on the wealthy in other ways, too. He has spearheaded an effort to make a mark-to-market proposal law for years, one which would entail taxing the unrealized capital gains of billionaires.
The Wyden plan, which he first unveiled in 2021, would affect those with net worths of over $1 billion. It would also apply to high earners who made more than $100 million in three consecutive years.
