Taxation of Life Insurance Companies (CRS Report for Congress)
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| Release Date |
Dec. 24, 2003 |
| Report Number |
RL32180 |
| Report Type |
Report |
| Authors |
Andrew D. Pike, Government and Finance Division |
| Source Agency |
Congressional Research Service |
Summary:
Life insurance companies determine their federal income tax liability using a set of Internal
Revenue
Code provisions that apply only to those companies. This report provides an overview of these tax
provisions.
Life insurance companies sell financial contracts that contain two common features. First, these
contracts generally provide protection against uncertain financial risks that relate to the timing of the
death of insured individuals. Second, they incorporate a broad variety of financial investment
arrangements. Most of the difficult issues that arise concerning the taxation of life insurance
companies relate to these two economic components of life insurance arrangements. This report
contains a very brief overview of these business activities of life insurance companies.
The report then provides a brief history of the federal income tax treatment of life insurance
companies. Prior to 1984, when Congress enacted the current tax provisions, life insurance
companies were taxed in a manner that reflected two major policy decisions. First, a significant
component of life insurance company profits was untaxed. Second, Congress sought to achieve an
"acceptable" balance between the tax burden borne by life insurance companies owned by their
shareholders and the mutual life insurance companies that were owned by their policyholders. These
provisions of prior law led Congress to enact Internal Revenue Code Sections 809 and 815, which
have attracted legislative attention in recent years, which are discussed in this report.
Next, the current tax provisions applicable to life insurance companies, including an overview
of the general approach to taxation, are examined. In general, life insurance companies include all
of their receipts in income and may deduct their general business expenses. In addition, specialized
provisions that apply to insurance companies make certain that these companies are not overtaxed
as compared to other financial intermediaries. These specialized provisions are discussed,
specifically:
(1) the special deductions for "small" life insurance companies that effectively reduce the tax
rate applicable to these companies from 35% to 14%;
(2) the limitation enacted to prevent life insurance companies from deducting inappropriate
expenses that are attributable to generating tax-exempt income;
(3) the complex provisions that govern the deductions allowed with respect to a life insurance
company's reserve liabilities; and
(4) the limitation on the amount of policyholder dividends that mutual life insurance
companies are allowed to deduct.
