Reforming The Taxation Of Life Insurance

Ari Glogower (Northwestern; Google Scholar) & Andrew Granato (J.D.-Ph.D. Candidate, Yale; Google Scholar), Reforming the Taxation of Life Insurance, 44 Va. Tax Rev. __ (2025):

The purpose of life insurance was once to provide financial protection to “widows and orphans” upon an untimely death. Now, wealthy investors also use it to avoid paying taxes. Thanks to federal tax benefits for life insurance, insurers now market policies designed explicitly as vehicles for tax avoidance, with insurance protection as an afterthought.

Well-advised taxpayers accomplish this disappearing tax trick through a “cash value” policy. These policies contain an internal savings balance, which over time can transform the policy from an insurance product into an investment account that can still qualify for insurance tax exemptions. No other investment form—even explicitly tax-preferred savings vehicles like IRAs—offers the same combination of tax benefits with minimal restrictions. In the new market for life insurance, the current rules increasingly operate as a subsidy to the rich, invite abusive planning, and can obstruct broader capital income tax reforms.

“Private placement life insurance” (PPLI) policies, a variation of cash value life insurance, now allow rich investors to avoid taxation on an even wider range of boutique investments, such as hedge funds and private equity. These market innovations have brought new attention to the taxation of life insurance, and motivated current legislative reforms targeting PPLI strategies.

This Article provides a comprehensive study of the taxation of life insurance. It presents new empirical analysis of trends in life insurance ownership, finding that policies issued today are larger and more concentrated among the richest taxpayers. It then presents a framework for evaluating reforms that can be implemented by Congress, the IRS, and the judiciary, and considers the tradeoffs of different reform directions. The Article ultimately proposes a relatively simple yet powerful reform: capping the size of tax-preferred policies. This approach could address the new market for life insurance and realign its tax benefits with their original policy justifications.

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