Mortality Charges on Single Premium Life Insurance Should Be Restricted
GGD-88-95, Jun 14, 1988
Pursuant to a congressional request, GAO examined: (1) tax policy issues arising from life insurance companies' use of excessively high mortality charges to increase premiums; and (2) ways to change the tax status of investment-oriented life insurance.
GAO found that policyholders of single-premium life insurance and other investment-oriented insurance products can shelter more money for investment and more funds for low-cost, tax-free policy loans, since life insurance companies can: (1) set premiums based on the mortality charges that they specify in the policies; (2) enhance policies' investment potential by specifying charges in excess of those normally considered reasonable for life insurance contracts; and (3) use higher mortality charges to artificially inflate premiums for individuals who are considered standard risks. GAO believes that: (1) recent legislative proposals curtailing the tax advantages associated with investment-oriented life insurance do not deal directly with excessively high mortality charges; and (2) revision of the cash value corridor test to disqualify contracts from favorable tax treatment would eliminate excessive borrowing and reduce the incentive to inflate mortality assumptions.