Congress may stifle tax-free loan sales pitch for life insurance

One of the favorite post-tax-reform investments may soon lose its favored status. Since Congress overhauled the tax code in 1986, insurance agents, stockbrokers, and financial advisers have been busy pushing the tax-free benefits of single-premium life insurance products - too busy, in the eyes of many in Congress.

Unlike the more traditional whole-life products, single-premium policies call for full payment of the policy's entire premium when the policy is issued. Usually, the minimum is $5,000, but most policyholders put in more that that. The average premium is about $30,000, according to the Life Insurance Marketing and Research Association, an industry group. Often, sums of that size come from pensions, company-sponsored savings plans, or individual retirement accounts (IRAs) that are put into single-premium policies at retirement.

While single-premium life insurance is supposed to be a good way to save for retirement or other long-range goals, like college, and while it has some of the same tax-free accumulation benefits of IRAs and annuities, it has something they don't have: tax-free loans. It is not possible, for instance, to borrow money from an IRA. If any money is taken out of an IRA before retirement, it will be treated like an early withdrawal, and taxes and early-withdrawal fees will be charged.

But with single-premium life insurance, an individual can make tax-free loans almost as soon as the policy is written, and once it has had time to build up some interest (which is also accomplished tax-free) the loan feature becomes even more attractive.

Since tax reform, this feature has often been touted more heavily than the policies' insurance or long-term investment features. At least one company even issues checkbooks with its policies so customers can make easy withdrawals.

``That's clearly not what these policies were intended for,'' says Perry Plumart, an aide to Rep. Fortney (Pete) Stark (D) of California. Representative Stark and Rep. William Gradison Jr. (R) of Ohio are cosponsoring a bill that would remove the tax-free status of loans from life insurance products.

The bill, supported by the Treasury Department, would affect all policies sold after Oct. 7, 1987. Hearings on the bill were held last week, and a vote by Congress is expected this year, Mr. Plumart said.

In opposing the bill, the insurance industry points out that loans from insurance policies shouldn't be treated any differently from loans from banks, which aren't taxed. ``The solution to the `single-premium problem' lies in restricting the amount of money that can be put into a life insurance policy,'' William Irons, chairman of the National Association of Life Underwriters, told the committee. ``The restriction must be severe enough to repel pure investors but not so harsh as to make the product non-competitive for those who need life insurance and are willing to pay for it.''

Already, some of the people selling these policies have been revising their pitches with an eye to Congress.

``We're working with one insurance company that will refund the principal,'' says Stuart Purcell, a financial planner and broker-dealer in San Rafael, Calif. If Congress changes the rules, ``we would ask for the principal back and all that would be lost is the interest,'' he said.

In the meantime, Mr. Purcell says, he is still selling single-premium policies, but ``we're trying to keep on top of it and inform the client about what might happen.''

``In about a year, the product will be dead,'' predicts Robert Martel, a financial planner in Lexington, Mass. If Congress takes away the tax-free loan privileges of life insurance, Mr. Martel says, ``there will be no reason to treat life insurance any differently than qualified [retirement] plans or IRAs.''

For people thinking of buying either single-premium whole life or its variable-life counterpart, the reasons behind such a purchase, then, might have to change. If the policy is being bought as a long-term investment with the bonus of some added life insurance, there should be no problem, whatever Congress does.

But sales pitches based on the ability to take out tax-free loans should be regarded with great skepticism. If some in Congress and the Treasury have their way, that feature will have disappeared last October.

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