Taxing Risk: An Approach to Variable Insurance Reform

Luke examines federal income tax treatment of variable insurance contracts and proposes reform to address perceived inequities in tax deferral provisions. Variable insurance products combine insurance and investment features, allowing policyholders to defer taxes on investment returns within the contract. The article analyzes limitations of variable insurance as an investment vehicle and explores how current tax treatment enables certain tax-avoidance strategies. Luke proposes taxing the risk-related returns from variable contracts while maintaining some tax deferral for the insurance component, attempting to balance investment suitability concerns with tax policy objectives. The proposal addresses the Domar-Musgrave model of taxation and considers practical implementation issues. The author argues that reform should increase transparency of contract components, improve competitive dynamics among insurers, and eliminate improper tax shelter incentives while preserving legitimate insurance tax benefits.

Topics: Tax Law

Keywords: variable insurance · tax deferral · inside buildup · investment suitability · tax reform