Working Paper: NBER ID: w1040
Authors: Mark Warshawsky
Abstract: This paper presents a calculation of the time series of the after-tax rate of return to whole life insurancy. When compared to the after-tax return on an alternative portfolio of similar risk, more than 60%of the decline in life insurance savings (suitably defined) in the past two decades can be attributed to a widening after-tax rate of return differen-tial.Both the existence and importance of this result depend on the characteristics of life insurance savings. Life insurance saving is intimately connected to life insurance coverage and therefore is long-term and quasi-contractual in nature. Furthermore (and, in part, because of the above characteristics), the interest earned on the fixed income portfolio of life insurance intermediaries has been taxed under a special set of rules. From 1958 to 1981,these rules have taken the rather complicated form of the Menge formula. This formula is very sensitive to changes in nominal interest rate levels and in particular, during inflationary periods it acts so as to dramatically increase the tax burden of life insurancesavings.Life insurance savings is therefore an example of the non-neutrality of monetary policy. This is important for studies of flow of funds and capital accumulation using the historical record.
Keywords: life insurance; savings; taxation; rate of return
JEL Codes: G22; H24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| aftertax rate of return on life insurance savings (G52) | decline in life insurance savings (G52) |
| nominal interest rates (E43) | aftertax rate of return on life insurance savings (G52) |
| tax burden (H22) | aftertax rate of return on life insurance savings (G52) |
| aftertax rate of return on life insurance savings (G52) | propensity to save in life insurance (G52) |
| characteristics of life insurance savings (G52) | propensity to save in life insurance (G52) |