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This month, the Obama administration unveiled a plan to reform the taxes that apply to life insurance. Not surprisingly, the insurance industry freaked out, paushing out its spokesman to say "This is absolutely the wrong time to make it more expensive for families, as well as U.S. businesses, to obtain the security and peace of mind our products provide."
That sounds reasonable, until you read this incredible new report from the Wall Street Journal about how insurance companies use current tax rules not to help "families obtain security and peace of mind" but to help fat-cat executives pad their salaries:
Banks are using a little-known tactic to help pay bonuses, deferred pay and pensions they owe executives: They're holding life-insurance policies on hundreds of thousands of their workers, with themselves as the beneficiaries.
The insurance policies essentially are informal pension funds for executives: Companies deposit money into the contracts, which are like big, nondeductible IRAs, and allocate the cash among investments that grow tax-free. Over time, employers receive tax-free death benefits when employees, former employees and retirees die.
Though not improper, the practice is similar to what is known as "janitors insurance," an insurance-on-employees technique that has long been controversial. Critics say the banks' insurance contracts are a way for companies to create tax breaks for funding executive pensions. And some families have complained that employers shouldn't profit from the deaths of their loved ones.
This is the kind of story that you read and think wow, just when you thought corporate rip-off schemes couldn't get any more shameless ...I mean, using employees' life insurance policies as a back-door way to pad the boss's salary ... wow.
I've (obviously) been critical of the Obama administration in its handling of the financial bailouts, but I think on tax issues, the administration is basically trying to do the right thing. When you look across the news, you see a bunch of big and small efforts to shut down the worst tax loopholes, from the corporate tax haven loopholes to this life insurance loophole. That effort is going to have its predictable critics, but when you read a story like the Wall Street Journal's scoop this week, you see how important it is to ignore those critics.