A small tax change is a boon to everlasting life insurance coverage

The big year-end federal legislature package includes a little-noticed revision of tax law that should boost life insurance sales, especially for wealthy Americans.

The law lowers a minimum interest rate that is used to determine whether combined savings and death benefit policies, known as permanent life insurance, are too similar to investments to qualify for tax breaks granted to the insurance. The interest rate floor was introduced in 1984 to sort out policies that were mainly investment vehicles with a thin layer of insurance. By lowering the rate, owners can invest more in the savings portion.

And it makes it easier for insurers to offer policies, as interest rates have fallen so far in the past decade that the 1980s minimum threshold is now well above long-term government bond yields. This has led insurers to warn that they may stop selling some policies.

The reduction in the interest rate took effect on January 1st for new sales.

A US House of Representatives summary said the revision was necessary “to reflect economic realities” and to give consumers “access to financial security through permanent life insurance.”