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Life Insurance Savings and the After-Tax Life Insurance Rate of Return


  • Mark Warshawsky


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.

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  • Mark Warshawsky, 1982. "Life Insurance Savings and the After-Tax Life Insurance Rate of Return," NBER Working Papers 1040, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:1040
    Note: PE

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    References listed on IDEAS

    1. Thaler, Richard H & Shefrin, H M, 1981. "An Economic Theory of Self-Control," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 392-406, April.
    2. Friedman, Benjamin M, 1982. " Effects of Shifting Saving Patterns on Interest Rates and Economic Activity," Journal of Finance, American Finance Association, vol. 37(1), pages 37-62, March.
    3. Riley, John G, 1979. "Informational Equilibrium," Econometrica, Econometric Society, vol. 47(2), pages 331-359, March.
    4. Martin Feldstein, 1982. "The Fiscal Framework of Monetary Policy," NBER Working Papers 0966, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Martin Feldstein & Joosung Jun, 1987. "The Effects of Tax Rules on Nonresidential Fixed Investment: Some Preliminary Evidence from the 1980s," NBER Chapters,in: The Effects of Taxation on Capital Accumulation, pages 101-162 National Bureau of Economic Research, Inc.

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