products for example combining life protection with income or disability

Products for example combining life protection with

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products – for example, combining life protection with income or disability insurance. 3.5 The task in designing a tax on the myriad complexities of a life insurance business is a two-step process. First, the total investment return of a life insurance business must be divided between a return on equity invested in the company and a return on the accumulated savings of the policyholder. Second, a way of taxing these returns must be determined in a way that fulfils as much as possible the concepts of neutrality and equity within existing tax policy settings and structures. A norm for taxing life insurers 3.6 Life insurance businesses consist of three elements. The first is protection against the improbable event of death during the next succeeding relatively brief period. The insured (or someone else on his or her behalf) pays a premium in return for which a stipulated sum will be paid to his survivors in the event of the insured person’s death. The second is the investment element. The third is fee income for managing the other two elements. These components are now analysed. Pure risk insurance (without savings) 3.7 Pure risk insurance income consists of either or both underwriting gains (if fewer people die than is assumed in setting premiums) and investment income on corporate retained earnings. Therefore, life insurers’ profits, measured as the excess of premiums plus interest earnings over outgoings (claims and expenses) are, in principle, no different from the profits of any other business (excess of receipts over cost of goods sold or income from the provision of services less expenses). However, as income for the insurance service is spread over a long period, and liabilities may be incurred but not actually reported in a period, there are differences in the timing of revenue and expense recognition. A number of countries therefore tax on accounting income or, as in Australia, a basis equivalent to general insurance. (See Appendix 1.) 15
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Fees 3.8 A life insurer receives income from fees and charges in respect of investment, administration or risk and these can be deducted from premiums, investment income or account balances. The profits made are therefore no different from any other business that charges fees for services. Investment income 3.9 A company that sells pure term insurance earns profits on only invested capital, including reinvested income on accumulated company surpluses, but amasses virtually no reserves on behalf of policyholders and earns no investment income for them. It is selling a “risk product”. This investment income should be taxed to the life insurer. 3.10 A company that sells savings products and traditional with-profits insurance accumulates reserves in the name of policyholders, eventually payable to them or their estate. Two types of income are earned by the company: one, ordinary profits, including investment income on invested corporate surplus and equity, and share of traditional participating profits allocated through the gate; and two, investment income.
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