There is probably nothing that is sacred anymore with the federal government and almost every state government facing mounting budget deficits, loss of tax revenue and so on.

I’m sure every level of government must have multiple committees whose sole job is to determine what hasn’t been taxed yet, or what tax breaks have been given in the past that can be taken away. Today I saw a copy of Hawaii Senate Bill 1532 that would essentially wipe out almost every tax break or incentive ever given, all the way from solar power tax credits to taxing life insurance death benefits.

If passed Hawaii will be the first government at any level to touch the death benefit of life insurance. And it will be retroactive to in force policies because it is a repeal of a tax exclusion on something that hasn’t been paid yet.

I realize that in these financial times it’s hard to pretend that anyone’s sacred cow is any more important than any other sacred cow, but there are some real ethical issues that need to be weighed. The tax free status of life insurance proceeds has been a part of life insurance since its’ inception. It is one of the rock solid guarantees that policy holders have been able to stand on when they consider their family’s future. When they buy a $500,000 policy, they know what will go to their spouse. You don’t have to try to estimate what the net amount of the final check will be.

I mentioned all the sacred cows out there. Hawaii is also considering cutting the low income housing tax credit. The fight may come down to who can convince the Senate that their tax break is the most crucial. Or could it come down to deciding which tax breaks are historical and which are reactionary? Virtually all of the tax credits they are talking about cutting in Hawaii and tax breaks that were put in place to stimulate one business or another. The tax treatment of life insurance is historical.

A change in the tax status for life insurance death benefits would put virtually every life insurance agent and life insurance company in a position to be accused of bait and switch. While we can’t really be held responsible for government actions from a legal standpoint, a trust will have been broken.

Bottom line. Would Hawaii’s change lead to other states tax changes? Would it lead to Federal tax change considerations. Will all the planning that has gone into life insurance plans be suddenly outdated?