What is Premium Tax?
Premium tax is a tax levied by state or local governments on the premiums that insurance companies collect from their policyholders. This tax is typically calculated as a percentage of the premium amount paid by individuals or businesses for various types of insurance, including life insurance, health insurance, and property insurance.
In the context of life insurance, such as Indexed Universal Life, Whole Life, and Term Life insurance, premium taxes can slightly increase the overall cost of maintaining a policy. While insurance companies are responsible for paying this tax, they often pass on this cost to policyholders indirectly. For example, premium taxes may contribute to higher premium rates or lower crediting rates on cash value growth within certain policies.
Each state has its own rules regarding premium tax rates and how they apply to different insurance products. Some states may exempt specific types of insurance, such as senior life insurance, from premium tax or offer reduced rates under certain conditions. Therefore, the impact of premium tax on an insurance policy can vary widely depending on the policy type and the state in which it is issued.
The purpose of the premium tax is to generate revenue for the state, which can then be allocated to public programs or infrastructure. Policyholders are encouraged to understand their state’s specific premium tax rates as part of assessing the overall cost and benefits of an insurance policy.