The nontaxation of life insurance inside buildup will cost $22.6 billion in fiscal year 2012, and a combined $129 billion over 2012-2016.
Why subsidize life insurance through the tax code?
Life insurance receives favorable tax treatment principally because of the belief that public policy should encourage families to protect themselves financially from the unexpected loss of a provider.
Death benefits have always been excluded from taxation. The inside buildup of life insurance has gone untaxed also because of the difficulty in taxing people from year to year on investment gains within life insurance policies that aren’t realized in cash. (Though one alternative is to tax the insurance company on the gains as they are earned rather than policyholders.)
Source: http://www.americanprogress.org/issues/2011/03/te_033011.html Tax Expenditure of the Week