by John Darer CLU ChFC MSSC CeFT RSP CLTC Updated June 27, 2026
Could insurance companies, including those that issue structured settlement annuities, offer more to their customers if a 36-year-old revenue sapping regressive Federal tax were abolished?
What is the Deferred Acquistion Cost Tax?
The Deferred Acquisition Cost Tax (DAC Tax), introduced with the Revenue Reconciliation Act of 1990 which established IRC 848, is a federal tax on insurers [ including insurers that issue structured settlement annuities} that does not allow insurers to immediately deduct expenses incurred in putting business on the books, even though the expenses are actual.
- These expenses often exceed the premiums paid in the early years of different types of insurance.
- Therefore, insurers are taxed on the premiums paid before any profits are made. This is a phantom tax on nonexistent money.
- The formula artificially inflates the taxable income of insurers for the current year by deferring expenses to future years.
- In theory, after an insurer starts to recoup the deferred expenses, a credit is issued toward the current year’s tax bill, which is inflated as a result of the current year’s DAC. However, the only way for the insurer to even approach break even is to stop growing. Otherwise, the dissipation of surplus restricts an insurer’s ability to write new business and it reduces funds needed for product development.
Contrast this with modified cash basis accounting required by state regulators. Statutory accounting is a modified cash basis of accounting. Expenses are written off when paid, whether the asset is admitted or not.
The impact of this growth-inhibiting, regressive tax on smaller companies is dramatic, according to the National Alliance of Insurance Companies. This tax policy has disproportionately retarded the growth of the smaller insurers. These companies have the ability and need for greater growth than the larger companies. While larger companies, which have mature surpluses, may opt for a slow growth or no-growth strategy in order to counter the effects of the DAC Tax, this option is not available to smaller companies. In fact, some small companies are paying Federal Income Tax well in excess of 100% of statutory income says NALC.
DAC Tax impacts earnings which impacts the amount available for investment
A comment appearing on the Actuarial Outpost boils it down nicely: “Taxes impact earnings which impacts the amount of money you have to invest. By paying more taxes earlier there is less money to earn interest on, and the effect is cumulative”.
In an environment where government seems to want to cut taxes and create jobs and growth, it seems that this is a worthy button to push.
State of DAC TAX Today (2026)
DAC is still sitting exactly where Congress left it decades ago — unchanged, unexamined, and quietly draining insurer revenue year after year. It doesn’t reshape markets, but it does nibble at margins, especially for carriers issuing long‑tail products like structured settlement annuities. Nobody in Washington is talking about reforming it, and insurers have simply baked the drag into their pricing models.
In short: DAC remains a legacy tax that persists out of inertia, not purpose. Most readers will never think about it again — and most insurers wish they didn’t have to.
What if the DAC Tax Didn’t Exist?
If the DAC tax didn’t exist, insurers would likely have more room to sweeten the early‑year crediting rates or make shorter‑term annuities more cost‑effective for annuitants. It’s not a magic wand, but removing a persistent revenue siphon would give carriers a little more pricing flexibility — especially in products where front‑loaded expenses and short durations matter.
Explore your “Inner Geek”
If have the urge to explore your inner geek, you may find the Society of Actuaries Federal DAC Tax to be a helpful read, with a little espresso☕🫘.