Proposed changes to the way life insurance companies are taxed will result in higher levels of complexity for the industry and increased costs to policy holders.

According to Greenwoods and Freehills director Andrew Mills, the proposed changes could potentially kill one of the country's major collective investment vehicles.

The tax advisery firm says the Ralph report's recommendation to tax life companies at the corporate rate will cost them dearly.

"The way it's being attacked is at odds with everything else," Mills says.

Unlike other parts of the two-volume, 900-page report, the life insurance chapters set out only one approach; options occur only in implementation.

Failure to give life insurance companies the collective investment taxation concessions means that they're not creating a level playing field, Mills says.

While the paper realises a large percentage of life company business represents a collective investment, it precludes these companies from the special flow-through tax treatment received by other collective investments.

"They're saying that the profits of a life company should be taxed at the corporate rate while the life insurance industry believes that if is a collective investment vehicle the flow-through approach allowed for trusts should be extended to include all collective investment vehicles," Mills says.

"It is claimed that the proposed change is required because the present system of taxing life insurance companies is too complex, although the proposals don't make it any less complex."