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Industry Preparing For Possible Attack On Life Insurance Products

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Industry Preparing For Possible Attack On Life Insurance Products



The life insurance industry is preparing for a possible attack on life insurance products as Congress seeks new revenue to implement its agenda during a time of a diminishing federal surplus.

David Winston, vice president of government affairs for the National Association of Insurance and Financial Advisors, Falls Church, Va., notes that the tax treatment of bank-owned life insurance, corporate-owned life insurance and inside buildup again could be viewed as revenue raisers.

Specifically, Winston says, several high-profile spending bills are likely to be considered over the next two months, including President Bushs faith-based charity initiative, Medicare prescription drug benefits and possibly capital gains tax reduction.

The current estimate, he says, is that these and other initiatives will cost some $6 billion. This spending must be revenue-neutral, he notes, meaning that revenue must be found to offset the cost.

However, Winston notes, the Congressional Budget Office estimates that only $2 billion of budget surplus is left to pay for new programs. This means that Congress could be looking for some $4 billion in new revenue to fully implement this program.

Due to the diminishing surplus and the sluggish economy, Winston says, life insurance products could be on the table again.

“I expect we will have to play defense on taxation of life insurance products,” he says.

In addition to these budget issues, several other life insurance concerns will be considered during the remainder of the 2001 session.

A major issue for both agents and companies is H.R. 2269, the Retirement Security Advice Act, that would make it easier for insurers and agents to provide investment advice to participants in qualified pension plans.

Jack Dolan, a spokesman for the American Council of Life Insurers, says ACLI expects the House Committee on Education and the Workforce to consider H.R. 2269 this month.

The hope, he adds, is that the full House will vote on the legislation this fall.

ACLI, Dolan says, is also supporting three tax issues. One is a tax deduction for long-term care insurance, he says, and the hope is that a deduction will be approved sometime during the 107th Congress.

A longer term issue, Dolan says, is ACLIs Lifetime Annuity Payout (LAP) proposal. Under the LAP proposal, retirees who receive their retirement benefits in terms of a lifetime annuity would be taxed at the capital gains rate instead of the higher individual rate.

Dolan says ACLI hopes Congress will begin consideration of LAP this month.

Of more immediate concern is the treatment of investment income earned by foreign subsidiaries of U.S. financial services firms under Subpart F of the tax code, Dolan says.

Currently, that income is not subject to U.S. tax until the parent company receives it. However, unless Congress affirmatively extends this treatment, it will expire on Dec. 31. If so, the investment income will be subject to U.S. tax as soon as it is earned by the subsidiary.

Finally, Congress will also be considering class-action lawsuit reform and state insurance regulation.

The class-action reforms would make it easier for defendants to have cases heard in federal courts. However, any tort reform legislation is considered a long-shot.

On insurance regulation, the House Financial Services Committee is expected to hold further hearings on state insurance regulation and optional federal chartering, but probably will not consider a specific bill.

Turning to health insurance, a House-Senate Conference Committee will work out differences between conflicting patients bill of rights legislation approved by the House and the Senate.

However, some insurance agents are hoping a provision contained in the House bill, H.R. 2563, which would allow associations to sponsor group health plans, can be modified in a way that will expand employer-provided coverage.

The provision would allow bona fide professional and trade associations to sponsor group health plans, called Association Health Plans (AHPs), for their members.

Insurance agents would be able to assist association in setting up AHPs and would be able to market the AHP to small employers if it offers at least one fully-insured benefit option.

However, a major problem is that the AHP provision contains a nondiscrimination requirement that bars an association from taking into account a specific members claims history when setting premiums.

This, agents say, would undermine the purpose of AHPs because an association would have to have a very broad spread of risk in order to operate economically.

“With some modifications, the AHP provision could expand the availability of health insurance to employer groups,” says Joel Wood, senior vice president of government affairs for the Council of Insurance Agents and Brokers, Washington.

Specifically, agents are asking the conference committee to consider language that would bar an AHP from discriminating against an individual employee, but allow the AHP to experience-rate a participating employer.

Wood says that in a bill that threatens to increase the cost of health insurance, it is necessary to have offsetting provisions that will increase the availability of insurance.

While that is the intent of the AHP provision, he says, the current draft is flawed.

“We hope some minor adjustments will eliminate the problems that could undermine the intent of the AHP provision,” Wood says.

Reproduced from National Underwriter Life & Health/Financial Services Edition, September 10, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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