In rapid fire succession, the life insurance industry found itself on the defensive on a variety of tax fronts last week, with Congress expected to take a close look at corporate uses of life insurance.
On split-dollar and corporate-owned life insurance, as well as the politically-hot issue of estate tax repeal, the industry began preparing for what could be a major, emotional legislative battle in the next few months.
“The industry is facing some real challenges,” says Morris Goff, director of government affairs for the National Association of Insurance and Financial Advisors.
“But NAIFA is on top of the developments,” he says. “We have faced these challenges before and have always met them.”
“Attacks have been made before on industry products,” adds Jack Dolan, a spokesman for the American Council of Life Insurers. “Unfortunately, those attacks continue.
“We are continuing to fight,” Dolan says. “We are making our case that our products are vital to address consumer and business needs.”
The backdrop for the activity on life insurance taxation is the controversy over the collapse of Enron, and the view of some that life insurance can be used to provide tax-favored executive compensation.
Indeed, during the investigation of Enron’s collapse, it was revealed that the companys former chairman, Kenneth Lay, had a large split-dollar policy.
This led some members of the Senate–particularly Sens. Blanche Lincoln, D-Ark., and Finance Committee Chairman Max Baucus, D-Mont.–to begin questioning the use of split-dollar.
In fact, the Finance Committee scheduled a hearing on executive compensation for April 18, during which split-dollar was an issue to be discussed.
Details of what happened are still sketchy, but sources told National Underwriter that a witness who was scheduled to testify on split-dollar cancelled his appearance before the committee at the last minute.
The reasons for the cancellation are unclear but some on Capitol Hill say they believe the witness was pressured into cancelling.
This angered Lincoln and Baucus so much that during the hearing Lincoln asked Baucus for a separate hearing devoted to split-dollar, Baucus agreed.
At press time, a date for the hearing had not been set.
One industry source, who asked not to be identified, says at the end of the day, he does not believe the controversy over split-dollar will result in legislation.
The fact is, he says, that the Treasury Department already has a handle on this issue, knows where the ambiguities are and is working on ways to resolve them.
Despite all the outrage over split-dollar, he says, Congress is starting to realize there is not a lot of revenue to be raised from split-dollar.
But the controversy over COLI, he says, has real potential for damage.
The COLI controversy erupted following an article in the Wall Street Journal about a company that purchased a COLI policy to cover low-wage employees and profited from receiving the death benefits.
This created such a stir that Rep. Gene Green, D-Texas, introduced legislation almost immediately after the article appeared called the Life Insurance Employee Notification Act, which did not have a bill number at press time. The legislation would require corporations who take out COLI policies to inform employees and reveal the amount of the policy.
“This bill will stop corporations from hiding these policies and force them to let their workers know that their employer stands to gain hundreds of thousands of dollars if they die unexpectedly, while their survivors receive nothing,” Green says.
Dolan says the legislation seems to be responsive to an emerging issue. He adds that more and more employers are seeking the consent of employees before taking out COLI policies.
Moreover, Dolan says, at least five states have passed laws requiring employers to seek consent.
But one source says the COLI issue could become much more worrisome, particularly if legislation is introduced to change the COLI tax rules. As has been shown from earlier reforms of COLI, a lot of revenue can be raised from COLI, he says.
The real issue, this source says, is one of insurable interest. Some years ago, he says, states rewrote their laws on insurable interest with the intent of allowing companies to insure some employees, generally key employees.
Due to bad drafting or aggressive lobbying, some of the laws were written to allow companies to insure all their employees, he says.
The real question, he says, is why companies have an insurable interest on low-wage employees. There is, he says, no good answer to that.
If the Senate Finance Committee, he says, decides to move aggressively on tax shelters, COLI may well be in the mix.
Finally, Democratic and Republican leaders in the Senate reached an agreement last week to allow floor vote on language permanently repealing the estate tax.
Permanent estate tax repeal is a key issue for some Republicans, particularly in light of legislation passed last year that phases out the estate tax on Jan. 1, 2010, but due to a sunset provision, brings it back on Jan. 1, 2011.
President Bush has also repeatedly asked Congress to make the tax cuts enacted in 2001, including estate tax repeal, permanent.
However, one industry source says he expects to see a compromise on repeal.
With the federal budget still in deficit, he says, estate tax repeal is just not viable.
Rather, he says, he believes that if any legislation on the estate tax passes, it will be along the lines of reform.
He believes the exclusion will be increased to $4 million and there will be a full exemption for family farms and small businesses.
Reproduced from National Underwriter Life & Health/Financial Services Edition, April 29, 2002. Copyright 2002 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.