With Republicans Victorious, Expect Challenges And Opportunities

The stunning victory by Republicans on Nov. 5–not only taking control of the Senate but increasing their margin in the House–is likely to offer the life insurance industry as many challenges as opportunities in the upcoming 108th Congress.

On the positive side, Republican control of both Congress and the White House promises renewed efforts to enhance private sector-based retirement security, expand long-term care insurance and reform the liability system.

But on the negative side, Republicans remain strongly in favor of permanent repeal of the estate tax. Moreover, as recently as last year, House Ways and Means Committee Chairman Bill Thomas, R-Calif., championed an effort to cap the tax-free inside buildup of whole life insurance.

Indeed, the upcoming debate on the effort now under way at the Treasury Department to propose a major overhaul of the nations tax system reflects the risks and rewards that emerged from the election.

Life insurance companies are eyeing the tax reform effort as a golden opportunity to eliminate certain vestiges of the tax code that they have long felt have outlived their usefulness.

These include Sections 809 and 815 of the tax code (dealing, respectively, with mutual life company taxation and stock company policyholder surplus accounts), as well as the rules on consolidated returns.

Resolving these tax issues would go a long way toward modernizing taxation of life insurance companies.

But at the same time, the tax reform effort also offers a golden opportunity to put inside buildup back on the table.

Indeed, it was President Ronald Reagan, in his initial proposal to reform the nations tax system, who suggested that the inside buildup on whole life insurance and annuities should be treated as any other investment and subject to taxation.

A few years later, the first Bush administration advanced a plan to tax the inside buildup of annuities.

The widespread belief is that Treasury has an institutional bias that investment decisions should be based strictly on the underlying economics and not on tax advantages surrounding a particular product.

If so, the lifes blood of the life insurance industry may again be called into question, especially if Chairman Thomas again decides to lead the charge.

The margin in the Senate is so narrow (51 Republicans, 47 Democrats, one independent and one seat still undecided) that it is unlikely that anything severely damaging the life insurance industry will reach the finish line.

But the Republican efforts on estate tax repeal and tax reform could put the life insurance industry in a defensive posture during the upcoming debate.

It is a challenge that the industry–both companies and agents–must be prepared to meet.

The life insurance industry has a great story to tell, and the challenges ahead could afford it the opportunity to remind consumers and lawmakers of the vital role that life insurance plays in the nations economy.


Reproduced from National Underwriter Life & Health/Financial Services Edition, November 18, 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.