Life insurance companies face perils on multiple fronts, some of their own making, said speakers at a meeting here, and if advisors and their firms dont take the threats seriously, the tax advantages upon which the industry has long prospered might soon vanish.
These words of warning were a recurring theme at the Limra International 2004 Advanced Sales Forum held here last month, as advanced market professionals got an earful on the more sobering challenges that lay ahead.
Stephan Leimberg, CEO of Leimberg Information Services, Inc., Bryn Mawr, Pa., highlighted the potentially deleterious effects of IRS and Treasury Dept. regulations proposed earlier this year. The regulationsReg. 126967-03, Rev. Rul. 2004-20, Rev. Rul 2004-21 and Rev. Proc. 2004-16collectively aim to eliminate abusive transactions involving individual and group insurance, retirement plans, and Section 83 transfers.
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Leimberg expressed particular concern over Reg. 126967-03, which would measure the worth of distributions from a life insurance policy for income tax purposes according to a single standard: fair market value. The rule would thus eliminate other variables for determining worth, such cash value, cash surrender value and reserve.
Leimberg views the proposed single standard as overly restrictive. But, he notes, the insurance community effectively invited government intervention by not blowing the whistle on firms that engage in “blatant and significant abuses” of tax laws. Without a self-policing entity (Leimberg suggests an NASD-like governing body) more such adverse rules can be expected, he says.
“This [government regulation] is a rolling stone thats coming down the hill,” says Leimberg. “And, like a snowball, its just going to get bigger as its reach extends from 412(i) plans and pension rescue to other transactions bearing on gift taxes, estate taxes and generation-skipping plans.”
“Were to blame for the current situation,” he adds. “We dont know how to shun or censor our own members. If we dont find a way to shut down abusers, much as the securities industry has done with the NASD, then our community will continue to get pummeled.”
William ODonnell, president of William T. ODonnell Associates, Chicago, Ill., concurs about the challenge, but questions whether a self-regulating industry organization is the answer. Pointing out that similar initiatives had been undertaken in the past, he observes that “the more rigid the rules, the harder the industry will buck you.”
During a general session on drawing the line between aggressive strategies and abusive techniques, ODonnell says the solution is for advisors to “exercise personal leadership” in upholding the spirit of the tax laws and in navigating ethical dilemmas.
Leadership will be required of the insurance community, too, if it is to stave off government assaults on the tax-free status of death benefit distributions, long an industry pillar. The threat, conference panelists warned, comes from two fronts: the advent of investor-owned life insurance (mockingly termed stranger-owned life insurance or SOLI) and insurance firms growing abandonment of the middle market.