Industry is quietly starting to gear up to protect inside buildup

By Arthur D. Postal

Washington

The life insurance industry is quietly gearing up to protect inside buildup in core whole life policies out of concern that dominant congressional Republicans might use a limitation on inside buildup in policies for the affluent in order to pay for making repeal of the estate tax permanent.

The industrys concerns were brought to the surface last Monday when Senate Republicans revealed their list of 10 priority bills they hope to push through Congress this year. These include creation of private accounts for Social Security and facilitating purchase of health insurance for the uninsured.

Other components of the top-10 legislative priorities that would involve insurance products include reform of the tax code and making permanent the repeal of the estate tax. A proposed provision the industry wholeheartedly supports is an above-the-line deduction for long term care insurance premiums. (See story on page 7.)

The priorities were laid out by Senate Majority Leader William Frist, R-Tenn., at a press conference. A document laying out the details of the priorities also was released later in the day.

Details of how private accounts proposed for Social Security would be structured were not disclosed, making it difficult to determine if such reform would benefit or hurt life insurers. And the industry has made clear it does not support total repeal of the estate tax because it would hurt sales of the tax-advantaged products it sells.

Regarding Social Security reform, Jack Dolan, a spokesman for the American Council of Life Insurers, said the insurance industry would like “to bring our expertise to the table. Our position on personal accounts is that if that idea is adopted, we would support a lifetime income option through purchase of an annuity for at least a portion of the assets accumulated in a personal account.”

Dolan said the industry hasnt taken a position on the issue of personal accounts. “But, if Congress decides to adopt them, we would support the lifetime income option for at least a portion of the assets accumulated in personal accounts.”

The industry also has a concern about another provision of the Republican priorities, permanent repeal of the tax on stock dividends. The insurance industry is lobbying to win an expansion of the current language to provide a pass-through for dividends paid into variable annuities. That is a priority for the insurance industry, although it is opposed by the House and also by the Treasury Department.

But it is the provision in the Republican Senate priorities regarding the estate tax that most concerns the industry.

“The death tax is fundamentally unfair; it discourages hard work, entrepreneurship and savings, while rewarding consumption,” the Republican document says. “Congress must permanently repeal the death tax. Without a permanent repeal, current law imposes confiscatory tax rates and tremendous planning costs on families, especially those owning a small business.

“Making death tax repeal permanent will eliminate the unjust and burdensome effects of this tax,” the document says.

The life insurance industry up until now has quietly opposed permanent repeal of the estate tax. Congress is preparing to deal with it because under current law, the estate tax will be phased out totally in 2011, but return in 2012 to the threshold level it was in 2001, $600,000.

But ACLIs Dolan says the industry doesnt support outright repeal. “We support reform and not repeal,” Dolan says, that is increasing the level from $600,000 gradually, perhaps by tying it to inflation.

“We support work; a person who is working is taxed on their income,” Dolan says. “Were not keen that another income source, an inheritance, should be treated more favorably than income going to a worker.”

But the industrys real concern is that Rep. Bill Thomas, R-Calif., chairman of the House
Ways and Means Committee, will seek to pay for total repeal of the estate tax by limiting inside building up on whole life policies sold to the affluent. The current plan is that when total repeal occurs, it will replace the “step-up” policy that has governed the estate tax since it was first inaugurated to a carryover basis, where assets are not taxed until they are sold by the estates beneficiary.

Thomas first proposed a limitation of $3 million in 2001 on inside buildup when his panel acted on President Bushs proposal to eliminate the estate tax, especially after a hearing where a witness said the affluent could use life insurance policies as a means of avoiding any taxes whatsoever on assets. But he dropped it before it was considered by the committee under intensive pressure from lobbyists at a famous Tuesday meeting that occurred before the bill was approved by his committee and reported to the full House.

But official Washington is aware the issue could return this year. “Any such suggestion represents awful public policy,” Dolan said. “The industry is already heavily taxed. Any tax on the industry represents an attack on our ability to promote Americans retirement and financial security.”

Ken Cohen, senior vice president and deputy general counsel at Massachusetts Mutual Life Insurance Company, had a different view.

“We take an iconoclastic view at MassMutual,” he said. “While most of the industry quietly opposes total repeal, because they believe it threatens sale of whole life policies, especially to the affluent, we support it because as a mutual life insurance policy we realize most of our policyholders would benefit. We are unique in that view.”

However, Cohen said, “We would certainly oppose a limitation on inside buildup if that is what is used to finance full repeal of the estate tax. It is a concern. If a limit on inside buildup is used to finance a tax cut of any type that would absolutely draw us into the debate [on repeal of the estate tax].”


Reproduced from National Underwriter Edition, January 27, 2005. Copyright 2005 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.