Ta Changes Would Give LTCI Buyers More Fleibility

And, although life insurance, endowment and annuity contracts can be exchanged without tax consequences under certain circumstances, there is no similar provision for exchanges to LTC contracts.

Moreover, the National Association of Insurance Commissioners’ LTC Insurance Model Act and several state laws and regulations also contain limitations on cash value LTC insurance, a lobbyist said. In other words, changes will have to be negotiated with the NAIC and certain states as well as legislation to win the support of Congress and President Bush before the new offerings can be marketed.

The industry also is lobbying for other retirement savings provisions to be included in the package in order to spur greater interest in life offerings.

At the same time, one downside is that the package being drafted by Thomas is likely to include creation of Lifetime Savings Accounts, a Bush administration favorite that many in the industry, including insurance agents, strongly oppose.

The critics within the industry are concerned because they view LSAs as tax-favored savings accounts with few limitations that will compete favorably with deferred annuities.

These proposals are being offered in response to suggestions by Rep. Thomas that he would be amenable to including strong incentives for Americans to increase retirement savings as part of legislation that would include reform of the Social Security system–legislation that presumably would include private accounts, an issue on which the industry is neutral.

Some industry officials say the proposals could be presented to Rep. Thomas’ staff very soon, but others caution that it could be weeks, at best, before any legislation sees the light of day, especially because of the reluctance of Republicans to sign on and the adamant opposition of Democrats.

Other components of the package which Thomas is considering include the so-called “paycheck for life” program, which would allow half of the proceeds of an annuity, variable or fixed, up to $40,000, to go to the annuitant tax-free if redeemed in equal monthly installments after retirement.

Additional provisions of the industry’s broad retirement security agenda of which Thomas seems supportive include automatic enrollment in 401(k) plans for new employees, and more flexible distribution rules for 401(k) and IRA accounts. For example, under current law the industry seeks to change, money must start to be withdrawn from 401(k)s and IRAs at 70 1/2.

The industry also is encouraging Thomas to include language in the broad package that would make all of the retirement savings and pension reforms contained in the 2001 tax relief law permanent.

Numerous proposals for changes in tax law are being developed by the industry for consideration by House Ways and Means Committee Chairman Bill Thomas, R-Calif., whose staffers are drafting a broad Social Security reform/retirement security package.