Life insurance executives will face new sales challenges if Congress permanently reduces the estate tax in the coming weeks. [@@]

Just a week ago, Senate Majority Leader William Frist, R-Tenn., was intent on addressing the issue quickly. Now Senate Majority Leader Harry Reid, D-Nev., is asking Frist to postpone discussion of estate tax repeal.

“Given the tragic and devastating events along the Gulf Coast, members of the Senate would have great difficulty explaining why we were debating the estate tax during our first days back when we know hundreds of thousands of families are suffering,” Reid writes in a letter to Frist that also was sent to news organizations.

Suneet Kamath, an analyst at Sanford C. Bernstein & Company L.L.C. New York, writes in a research note issued before Katrina hit that approval of a cut in the estate tax would be bad for life insurers.

“Any permanent reduction in the federal estate tax, or increase in the exclusion amount, could reduce the demand for survivorship life insurance, which is often sold the fund this tax,” Kamath writes in the note.

Although some states have estate taxes, “state and inheritance taxes represent only 1% of total state tax revenues,” Kamath writes. “As such, it might make more sense for states to prioritize other programs than focus on the estate tax.”

Since 2001, only 19 states and the District of Columbia have “decoupled” from the federal estate tax and started their own programs.

Life insurance sales for the 7 leading players are essentially flat when compared to 2004 sales. “In addition, we estimate that average earnings growth from the U.S. life insurance segments will be only 3% to 4% for the 4 years ending 2005,” Kamath writes.

Moreover, increased capital requirements on universal life products and the growth of the life settlement industry also may bedevil the industry in the coming year, Kamath writes.