As with any business whose fortunes are so tightly linked to federal tax policy, the life insurance industry will have its work cut out for it in Washington in 2006. That’s because the industry faces a daunting task–namely, asking policymakers to digest an outsized legislative agenda while dealing with extremely cloudy political skies.
According to Kimberly Olson Dorgan, senior vice president, federal relations at the American Council of Life Insurers, Congress is likely to wrap up most legislation by July 4 if not sooner and then focus efforts on the November elections.
At the same time, she says, “issues such as an optional federal charter and data security could remain in the summer or fall as neither is strongly partisan in nature.”
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Support for the OFC in Congress “grew in 2005,” she says. “In 2006, we are hopeful that bills to enact the OFC will be introduced in the House and Senate.”
Regarding pocketbook legislative issues Dorgan says in 2005 Congress focused its efforts on strengthening defined benefit plans. In 2006, she predicts, “Congress is likely to turn its attention to qualified plans and ways to encourage Americans to save for retirement.”
One obstacle to the industry’s agenda could arise because the turmoil that buffered the Republican party in the last quarter of this year loosened the leadership’s strong control over the rank and file, meaning that action on bills containing provisions the industry worked hard to get into legislation is likely to be delayed, probably until the first quarter of 2006.
At the same time, the industry has dodged one bullet, as the Bush administration signaled it is likely to postpone presentation of concrete tax reform proposals to Congress until 2007.
A proposal to the administration by an independent commission that was presented in November contained a recommendation that inside buildup on life insurance and annuity policies be limited to $10,000 annually.
It also proposed creation of three new savings vehicles that would replace existing tax rules for savings and which would have a decidedly negative impact on the industry, according to Saul Martinez, who analyzes life insurance stocks for Bear Stearns.
Martinez, after talking to ACLI officials, published a note to investors which said, “We believe that the reforms outlined in the tax advisory panel report are likely to face substantial political headwinds,” and this was even before the administration decided to postpone action until 2007. That period will give the industry even more time to lobby the administration and members of Congress against the plan.
The ACLI officials to whom Martinez talked included Frank Keating, president and CEO. Martinez said in his note that “according to Gov. Keating, meaningful progress for the recommendations outlined in the tax reform report is very unlikely given the current political climate.”
Looking to next year, David Stertzer, CEO and executive vice president of the Association for Advanced Life Underwriting, says, “AALU and the broader life insurance industry have a big job to do in 2006 and beyond.”
Michael Kerley, senior vice president for federal relations at the National Association of Insurance and Financial Advisors, says his group has been working in tandem with Stertzer and AALU to ensure that the views of life insurance agents “come through loud and clear” to both members of Congress and the administration.
“This is a huge issue for the entire life insurance industry,” Kerley says.
“The President’s Advisory Panel on Tax Reform report’s recommendation that would tax the inside buildup of life insurance and annuities beyond the narrow parameters of experimental new accounts is just the latest sign that we need to do a better job of helping people understand life insurance,” Stertzer adds.
“Life insurance products are the foundation of a private financial safety net. They protect families, provide retirement security and facilitate employee benefits,” he says. “The more our products are understood, the more support they will have.”
Stertzer says, “We are making progress. We have met with many legislators, are meeting with the Treasury Department and know that key legislators have communicated to Treasury Secretary Snow their opposition to the idea of tax reform imposing tax on life insurance products.”
Kerley says NAIFA has been working that issue mainly through talks with members of Congress back home in their districts.
The same also can be said for another cloud hanging over the industry–repeal of the estate tax.
Stertzer says AALU will continue to seek permanent reform “at a level we believe sustainable,” a $2.5 million exemption and top rate of 45%, but that no one, supporters of repeal as well as reform, has the votes to push something through in this Congress.
“Repeal advocates continue to push for permanent repeal,” Stertzer says. “The votes are not there for repeal or for reform at the level we support.”
As a result, the AALU is looking into the merits of raising the lifetime gift tax exemption level along with the estate tax exemption.
“This could help small businesses to be passed on sooner to the next generation,” Stertzer says. “It could give more of a bang for the reform buck because transfers can occur before much of the appreciation in the value of the business. It also could lead to earlier participation by the next generation in managing a business and increase the prospects that the business will remain viable across generations.”
Kerley explains that “if there were no federal deficit problems, I believe there are 69 votes in the Senate to repeal the estate tax.” But, because “we do have such whopping budget deficits, we believe there are at least enough senators who are not willing to add further to the national debt.”
Kerley predicts there will be a “lot of rhetoric from the pro-estate tax repeal forces, and you will see a lot of countervailing information by the coalition that supports reform instead of outright repeal.
“But, at the end of the day, I hope the pro-repeal forces will remain one or two votes short of 60,” Kerley says.
NAIFA supports AALU and believes a $3 million to $3.5 million threshold and a top rate of 40% to 45% is appropriate, Kerley says.
Regarding issues remaining from the industry’s 2005 agenda, the Senate in November passed a bill strengthening defined benefit plans, markedly different from a bill scheduled for House floor action at press time.