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.”
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.
Both bills contain provisions sought by the industry, and a combined bill containing all the provisions would satisfy much of the industry agenda.
For example, the Senate bill contains a provision codifying the current “best practices” on corporate-owned life insurance. The provision would effectively limit COLI to coverage of highly compensated employees and require the consent of insured individuals.
The industry has been seeking such a provision for three years.
Stertzer says there “is a chance we will still need to do additional work in 2006 on the enactment of the COLI Best Practices Act.”
He says there is bipartisan support for enactment of industry best practices, and passage of the legislation will assure that life insurance is used responsibly for the benefit of employees and their families. “We are committed to seeing this process move through to completion,” Stertzer says.
Kerley agrees. “NAIFA sees the business use of life insurance issue as one that impacts small, medium and large business.”
Some members of Congress would restrict the use of life insurance in the business setting to only the most basic, key person situations, Kerley says.
“But life insurance is uniquely valuable in a variety of business uses,” he says. “As a result, this provision is very important to all insurance agents.”
The House bill contains a provision enabling insurers to market a “combination insurance product” that allows annuities to include riders for LTC coverage.
Other provisions sought by the insurance industry in the House bill include incentives for employers to allow automatic enrollment of new employees in 401(k) plans and allowing employees access to professional investment advice.
Under the proposed legislation, fiduciary safeguards will be created to protect workers from potential conflicts of interest.
The legislation awaiting House floor action also extends the annual contribution limits for IRAs and qualified pensions first enacted by Congress in 2001 tax-cut legislation to 2010.
It also extends provisions in the 2001 law creating additional “catch-up contributions for individuals 50 and older, as well as incentives created under the 2001 law for small employers to offer pension plans.
In an issue also linked to the tax reform proposals, ACLI’s Dorgan says a focus of ACLI’s 2006 agenda will be on legislation “that encourages Americans to save and provide incentives to help them manage savings to last a lifetime through annuities.”
Bipartisan legislation was introduced earlier this year in both the House and Senate providing an incentive that would encourage Americans to invest in retirement vehicles that provide steady income for life, such as lifetime annuities. The bills are H.R. 819 and S. 381.
“ACLI strongly supported this legislation and will support any similar legislation introduced in 2006,” Dorgan says.
Regarding the recommendations of the President’s Advisory Panel on Federal Tax Reform, which would conflict with the bills the ACLI is supporting, Dorgan says the “panel’s options ignore crucial components of sound lifetime financial planning.”
Dorgan explains that “families need to save, but they also need to protect against the financial loss at death at any age through permanent life insurance. And they must guard against outliving their retirement savings through the guarantees only annuities can provide.”
Kerley supports such legislation, but says NAIFA is also a strong supporter of the provision providing a change in the tax law allowing the inside buildup of annuities and life insurance to be used for LTC insurance needs.
That provision is contained in the House version of the legislation strengthening defined plans. Final action on that legislation is unlikely to be completed until the first quarter of 2006, Kerley says.
Stertzer and Kerley also say that the issue of “investor-owned life insurance” will be in play in 2006.
“The life insurance industry will continue to play a constructive role as Congress tries to structure and pass legislation ensuring proper utilization of life insurance in charitable planning and imposing a tax where entities funded by private investors use charities to take out life insurance on persons in whom the investors lack an insurable interest,” Stertzer says. “Enacting legislation that addresses this problem without creating unintended negative consequences for legitimate arrangements is an important but difficult endeavor.”
Kerley says NAIFA’s concern is that in dealing with this issue, “Congress will come to believe that life insurance is being used to make wealthy people wealthier.
“That is not the purpose for which Congress granted important tax benefits to life insurance,” he says. “Congress granted these benefits to encourage middle-income Americans to protect themselves and their families from untimely death, not as an investment haven for very wealthy people. So, NAIFA has been jealously guarding traditional state insurable interest laws to make sure that IOLI will not proliferate in the marketplace.”
Stertzer says AALU will provide comments in early January to ensure that clients of AALU members “are not whipsawed by a conflict between split-dollar rules and rules relating to deferred compensation.”
Split-dollar arrangements entered into before regulations were finalized in 2003 received protection from a new tax regime applicable to split dollar as long as these existing arrangements were not “materially modified,” Stertzer says.
However, he adds, new rules under Internal Revenue Code Section 409A could require modifications to the arrangements that could be considered “material” and could trigger the loss of protection. It is this issue to which the AALU is paying close attention, he says.
Another issue which Congress is likely to take up again next is data security legislation. “At this time, we are uncertain if there will be any impact on life insurers but will monitor developments closely,” Dorgan says.