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The New Congress Will Present Opportunities And Challenges

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The outlook for the life insurance industry in the incoming 110th Congress is cloudy, according to trade group officials. These interviews were conducted prior to the serious illness of Sen. Tim Johnson, D-S.D. on Dec. 13, placing Democratic control of the U.S. Senate next year into question. However, Democratic control of funding through control of the House will make it difficult for the Bush administration–and Republicans in general–to significantly alter a major change in agenda, according to analysis.

Trade group officials foresee critical opportunities for the industry to make key advances in its legislative priorities. At the same time, they warn they could be forced to wage a spirited defense play on behalf of inside buildup in the face of efforts by some in the Democratic majority to tap that tax benefit in order to pay for their social welfare priorities.

Two key reasons for the cloudy outlook and the potential for stormy weather are the fact that industry priorities in Congress will be dealt with by a whole new crop of faces, as Democrats control both houses of Congress for the first time since 1995; and because Congress has kicked down the road for several years action on the future of the estate tax. Specifically, Republicans in 2001 enacted legislation that will gradually phase out the estate tax by 2010, but, because of the potential cost, did not act on what would happen afterward, resulting in a situation where the 2001 structure will return in 2011.

Other key issues cited by industry officials are potential action on changes in insurance regulation, perhaps in the form of an optional federal charter, and on the future of the Terrorism Risk Insurance Act.

Kim Dorgan, head of federal relations for the American Council of Life Insurers, noted that the Senate held 2 hearings on the OFC this year, and bills establishing an OFC will be introduced both in the Senate and in the House. She said she hopes “the momentum” for ultimate creation of such an option for both life and property/casualty insurance will continue in the 110th Congress, but wouldn’t speculate as to whether Congress will act on such a proposal in the coming 2 years.

In any case, the first issue likely to be addressed is taxes.

“Serious consideration of tax reform–with huge potential implications for life insurance–is coming; we just don’t know when or how,” warns David Stertzer, CEO of the Association for Advanced Life Underwriting.

He said the consideration could be prompted by a State of the Union proposal by President Bush; through proposals by the Democratic Congress to deal with the Alternative Minimum Tax or other issues; or by events or factors not yet known.

Most likely, Stertzer said, the issue will take some time to reach critical mass. That will give the industry–agents, companies, producer groups, brokers and carriers–”a major opportunity,” he said.

“We are working proactively and on a united basis to take advantage of it by spreading the word about how effective permanent life insurance products are in protecting Americans, fostering savings and meeting their financial needs,” he said.

“We have a compelling story to tell about the success of our products in providing savings and financial protection to American families and businesses,” Stertzer added. “To protect permanent life insurance, it may make sense to ask for consideration of additional incentives.”

Michael Kerley, senior vice president, federal government relations, at the National Association of Insurance and Financial Advisors, agreed, saying his group is “paying close attention to what Congress will do in tax matters.”

Of major concern is the comment by the incoming Democratic leadership in the House that it plans to re-establish so-called “pay-go rules,” and what that might mean for tax-deferred inside buildup on life insurance and annuities. “Pay-go” is congressional shorthand for requiring Congress to pay for a new program by cutting back an equal amount on an existing program in order to control deficit spending. Republicans have ignored such policies since President Bush took over in 2001.

Kerley said he is also concerned about Rep. Pete Stark, D-Cal., a senior member of the House Ways and Means Committee who will take over its Health Subcommittee “because he has tended in the past to favor the taxation of inside buildup on life insurance and annuities.

“That is why we are going to be aggressively watching the pay-go environment,” Kerley said.

He also spoke to the estate tax issue. “Any ‘reform’ costs a lot of lost revenue,” Kerley said. “On the other hand, it’s a major political issue leading into the 2008 election.

“So, it is more likely senators will want to address the subject than House members, but I think you will see a fairly strong effort to reform the estate tax,” he said. “But I don’t see any appetite for repeal.”

Kerley said the industry is supporting estate tax reform that will create a per-person exemption of $3 million to $3.5 million–the level that under current policy will go into effect in 2009–and a top tax rate of 35% to 45%.

“But others, including some Democratic senators, are seeking a considerably higher exemption,” Kerley said. “So, I think there is going to be a lot of activity on the repeal front, and I wonder whether the word ‘reasonable’ will creep into the discussion.”

“You have to remember that the last proposal of Rep. Bill Thomas, R-Calif., the retiring chairman of the Ways and Means Committee, was labeled reform, but in reality would have cost 90% of repeal. That is a concern for us.”

Joe Normandy, executive director of the National Association of Independent Life Brokerage Agencies, touched on the sensitive issue of insurance regulation and the proposal of a strong component of the life industry: an optional federal charter.

“We’re very much in favor of federal regulation of life insurance,” Normandy said. “We support federal licensing and regulation. But we don’t want to force any agent or company to go through the federal process if that doesn’t fit their needs,” he said.

“Companies and agents should have the option to do what fits their business model,” he said. Regarding an umbrella proposal to let both life and p/c companies have an option for a federal charter, he said, “let the p/c speak to the OFC on its own.”

“An OFC charter for p/c companies is not an issue that we’re going to take up,” he said. “We’re going to work for the life insurance part of it.”

He noted that an OFC for life insurance sellers is going to take a couple of years and many twists and turns. But, “we’re in the fight,” he said, “and are going to work to see this through.”

The ACLI says it will keep a “close eye” on Social Security and tax reform issues.

“As an industry that helps people achieve retirement security, we recognize Social Security’s important role, and its long-term solvency is paramount,” said Dorgan. “We look forward to offering our industry’s expertise if asked.”

The ACLI will also lobby for tax reform proposals that recognize the importance of long-term savings “and the crucial role that permanent life insurance plays in protecting families against financial loss.”

Specific proposals that ACLI will lobby for include an above-the-line deduction for long term care insurance, Dorgan said, but the ACLI recognizes that “it is very expensive, and with pay-go rules likely to be enforced, it is unlikely to be enacted.”

The ACLI will also lobby for provisions that will allow employers to include LTC insurance in cafeteria plans so employees can set aside money in flexible spending accounts or cafeteria plans to pay for LTCI, she said. “The impact of lack of LTC insurance is going to grow in prominence,” she said. “Congress must address this before the crisis gets out of hand.”

Another priority will be to seek provisions in tax legislation that would allow annuities to be included in employer-sponsored retirement plans, reducing barriers to partial annuitization of money in Individual Retirement Accounts or 401(k)s.

The ACLI thinks using annuities as a tool in retirement package is important so retirees will have “some known payment going to them in their lifetime after they retire,” she said. She added that employees should be allowed to have these guaranteed-payout annuities in their group plans.

“Americans are being held more and more responsible for managing their retirement finances, and they are ill-equipped to do it,” Dorgan said. “We want to offer them some options to share their risk about outliving their income and taking advantage of annuities to deal with that.”