The 10-year budget blueprint recently proposed by the Obama administration contains several key components for the life and health insurance industries, highlighted by a $175 billion cut in the Medicare Advantage program and sustaining the estate tax at 2009 levels while indexing it for inflation.

The latter decision is being strongly supported by the life industry, because the 2001 decision by the Bush administration to phase out the estate tax over 10 years created great uncertainty for the industry and undermined sale of many tax-advantage products.

Under the Obama proposal, individuals will have a $3.5 million exemption from the estate tax and the maximum tax rate on the remainder will be 45%.

In comments at a recent industry conference, Dennis Catanzano, vice president, Insurance Solutions Strategy, at Lincoln National, said, “At this level the vast majority of estates will not be taxable.

“The wealthiest families and individuals, who will be taxed, will build their plans from a solid foundation,” he explained.

“This is an outcome that wealthy families, their advisors and companies that provide planning solutions, will all welcome,” he said.

The Bush administration policy created uncertainty “for the past 9 years around the ultimate level of estate taxes.”

“This uncertainty has made concrete planning difficult, and for some families it has caused them to either delay their estate planning or to put in place temporary solutions,” he said. “Neither delay nor a temporary solution is optimal for the consumer. Certainty will be most welcome.”

David Stertzer, CEO of the Association for Advanced Life Underwriting, Falls Church, Va., said the group will strongly lobby for reinstating another provision of the old law, reunification of the gift and estate tax exemption.

He called the change from prior law “an artificial and harmful barrier to [estate tax] planning.

“There is no reason to discourage earlier intergenerational transfers, but under current rules a father could incur more than a million dollars in gift tax liability by conveying a $3.5 million interest in the business he runs to his son, but incur no estate tax liability by waiting to make the same transfer at death,” Stertzer said.

The proposed budget also calls for increasing taxes on couples earning more than $250,000 and individuals earning more than $200,000, and would raise the tax on dividends for those earning above those amounts from 15% to 20% starting in 2011.

Other tax changes for high-wage earners, such as reducing the deduction for interest paid on home mortgages and charitable contributions, would also be phased in.

Under the blueprint, deferred compensation plans would be affected only if they are domiciled offshore.

The administration also proposed a new program that will allow employees not covered by qualified retirement plans to save for retirement through automatic payroll deposit IRAs.

Under this proposal, employees will be automatically enrolled in workplace pension plans–and will be allowed to opt out if they choose. Employers who do not currently offer a retirement plan will be required to enroll their employees in a direct-deposit IRA account that is compatible with existing direct-deposit payroll systems.

The blueprint also expands the “saver’s credit” provision, which is designed to help moderate- and lower-income families who save in 401(k) s or IRAs.

The budget proposed to modify the existing saver’s credit to provide a 50% match on the first $1,000 of retirement savings for families that earn less than $65,000. The credit would be fully refundable to ensure that savings incentives are fair to all workers.

Cliff Wilson, president of the National Association of Insurance and Financial Advisors, said NAIFA’s members support the provisions regarding the estate tax as providing certainty, and also support the provision that would allow employees not covered by qualified retirement plans to save through automatic payroll deposit IRAs–as long as employees have an opt-out provision.

Wilson said the changes may “very well” provide opportunities for agents to sell tax-advantaged products, but cautioned that above all else, “taxpayers must be confident the economy will grow in order to ensure there are incentives available for people to plan for their future and to save for retirement, as well as invest in their business.”

At the same time, Stertzer cautioned that proposals to increase taxes on the wealthy are likely to be controversial.

He also said, “There will be many critical decisions in 2009 and 2010 with major implications for the life insurance industry and the broader public–tax reform, regulatory reform, employee compensation issues, and health insurance reform,” adding that the blueprint “is a post-stimulus bill kick-off of legislative consideration in which AALU and the broader life insurance industry will be heavily engaged.”

The Medicare Advantage proposal is also expected to be controversial. It is designed to deal with the fact that under current law, Medicare overpays Medicare Advantage plans by 14% more on average than what Medicare spends for beneficiaries enrolled in the traditional fee-for-service programs.

It was proposed as part of a $634 billion down payment toward creating universal health coverage.

Under the administration proposal, the current system for setting rates will be replaced with a competitive system in which payments would be based upon an average of plans’ bids submitted to Medicare.

“This would allow the market, not Medicare, to set the reimbursement limits, and save taxpayers more than $175 billion over 10 years, as well as reduce Part B premiums,” the document said.

Karen Ignagni, president of America’s Health Insurance Plans, applauded the overall concept, saying it “sends a signal to the American people that this administration is serious about prioritizing health care.”

But she criticized the decision to cut the funds for the Medicare Advantage program. “Unfortunately, this proposal would force seniors enrolled in Medicare Advantage to fund a disproportionate share of the costs to reform the health care system,” she said.

“A cut of this scale would jeopardize the health security of more than 10 million seniors enrolled in Medicare Advantage and would turn back the clock on innovative payment incentives to improve the quality of care that patients receive,” she added.

The Automatic IRA proposal was developed by the Retirement Security Project, which includes a former IRS commissioner and congressional staff member. The proposal was endorsed by President Obama and Sen. John McCain during the Presidential election campaign.

David John, a principal of The Retirement Security Project, reacted to the proposal’s inclusion in the budget by saying, “We are delighted to see that the president has included Auto IRA in his budget.”

He noted that it has “broad bipartisan, cross-ideological support, and has bipartisan support in Congress.”