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Industry Gears Up To Fight Tax Changes

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The life insurance industry is gearing up to fight sweeping changes in tax laws proposed by the Obama administration last week, among which is one that could severely reduce sales of corporate-owned life insurance.

Besides those affecting COLI, the proposed changes would tighten the rules governing estate and gift taxes as well as the tax treatment of annuities and life insurance.

In addition, another change would require purchasers of life insurance, specifically settlement companies or investors, to report transactions on policies exceeding $1 million in face value to the Internal Revenue Service and the seller.

According to officials at the American Council of Life Insurance, the goal of this is to ensure compliance with the tax code by improving the reporting of tax-related information.

However, ACLI officials say, “the reporting requirement imposes no new taxes on either the sellers of insurance policies or the buyers. The provision is simply a new reporting requirement.”

Responding to the proposed new tax changes, Frank Keating, president of ACLI, voiced serious concern.

“Seventy-five million American families rely on the products offered by life insurers for their financial and retirement security,” he said. “This is absolutely the wrong time to make it more expensive for families to obtain the security and peace of mind our products provide.”

David Stertzer, CEO of the Association for Advanced Life Underwriting, added that, “A united life insurance industry–producers and carriers alike–are committed to being a big part of the solution in these times of financial uncertainty; providing tremendous protection, savings, retirement and other benefits, as well as securing businesses, jobs and employee benefits.”

Stertzer added that “AALU and the broad life insurance industry are resolute. Life insurance products have never been more important to this nation and proposals that undermine the benefits this industry provides must not move forward.”

A key provision is one termed by an AALU official as an “attack on life insurance owned by businesses.”

It would do so by repealing the exception from the pro rata interest expense disallowance rule for contracts covering employees, officers or directors, other than 20% owners of a business that is the owner or beneficiary of the contracts.

In general, the provision would disallow otherwise deductible interest by these entities by the ratio of the value of such life insurance contracts to the business’s total assets.

For example, if an entity had 10% of its assets in life insurance, 10% of otherwise deductible interest would be disallowed, according to AALU officials.

The proposal would apply to policies issued after the date of enactment and is estimated to raise approximately $8.4 billion from 2010 to 2019.

William Sweetnam, a principal with the Groom law firm, Washington, D.C. said the proposal “would impose a big–and adverse–financial impact on companies that purchase COLI.

“The provision, if enacted, would make it exceptionally expensive for companies to purchase these types of policies for their executives and employees,” Sweetnam said.

The provisions were added by the Obama administration as a means of raising revenue to pay for healthcare reform.

All the proposed revisions, if accepted by Congress, are designed to raise a total of $12.7 billion in new revenue over 10 years.

Sarah Spear, director of policy and public affairs at the AALU, acknowledged that the industry’s work is “cut out for us” in ensuring the proposals don’t become law.

In the estate and gift tax arena, the plan would require consistent valuation for transfer and income tax purposes, modify rules on valuation discounts, and require a minimum term for grantor retained annuity trusts, according to AALU officials.

The administration justified the changes by arguing that they target “valuation games played by those facing estate and gift taxes that allow them to undervalue transferred property.”

The proposed changes would also modify the rules that would apply to “certain life insurance contracts,” and change the dividends-received deduction for certain life insurance company separate accounts and expand the pro rata interest expense disallowance.

The dividend-received deduction deals with provisions in the tax code designed to prevent double taxation of corporate earnings, according to officials at the ACLI.

Life insurance companies have been taking for many years a deduction relating to assets they manage in their separate accounts, which hold a variety of investments, including stocks and mutual funds to support variable annuities and 401(k)s, an official said.

Keefe, Bruyette & Woods analysts in Hartford, Conn., estimate that the dividend-received-deduction provision would impact the earnings of Ameriprise Financial, Hartford Insurance Group, Lincoln National Group, Metropolitan Life, Principal and Prudential Financial by 5% to 10%.

“While that may seem small relative to recent share price volatility, we would argue that a permanent 5% to 10% change in earnings power would be an unusual and non-trivial event,” the KBW analysts said.

Other stock life insurance companies “have limited separate account exposure and thus have limited DRD downside,” the analysts said.


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