Are Legislative Changes Ahead For Life Products?

The current economic crisis has seen huge increases in government expenditures to stimulate the economy. As per usual, increased expenditures cause politicians to seek new sources of revenue to ameliorate the inevitable deficits that result.

This is causing the two of us to wonder if the long predicted change in the tax structure of life insurance products–to tax the inside build-up of cash values–may see daylight in the next few months.

Another issue is stirring too. Proposals are surfacing for total restructuring of the regulatory oversight of the entire financial services industry, including at least annuities and perhaps life insurance products as well. There is talk of creating some type of super regulatory agency to oversee banks, asset managers, brokerage firms and life insurers and their products for the public. The recent financial services industry scandals merely add fuel to this race to impose new forms of regulation.

Annuities may be safer from potential tax changes than traditionally thought. Apparently, Congress has finally realized that annuities facilitate secure retirements.

Certainly, no one has a sense of security when it comes to government sponsored retirement programs like Social Security. People are finally understanding that they are responsible for their own financial security and the risk of living too long can only be hedged by ownership of a life contingency annuity. Meanwhile, the annuity industry is pushing not only to continue the current tax treatment, but to obtain even greater tax incentives for people to provide for their own retirements.

Life insurance products have been somewhat obscured by the success of annuities for the past 15 or so years. Yet, life insurance provides an essential element in financial planning that cannot be provided by any other product.

The fact that a person has to die to obtain the primary benefits provided by the tax-favored tax treatment of life insurance should be sufficient to prevent attempts at meddling with the product’s taxation. It seems morbid to tax people on the life policies they use to protect their loved ones in the event of untimely death. However, the long-standing estate taxes prove that morbidity does not always trump the need for government revenue.

Profound changes in the regulatory structure of life insurance at the federal level may be inevitable.

Many years ago, it would have been considered heresy to suggest that federal regulation of life insurance might be superior to state insurance regulation. Yet today, a substantial number of insurance executives would welcome federal regulation–to put an end to the chaos of 50+ state regulatory bodies administering the process. This is particularly true when factoring in politics.