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Let the budget lobbying begin

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President Obama’s $3.7 trillion 2012 budget proposal released Monday predictably includes some provisions that have the life insurance industry on high alert.

Chief among them is a provision to expand the “pro-rata interest expense disallowance” for corporate-owned life insurance (COLI). This proposal would keep a company from taking an interest deduction up to the amount of the unborrowed cash value of the COLI policy, except in cases in which the insured is a 20% owner of the business, according to a Monday article from Life Insurance Selling sister publication National Underwriter Life and Health. It would cancel out the inside build-up for COLI insureds who are officers, directors or employees. The Obama administration projects this change would raise $7.7 billion by 2021.

The proposed budget’s other key life insurance provision is a cut in the dividends-received deduction (DRD), which would undercut longstanding rules regarding the DRD that are designed to prevent double taxation of corporate earnings.

Both of these provisions were originally included and subsequently removed from the 2010 budget after being rejected by Congress. Monday’s proposed 2012 budget release marks the beginning of a long process, which will undoubtedly include many revisions before the 2012 budget is finalized and adopted.

A quartet of life insurance industry organizations have banded together to voice their opposition to the life insurance-related provisions in the budget. The Association for Advanced Life Underwriting (AALU), Reston, Va.; the American Council of Life Insurers (ACLI), Washington, D.C.; GAMA International, Falls Church, Va.; the National Association of Insurance and Financial Advisors (NAIFA), Falls Church; and the National Association of Independent Life Brokerage Agencies (NAILBA), Fairfax, Va., released a joint statement Monday.

“As an industry that helps 75 million American families and thousands of businesses responsibly plan for their financial futures, the life insurance industry is deeply concerned about provisions in the president’s proposed 2012 budget that amount to new taxes on products that provide security and peace of mind,” the statement begins.

“The COLI proposal would impose new taxes on life insurance used by businesses small and large. Many businesses use COLI to protect against financial or job loss stemming from the death of owners or key employees. COLI is also used to ensure business continuation. In addition, COLI is a widely used funding mechanism for employee and retiree benefits. Congress affirmed the benefits and tax treatment of COLI and ensured its responsible use in bipartisan legislation enacted in 2006.

“Another proposal would undercut longstanding rules regarding life insurers’ DRD that are designed to prevent double taxation of corporate earnings. The administration’s proposal would reduce the DRD that life insurers use in accounts that fund variable life insurance and variable annuity contracts — key products for financial and retirement security.

“With our economy still recovering from the recent crisis, public policy should encourage families and businesses to responsibly plan for their financial futures. The administration’s budget proposal would have the opposite effect. Congress rejected the same proposals last year. We urge the administration to withdraw its proposals on COLI and DRD.”

And so the budget lobbying process begins once again, where industries such as ours continually have to point out to lawmakers the damage some of their proposals would inflict on the public. The last thing we need is for the feds to enact new tax policies that discourage the use of badly needed insurance products. Fortunately, the industry organizations are on the ball and adept at the budget lobbying game.

Check out more blog entries from Brian Anderson.