Coming Up Short

He added, however, that serious negotiating will require the parties over the coming weeks to “put everything on the table.” And he noted the political rhetoric of recent weeks will make the task “extraordinarily difficult.”

Turning to the potential impact of deficit reduction negotiation on producers, the panelists agreed that the tax-favored treatment of life insurers remains a target. Kies noted this is annually cited by the Congressional Budget Office as a deficit reduction “option.” Taxing the inside build-up of permanent policies, he added, would generate more $200 billion over 10 years.

Cadin said that a phrase adopted by Democrats to describe tax preferences in the Internal Revenue Code–tax expenditures–could make the taxing of life insurance more appealing.

“There is no question that Democrats want tax increases as part of a deficit reduction package,” he said. “And ‘spending’ through the tax code doesn’t really sound like a tax increase.”

Ricchetti said the industry could be negatively impacted if an overhaul of the tax code takes the form of lower marginal tax rates for high income earners, as many Republicans advocate. Life sales might also suffer if, as left-of-center think tanks have proposed, the tax-favored treatment of life insurance were limited through income-testing.

“Individuals with higher incomes might have a lower chance of being able to take advantage of tax preferences [offered on life insurance],” he said. “Income-testing could easily be embedded in a tax reform bill.”

Kies, however, was skeptical tax reform will happen this year because any effort to simplify the IRS code by removing tax preferences is “complicated.” The initiative, he said, affects a myriad of interests that have a vested stake in maintaining current tax credits. Among them: the home mortgage interest deduction.

“Tax reform is enormously complicated,” Cadin said. “We as an industry have a vested interest in the discussion. Our message to Congress needs to be: the tax code needs to incent people to save. And life insurance is a big piece of saving incentives. There’s a lot of stake.”

Ricchetti expressed confidence that the industry will be able to rebuff potential challenges to its tax preferences. He noted that industry lobbying campaigns currently are backed by $16-17 million in funding from AALU member companies. And he noted the AALU has “market-tested” its advocacy messages. Among them: that the savings component of life insurance is critical to helping consumers achieve financial security in retirement.

Cadin also voiced optimism about the industry’s ability to protect its interests.

“The unity of the industry has never been greater,” he said. “We have the relationships, the funding, the communication tools and the messages to address any new legislative initiative. In terms of preparation, we’re ready to go.”

Added Morton: “Each year we’re getting stronger as a result of the relationships we’ve built fighting back adverse tax proposals. Thirty-one of 37 members on the House, Ways and Means Committee have signed a letter stating that taxing COLI [corporate owned life insurance] is not an appropriate way to address fiscal challenges that we face as a country. What we’ve done works.”