Federal budget negotiations that increase tax rates for higher income consumers could be good for U.S. life insurers, securities analysts say.
John Nadel and Dennis Zavolock, analysts in the New York office of Sterne, Agee & Leach Inc., write about the possibility in a comment on the release of an Obama administration deficit-reduction proposal.
The proposal calls for lowering the estate tax personal exemption to the 2009 level, increasing the maximum estate tax rate to the 2009 level, increasing taxes on corporate-owned life insurance (COLI) arrangements, making the dividends-received deduction (DRD) for life insurers’ separate accounts less favorable to insurers, and making it clear that taxpayers who buy life insurance policies through life settlement arrangements must pay income taxes on the death benefits.
The proposal is supposed to save a total of about $3 trillion over 10 years, with $1.5 trillion coming from spending cuts and $1.5 trillion from tax increases.
The COLI provision is supposed to raise about $6 billion over 10 years, but, in the real world, the main effect on life insurers likely would be a dramatic reduction in demand for the product, the analysts say.
The DRD change is supposed to raise about $5.5 billion over 10 years, and the life insurers that Sterne, Agee follows took about $650 million to $700 million in DRD deductions in 2010, the analysts say.