Proposed changes to corporate-owned life insurance and the dividend received deduction for separate account products could add to life insurers’ headaches.

Scott Robinson, a credit analyst at Moody’s Investors Service, gives that assessment in a comment on the Obama administration deficit-reduction proposal.

The proposal calls for increasing taxes on corporate-owned life insurance (COLI) arrangements and making the dividends-received deduction (DRD) for life insurers’ separate accounts less favorable to insurers.

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 could raise as much as $7.7 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, Robinson says.

The DRD change is supposed to raise about $5.1 billion over 10 years.

“We estimate that COLI products are no more than 5% of industry sales and DRD contributes 3% [to] 10% of normalized income for companies with variable products,” Robinson says.

For life insurers, one bright side is that the COLO proposal would apply to contracts issued after Dec. 31, 2012.

“COLI issued before that date is not affected, averting an industry worry that the proposal would apply to existing contracts, a costly proposition for insurers,” Robinson says. “There are still significant unknowns about the budget proposal. Its introduction is just the first step in what is likely to be a heated debate. The ultimate resolution could run the gamut of enactment with retroactive provisions, which would be the most credit negative for the industry, to no change in the tax laws, which would be credit neutral.”

- Allison Bell

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