Warnings by key industry officials of an Armageddon for the life industry through coming talks over restraining out-of-control budget deficits masks certain realities the industry obviously doesn’t want to accept.
The first is that some kind of deal is certain.
The second is, will the industry as it negotiates on the issue speak with one voice, or splinter on the basis of product lines?
The pressure for some kind of tax and spending deal by at least the end of 2013 is intense.
Two harsh facts, $1.2 trillion in automatic sequestration of funding for defense and domestic spending, and the expiration of all of the 2001 tax cuts—will force a showdown.
Moreover, the talks will come against the background that policy decisions of the Bush administration were not kind to the insurance industry.
For example, the Bush tax cuts hurt sales of the industry’s highly profitable variable annuities which were aimed at the middle class. This led marketers of this product to provide guarantees on VAs. The decision put the industry in a bad way when the greatest market downturn since the Depression hit the economy in 2007.
Sales of long-term-care products and the number of underwriters for this product have been declining because the low interest rate environment has crippled their ability to invest premium dollars profitably.
And, the purchase of another key product, whole life insurance, has declined precipitously amongst the middle class.
Americans more and more are turning to group life insurance as their backup source of funds; statistics indicate that up to 35 percent of new whole life policies lapse by the third year.
For example, despite the clear tax advantages of the insurance industry’s products, the industry’s overall share of the domestic financial services market has shrunken since it reached its peak in 2000.
The industry says its deepest concern is that such “tax expenditures” as tax-deferred treatment of cash value life insurance could be selected as the insurance industry provisions to be reduced in any deal aimed at reducing the growth in the nation’s deficit.