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Standing together

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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.

Therefore, in negotiations with Congress, the insurance industry is going to have to tell Congress that it is playing with a demographic time bomb if it considers watering down the attractiveness of the tax-advantaged products insurers sell.

For example, 10,000 people each day on average reach age 65, and that will continue for another 15-20 years, according to the Pew Research Center. That means a lot of demand for services that the government cannot support. The argument must be that life insurers are needed to help defuse this demographic time bomb and provide people with the financial security that comes with its products, i.e. annuities, life insurance and long-term-care.

 If history is any guide, there was a proposal in 2003 by Rep. William Thomas, R-Calif., then chairman of the tax-writing House Ways and Means Committee, to limit the tax advantages on inside buildup to $3 million.

The life insurance industry, usually divided as to its priorities, rose up as one to force Thomas to back down.

One possibility Congress and the industry might examine is eliminating tax-deferral for individuals whose income is above a certain level or who intend to use their policies for particular advanced planning applications.

“These proposals present challenges to our industry,” Boyle said.

One bit of recent history no one in the industry has brought up that should be brought to the attention of Congress is a provision of the Pension Modernization Act of 2006 (PMA).

Empowered by the PMA, the Department of Labor (DOL) in 2007 issued regulations that discourage sponsors from using fixed annuities or stable-value funds as the default option for people in 401(k) plans.

Despite intense industry opposition, the final DOL regulations ordered a phase-out of so-called “Guaranteed investment Contracts,” which offered a stable, if low, yield to people in these plans.

The alternative supported by the DOL was offering target date funds primarily offered by mutual funds as the preferred investment option.

In practice, target date funds didn’t turn out to be a viable alternative because the value of equities plunged as the nation went into deep recession starting in late 2007. Victims included people close to retirement who lost the opportunity to recoup their investment as the markets stabilized and then started to grow, in most cases starting in the second half of 2009.

Thus, a united industry must use the so-called qualified default investment alternative  disaster to illustrate the critical role it plays in ensuring that people have the funds to support a concern-free retirement.


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