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Life Health > Life Insurance > Permanent Life Insurance

New Law to Boost Life Policy Savings Power: Carrier Executives

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What You Need to Know

  • The Consolidated Appropriations Act, 2021 turned fixed interest rates built into Internal Revenue Code Section 7702 into variable rates.
  • The old rates were set in the 1980s and were very high, by 2021 standards.
  • For agents, one effect could be a change in commission payments.

A new feederal tax law update could help high-income clients use cash-value life insurance to ease some of the sting of future tax increases.

Life insurance company executives talked about the changes  last week, in a series of conversations with Patrick Bowen that were part of the NAILBA Engage online conference.. Bowen is co-founder of InsurAware, an insurance sales system company.

Jerry Blair, chief distribution officer at two Sammons Financial carriers, said the tax law update will make it much easier for clients to build up cash value in whole life policies, indexed universal life policies and other policies that can help the holders put off paying taxes on gains in value.

Eventually, Blair said, the holders also can use the policies to generate a tax-free income stream.

Because tax update helps savers build up policy cash value, “this may bring in more of the wealth managers, or the asset managers,” Blair said.

One consequence of the changes is that, if all other parameters are held equal, the new interest rate benchmarks will cause a policy’s death benefits and agent commissions to fall, said Doug Winkler, a vice president at Prudential Financial Inc.

Life insurers may move to mitigate the decrease in agent commissions by shifting to new compensation arrangements that are based on the policy cash value as well as the premiums, Winkler said.

In the long run, he added, the changes should be good for everyone involved with buying or selling cash-value life insurance. This is because the changes will make a wide range of products, including split-dollar life insurance arrangements and chronic illness planning, more attractive.

James Bowman, head of distribution strategy and operations at John Hancock, said clients’ ability to fund life insurance policies at a much higher level will lead to big, helpful changes.

Hancock already has adjusted the compensation rules for policies funded at a specified level, Bowman said.

“We’re actually going to pay agents more,” Bowman said.


NAILBA Engage is an online conference organized by the National Association of Independent Life Brokerage Agencies. Based in Fairfax, Virginia, the group represents about 300 insurance distribution companies, and about 10,000 people. Member firms produce a total of about $4 billion in annualized insurance premiums.

The IRC Section 7702 Update Legislation

The executives were reacting to Section 205 in the Taxpayer Certainty and Disaster Tax Relief Act of 2020. That act, which the IRS is calling the Relief Act, is part of the Consolidated Appropriations Act, 2021 COVID-19 relief act package. Former President Donald Trump signed the legislation that brought CCA, 2021 — and the Relief Act — to life Dec. 27, 2020.

Relief Act Section 205 changed Section 7702 of the Internal Revenue Code, which provides the official IRS definition of how life insurance should work. Developed in the 1980s, the definition is supposed to keep investors from evading taxes on ordinary investment funds by simply calling the funds life insurance arrangements.

The definition includes two interest rate floors. Congress included one interest rate floor of 4% and one interest rate floor of 6%, based on the assumption that those were typical rates paid by baskets of Federal debt securities.

Today, a typical basket of Federal debt securities pays a rate close to 1%.

Congress responded to the drop in bond yields by using Relief Act Section 205 to replace the original fixed interest floors with an “applicable federal mid-term rate” and an “applicable guideline rate” calculated each month by the IRS. The IRS bases those rate benchmarks on what federal debt securities are paying now.

 Also at NAILBA Engage

Jason Lea, NAILBA’s chair and president of Brokers’ Service Marketing Group, said NAILBA now hopes to get past COVID-19 pandemic-era online meetings and start its 40th annual meeting in person, in  Orlando, Florida, Nov. 15. It also has scheduled a casino night and a golf tournament, Lea said.

NAILBA is also organizing a forum that will bring NAILBA members together with independent marketing organization leaders, and it has recruited about 100 candidates for a new NAILBA Case Manager Certification professional designation program, he said.

(Photo: Allison Bell/ALM)


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