No Rest for the Weary

The Association for Advanced Life Underwriting said its focus in 2011 will be on important tax and regulatory issues facing life insurance producers and their clients.

ACLI spokesman Whit Cornman added that with so many new members of Congress, 37 new governors and up to a 33% rollover among state insurance commissioners by year-end, the buzzword for the year will be education.

"Since the vast majority of the new federal and state lawmakers will have little or no life insurance experience, we will need to spend a significant amount of time educating them on the financial and retirement security challenges Americans face and the vital role life insurers play in helping them meet these challenges," Cornman said.

Agents will not have to wait long for the first challenge. The Securities and Exchange Commission must deliver to Congress by Jan. 21 its study on how to harmonize the standard of care imposed on broker-dealers and investment advisers when selling investment products. A key part of that is whether a uniform "fiduciary duty" should be imposed on the sale of all investment products.

Under a provision of the Dodd-Frank financial services reform law, after completing the study, the agency will have full authority to write a regulation imposing a new standard of care on agents.

Terry Headley, president of the National Association of Insurance and Financial Advisors, said the SEC seemed predisposed to recommend a fiduciary standard of care for all sellers of investment products.

He added that the SEC decision will tell agents whether "they are going to have to modify their business model, and how they are going to engage consumers."

The main issue, he said, is how it will be defined. "Will there be flexibility or latitude so that the new standard will accommodate all the various business models that are out there for insurance agents and financial advisers?" he asked.

Among other issues, the ACLI will be dealing with implementation of the Dodd-Frank law, including regulation of its derivatives and investment banking activities, as well as the role of the new Systemic Risk Council and the Federal Office of Insurance.

The ACLI also said that it will continue to support improvements to enhance efficiency of state insurance regulation, including producer licensing, market conduct examinations, and the Interstate Compact for product filing.

"To date, 36 states have joined the compact," he said. "We will continue to advocate for all states to join the compact," he added.

An issue that emerged at year-end for insurers is an initiative by the Federal Reserve Board to require the substantive additional disclosures relating to the sale of credit insurance when selling a financial product. The Fed wants to do this through amendments to Regulation Z, the Truth in Lending Act.

The entire insurance industry is objecting to this proposal. In a comment letter to the Fed, the ACLI and the American Insurance Association argue that credit insurance is already regulated by the states and that the proposed rule infringes on the McCarran-Ferguson Act.

And officials of the Consumer Credit Industry Association say in their comment letter to the Fed that oversight of its members' product is already regulated by federal banking regulators as well as the states.

"The FRB has exceeded its authority as granted by Congress and is also attempting to dissuade consumers from purchasing these safety net coverages," the CCIA says in its comment letter.

Meanwhile, the tax cut legislation Congress passed in the recent lame duck session is seen as beneficial to the life insurance industry because of the scope of its estate tax provisions.

The industry benefits will be generated through estate tax provisions that will raise the per-person exemption on the estate to $5 million and reunify the estate and gift taxes.

According to trust and estates lawyers and insurance industry officials, that will allow so-called "settlors," families that will owe estate tax, to purchase insurance policies tax-free that over time will allow beneficiaries of the estate to escape payment of estate taxes.

One industry official who asked not to be named said the estate tax provisions are a "bonanza." In another comment, Andrew Katzenstein, a partner in the Personal Planning Department with Proskauer in Los Angeles, said that from a "taxpayer's perspective, this legislation is magical. It will allow us to do things we never expected we would be able to do."

Sarah Spear, director, policy & public affairs for the AALU, was more cautious, noting that the estate tax provisions are only for a two-year period. Spear said the ALLU was very pleased with the reunification of the estate and gift taxes, as it simplifies estate planning and removes an artificial barrier to intergenerational transfers of business interests and other assets. But she noted that this was only a temporary victory, and that going forward, the AALU would press for permanent estate tax reform in the range of the 2009 law as well as the importance of reunifying the gift and estate tax levels.

Michael Ban, a principal in the Personal Financial Services unit within Ernst & Young's Financial Services group also was skeptical that the estate tax provision is a clear win for the life insurance industry that would drive significant sales. "While life insurance trusts are popular, I don't know that uncertainty or inability to allocate generation-skipping trusts would prevent a sale."

Furthermore, he said the current estate, gift and GST provisions have raised respective unified exemptions to $5 million rather than a significantly lower amount that was set to come back into law.

"Arguably, these higher exemptions lessen the need for insurance, particularly for estate liquidity to pay taxes (as fewer estates will presumably be paying tax and many will pay less due to the higher exemption)," Ban said.

That said, the legislation is active for two years, which certainly leaves the door open for significant changes to the estate and gift area in the future.