Insurance Agents and Financial Advisors Support Current Tax Incentives for Life Insurance, Annuities, DI and LTC Insurance

Lifelong income protection products such as life insurance, annuities, and in latter days, disability income and long term care insurance, have been particularly sensitive to tax policy. Historically, Congress has recognized the fundamental value of transferring the financial risk of death, retirement, disability and incapacitation from individuals and businesses to insurance products specifically designed to absorb the risk of dying too soon, living too long or becoming disabled along the way. Insurance agents and financial advisors support Congress in preserving current tax law incentives that encourage individuals and businesses to “lock up” money in permanent life insurance and annuities. Only these vehicles guarantee financial benefits to families or businesses.

Background on Insurance Product Taxation

In fact, starting in 1913, Congress began fashioning an income tax structure that encouraged individuals, and later businesses, to transfer certain financial risks to life insurance and annuities. Recognizing that the only financial vehicles that are guaranteed to transfer the financial risks of death and longevity are lifelong income protection products such as life insurance and annuities, Congress granted them deferred or “non-taxed” tax treatment while much of the remainder of the savings market is taxed currently. Giving life insurance products consumption based (deferred) tax treatment in an income based tax system gives life insurance products a competitive advantage in the “savings” marketplace.

Congress recognizes that in order for these unique insurance savings and protection products to remain desirable, it must be wary of proposals that encourage short-term savings and spending at the expense of long term savings. Individuals and businesses must be willing to “lock-up” savings though life insurance and annuities that protect individuals, families and businesses long term.

Capital Formation

As a byproduct of premiums paid for insurance purchases, the nation has benefited from a storehouse of national long-term investment capital. Permanent life insurance and annuities constitute one of the largest sources of long-term investment capital in the U.S. In fact, life insurance companies rank number one in the purchase of corporate bonds.

Why Congress Needs Revenue: Threats to Tax Treatment of Life Insurance and Annuity Products (and Disability Income and Long-term Care Insurance)

When Congress re-established “Pay As You Go” (Pay-Go) budget rules in 2007, the result was that the revenue cost of any new tax break or new or increased spending program must be offset by an increase in taxes or a cut in spending elsewhere. If Congress determines to fundamentally “reform” the U.S. tax code in the future and wishes to fund critical government programs without increasing the budget deficit/national debt, Congress will encounter “pay-go” restrictions. Ultimately, all current tax code incentives could come under scrutiny.

The need for offsetting revenue can be large or small. When “fixing” such programs as the Alternative Minimum Tax, the Medicare-Medicaid-Social Security programs, or S-CHIP or fashioning a universal health insurance program, the need to find new tax revenue could be huge. Or, the need for revenue can be “small” (in federal budget terms), such as when the Senate in 2007 wanted to grant small business some new tax incentives and proposed to “pay for “ it with harsh restrictions on non-qualified deferred compensation plans.

Threats to the favorable tax treatment of life insurance type products from “Pay as You Go” Budget Rules, Comprehensive Tax Reform or pent up Congressional “demand” for new programs like health care reform is likely to continue for the foreseeable future.

Lawmakers will be confronted with some stark choices. And NAIFA members will be faced with some daunting challenges.