Life insurance industry to rally in Washington against higher taxes

Hundreds of insurance advisers are headed to Washington next week, as the industry tries to warn lawmakers not to touch preferential tax incentives for life insurance.

{mosads}Financial professionals say there’s good reason that their product has received beneficial tax treatment for a century. Making life insurance more attractive, they say, motivates people to take care of their own insurance needs, and protects spouses and children who may otherwise have to rely on entitlement programs for security.

But advocates for the insurance industry also say they realize that policymakers on both sides of the aisle are looking for savings all over the tax code, as they look for revenue to either reduce deficits or as part of tax reform.

“We’ve heard the members of Congress say that ‘everything is on the table,’ ” Diane Boyle, the senior lobbyist for the National Association of Insurance and Financial Advisors (NAIFA), told The Hill “If you say ‘everything’s on the table,’ we have to assume that we’re part of ‘everything.’ ”

Still, Boyle added that the industry doesn’t yet have a specific proposal to concentrate on yet – “there is nothing on the table right now that has us saying ‘fantastic,’ or something that we’re concerned about.”

But as it happens, insurers may have good reason to assume their preferences could play a role in tax reform and budget discussions where many provisions in the code have fierce outside defenders.

Some economic analysts on both the right and the left, for instance, have pointed out that a tax preference for investments on life insurance premium payments – the so-called “inside buildup” incentive – does primarily benefit the wealthy.

Insurance agents have already flown into Washington this year to meet with tax writers on the Senate Finance and House Ways and Means panels, and the 1,000 or so advisers headed in for a NAIFA conference starting Monday will meet with a wider mix of lawmakers.

Both the Finance and Ways and Means committees have been holding meetings in recent weeks on tax reform, with the House panel having a specific working group on retirement and pension issues.

Policymakers on both sides of the aisle have expressed an interest in reforming the tax code, which likely would require exchanging an array of tax preferences for lower tax rates. Democrats also continue to search for more revenue from the highest earners as part of the fiscal battles with Republicans.

Under the inside buildup preference, companies generally invest some of the payments made on long-term life insurance policies, and the tax code allows those investment earnings to collect tax-free. That policy, the Joint Committee on Taxation estimates, will cost around $157.6 billion between 2013 and 2017.

Boyle said that, while she thinks life insurance in general is “appropriately taxed,” her group is chiefly looking to defend a provision that allows the beneficiary of a life insurance policy to receive the proceeds tax-free – an incentive that’s been around for about 100 years, or as long as the income tax.

NAIFA also points to statistics saying that close to 60 percent of the households its members serve make less than $100,000 a year.

But critics of the inside buildup break say that wealthy households now control most of the money in life insurance policies. The left-leaning Center on Budget and Policy Priorities (CBPP), using Federal Reserve data on 2010, said the top 10 percent of earners owned more than half the benefits in cash value life insurance policies.

Chuck Marr of CBPP said that he had no issue with life insurance benefits being passed on tax-free. But Marr said that the investment gains that life insurance policies gain over time receive far favorable tax treatment than gains from bank account interest, IRAs or mutual funds.

Insurance companies, Marr added, have also taken to advertising these tax benefits when pushing their product.

“Life insurance serves an incredibly important purpose,” Marr, CBPP’s director of federal tax policy, told The Hill. “But since it has such tax advantages, it’s very tempting for people to push the rules and make it more of an investment product.”

“That’s the difficulty and the challenge of tax reform,” Marr added. “People and industries are loss adverse, and people hold on very tightly to what they have.”

The Wall Street Journal editorial page and the American Enterprise Institute also discussed how the inside buildup break largely benefits the wealthy last year during the debate over whether Mitt Romney’s tax plan was mathematically feasible.

But former Sen. Dirk Kempthorne (R-Idaho), the chief executive of the American Council of Life Insurers, defended how life insurance was taxed in a letter to the Journal. Kempthorne, who also served as Interior secretary in the George W. Bush administration, is expected to speak at the NAIFA conference next week.

“Life insurers invest the premiums they receive in long-term securities that help build America,” wrote Kempthorne. “Life insurers are the number one U.S. purchaser of corporate bonds, which spurs economic growth and job creation.”

Boyle, meanwhile, stressed that the industry’s message next week wouldn’t change much in next week’s meetings.

“Additional taxes against our product would make it more difficult for people to plan for their themselves, and many could then fall on the public doles that shouldn’t,” Boyle said “We want to maintain those safety nets for individuals that are truly needy.”