The life settlements and life insurance industries are criticizing President Barack Obama’s 2011 budget proposal, which includes provisions that would require additional reporting to the IRS for life settlements and would impose taxes on corporate-owned life insurance.
The president’s plan would require that anyone who buys an investment interest in a life insurance policy valued at at least $500,000 must report the issuer, the policy number, the purchase price, and the buyer’s and seller’s taxpayer identification numbers to the
Internal Revenue Service, the carrier issuing the policy and the seller.
The change would also require the insurance company to report the gross benefit payment, the buyer’s taxpayer ID number and the insurance company’s estimate of the buyer’s basis to the IRS and the person or entity receiving the death benefit.
Doug Head, executive director of the Life Insurance Settlement Association, said that implementation of the rule will not only be burdensome but will give carriers access to consumers’ private information.
“It invades privacy to provide consumer information to insurers, which could be used in a manner that’s not in the interest of consumers,” he wrote in an e-mail.
Though the American Council of Life Insurers is neutral on that portion of the proposal, according to spokesman Whit Cornman, the group does take issue with a change that would tax corporate-owned life insurance.
The interest on loans out of life insurance policies or annuities generally isn’t deductible unless the contract covers a key person in a business — someone who’s a 20% owner or an essential employee. The budget proposal would revoke the deductibility of contracts covering employees, officers or directors.
Meanwhile, another rule would change the dividends-received deduction for life carriers’ separate accounts. At this time, carriers can deduct dividends they receive from corporations that they own. That deduction is only allowed on the company’s share of dividends received, since some of the
dividend income is used to cover tax-deductible reserves.
The change would reduce the amount of dividends-received deductions carriers can use in their separate accounts — which fund variable life and variable annuity products. “This is a proposed tax increase on insurers that will impact consumers relying on variable annuities and variable life insurance for their retirement and financial security,” said ACLI spokesman Jack Dolan. “Anytime a product’s cost increases, it becomes less accessible to consumers.”
Finally, the proposal would also allow partial annuitization of a non-qualified annuity. An exclusion ratio — the amount of an annuity payment that isn’t subject to income tax — would apply to each amount received when it’s a portion of a non-qualified and partially annuitized annuity. But this will only be available if a taxpayer irrevocably chooses to use part of the contract to buy a stream of annuity payments over at least 10 years.
The exclusion ratio must also be computed based on the expected return and investment in the contract with regard to the portion of the annuitized contract.
