Corporate-owned life insurance is on the chopping block as President Barack Obama releases his 2012 budget.
The 216-page proposal, which is aimed at cutting the nation's massive deficit, would take a hatchet to a variety of favorable tax treatments for insurance companies and their products.
Specifically, Mr. Obama proposes to impose new taxes on corporate-owned life insurance. He also wants to reduce the dividends-received deductions that life insurers use in separate accounts for variable insurance products.
In addition, the White House seeks to modify the rules that apply to the sales of life insurance contracts.
The COLI proposal would deter companies from deducting the interest expense on the cash value of life insurance policies they've taken out on executives, effectively taxing the inside buildup of newly sold policies. The move, which has been proposed a number of times, would be expected to reduce the deficit by $7.7 billion between 2012 and 2021.
The proposed change to the calculation of dividends-received deductions was floated last year and has been brought back for a second chance. That change would shake up existing laws that the American Council of Life Insurers said “are designed to prevent double taxation of corporate earnings.”
The administration's measure would reduce the deduction that a life insurer received based on the proportion of its policyholder reserves to its separate-account assets.
Another proposal would step up tax reporting on life settlements, ensuring the payment of tax on the death benefits, as well as reporting in connection with the sale of the policy to ensure that the seller paid taxes on the proceeds. That planned change is similar to one brought up last year, only this time, the effective date has been bumped back by a year to 2012.
Finally, another provision would hit banks and thrift holding companies with an accountability fee in order to recoup cash used for the Troubled Asset Relief Program.
This part of the Mr. Obama's proposal raised the ire of the ACLI, which said that the fee could affect life insurers that owned a bank or thrift, regardless of whether they received funds. The Hartford Financial Services Group Inc. and Lincoln National Corp. received TARP funds but have long since repaid the amounts.
“It's difficult to know what the likelihood of passage is, given the situation in Congress,” said John Adney, a partner at Davis & Harman LLP.
“I think the COLI proposal has real problems in it, and because of that, it's less likely to be enacted,” he said.
Jeff Schuman, a life insurance analyst at Keefe Bruyette & Woods Inc., agrees.
“Given the numerous failed attempts [at adjusting the COLI treatment], we're skeptical that this will pass,” he wrote in a note.
E-mail Darla Mercado at [email protected].
