By Steven A. Morelli

Editor's Note: InsuranceNewsNet has launched a Web site,, where you can get the tools and information you need to take action to preserve the favorable tax treatment of life insurance products.

Of all the things to be called these days in Washington, D.C., a “tax expenditure” might be the most insulting.

That’s the name – and target – hanging around the neck of life insurance as Congress takes aim at tax reform. Tax treatment is what the insurance industry prefers to call the government’s hands-off approach to key features such as the death benefit and the inside build-up in permanent life policies. The favorable tax treatment legacy turns 100 this year.

It was a century ago that insurance agents with the National Association of Life Underwriters (NALU) descended on Washington to make the case why life insurance deserved special status as legislators established an income tax system. A direct appeal to President Woodrow Wilson won the day for the industry. NALU is now the National Association of Insurance and Financial Advisors (NAIFA) but although the association’s name has changed, the fight has not.

NAIFA is planning a congressional conference April 8-9 in Washington to promote the favorable tax treatment because once again, legislators are edging a real reform effort. And they might mean it this time, especially with everyone’s head hitting the debt ceiling every few months.

“They will deal with the ceiling and whenever they do, they ask if they should pursue policies that would allow us to continue on a more sustainable basis rather than having to face these challenges every few months,” said Diane Boyle, NAIFA’s vice president of federal government relations.

Those questions about sustainable revenue lead to louder demands for comprehensive tax reform, which goes down a familiar path.

“Whenever they get to that discussion, the conversations that we had been hearing leading up to the fiscal cliff as well as from the Simpson-Bowles Commission, or when you had the gang of six/eight/pick a number, were the same,” Boyle said. “Everyone was saying we need to simplify the code, lower rates and broaden the base.”

That sounds good to everybody until those simplifying the code and broadening the base produce a hit list of “tax expenditures,” which is a clinical way of saying tax loopholes and breaks. Although “loopholes” might conjure images of tax delinquents sneering greasy lips at a responsible, overburdened public, each one of them was a promising brainchild of a legitimate union of interests, such as insurance.

The official list of expenditures and costs is produced by the congressional Joint Committee on Taxation, which serves the House Committee on Ways and Means and the Senate Committee on Finance. In its latest expenditure report, released in February, a certain number in the financial institution section pops out like a low-hanging, plump plum. It’s $157.6 billion, the amount of tax revenue expected to be lost in the five years from 2013 to 2017 by excluding investment income in life insurance and annuity contracts, also known as inside build-up. The next largest figure is $13.2 billion for the special treatment of life insurance company reserves.

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The national debt is past $16.5 trillion and the United States is adding to that with a deficit of about $1 trillion a year. For a sense of how fast the debt is growing, visit (This is not recommended for those prone to motion sickness.)

The deficit and debt numbers are so large that the $30 billion of annual revenue from taxing the inside build-up could be lost in a rounding error. But it could be the baby in the bathwater in the case of wholesale reform, as promoted by the IRS’ Taxpayer Advocate Service and the National Commission on Fiscal Responsibility and Reform, led by Alan Simpson and Erskine Bowles.

“If someone were to take that route and start with zero-based budgeting, you’re eliminating all tax expenditures without looking at the merits of them,” Boyle said “You’re eliminating everything on the list and then building some of them back in.”

Is It ‘Wolf’ This Time?

But let’s be frank. Haven’t we all heard this before? Like maybe every year for the past several? For decades, even?

It all sounds familiar to Glenn E. Stevick, adjunct professor of insurance at The American College, who had been an advisor and trainer in his long career.

“I came into the life insurance business in August of 1983, which is just short of 30 years ago,” Stevick said. “And one of the first things I heard about was the pending possibility of the inside buildup of life insurance being taxed.”

Since then, Stevick has heard the call to battle many times. “I have taken the view that until the dotted line is signed, it is nothing,” he said. “Until they actually sign it in to law, I would not get too excited.”

But he acknowledges insurance is a tempting target for taxes. “There are certainly an awful lot of tax benefits and sheltered money in life insurance contracts and annuities and certainly that would be a place for our government to get money.”

He also agreed that the taxation could reduce life insurance ownership, which is already at a historical low. That could be the very reason Congress would not go along with that tax.

“That’s the one thing that I think that they would be very hesitant to which would harm the product and the protections,” Stevick said. “The number of people who have life insurance is already pathetically low.”

Why Now

Insurance associations and other advocates understand that advisors and others might be burned out on alerts, but by the advocates’ calendar, this is the Year of the Wolf.

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First the confluence of events provides powerful impetus for tax reform. Besides the national debt, pressure is building on Social Security and Medicare as the population ages without a substantial number of replacements to pay for those in the system. Then, of course, the political standoff pits revenue growth against budget-cutting with political opposition to higher tax rates and program cutting. The significant parts of the budget and spending growth are Social Security and Medicare, two entitlement programs with a vocal constituency who paid into the system and expect the benefits they were promised.

Add to that a growing contingent of legislators demanding tax reform this year. Right after the November election, the chairman of the House Ways and Means Committee, which would write tax reform, promised action.

“Tax reform is more necessary now than it was in 1986, and that is why the Ways and Means Committee will write, act on and pass comprehensive tax reform legislation in 2013,” Rep. Dave Camp, R-Mich., said in a Nov. 15 speech to the Tax Foundation, according to The Hill. “Let me repeat that: We intend to move a comprehensive tax reform bill in 2013 – no matter what.”

Insurance advocates believe that reform-crafting process is going on now.

“We think February or March was the plan to start doing that,” Boyle said. “And so having our folks come in to meet with the tax writing committees in February made a lot of sense to us. We don’t know when they’ll begin hearings, but they’ll have a better sense of where they’re looking to go in early April.”

Six insurance associations formed and planned a Capitol Hill visit the end of February. NAIFA expected to participate in that along with its own effort in April. One of the main SecureFamily organizers, American Council of Life Insurers (ACLI), declined to comment on the campaign before press time.

“That’s why we’re bringing our folks in, so that every member of Congress ideally will have an opportunity to talk with an agent and understand the value that our products play,” Boyle said

Although Congress seems to move slowly on issues, events move quickly once a decision is made. And although Stevick and other observers are correct that the tax treatment of insurance is often threatened and then saved, Boyle said that’s because someone did the saving. In Washington, the strongest voice is one from a legislator’s district.

“Frankly, our products are on the line every year and we’re successful at having them taken off the table,” Boyle said “So it’s not so much crying wolf as it is being prepared and making sure that the folks on the Hill understand.”

This is particularly important as the heat turns up.

“Look at the desperation and how quickly we have to revisit issues and extend short-term fixes,” Boyle said. “They’ve become much more frequent than what they have been in the past.”

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The Most Effective Voice

The most effective voice in Washington is one from a legislator’s own district.

“Members of Congress are having to deal with so many issues that they rely on their constituents who have an understanding in a given area to explain what the realities are with some of the decisions that they’re having to make,” Boyle said. “And that’s what our agents do. And that’s the value of bringing them in and having them share the story.”

Bob Roach, a Northwestern Mutual agent from Columbus, Ohio, doesn’t have to go far to talk to an influential legislator. He has one among his clients – Rep. Pat Tiberi, the chairman of the subcommittee that would do the tax-writing for the Ways and Means Committee. Roach says he has been able to impress the value of insurance on not just Tiberi but also his staff members, who would be involved in the nuts and bolts of reform.

The most powerful argument is how much money insurance products save for Americans.

“I talk to them about the savings rate in America today, and how poor it is, and then point out that over 20 percent of the savings in America today is represented by our products,” Roach said. “To do anything to discourage people from taking responsibility and using our products, all that’s going to do is further deteriorate the savings rate of Americans today.”

Another advisor, Hyatt Erstad of Boise, Idaho, said another reason for his colleagues to contact their representatives is to remind them who they work for.

“I think often that legislation passed in Washington, D.C., is intended for people that are doing business on Wall Street, whereas we deal with Main Street people,” said Erstad, who focuses on employee benefits. “We have people who make minimal income, and when an employer provides a retirement plan, it’s our job to sit down and be able to say, ‘Let’s see if we can help you plan for your own security and retirement.’ ”

Boyle said that is an important point because if Americans are not planning for their retirement, they will be falling back on the federal government.

“We’ve seen what happens when people don’t have protection in place,” Boyle said. “They end up running through limited savings that they have and relying on government programs. We know now that the government programs are strained, so we want people that are able to take responsibility for themselves to take that planning step.”

Erstad said nothing drives that point home more than a personal story.

“What I find useful is sharing situations of how our products have helped people here within the community – people within their own district,” Erstad said. “Because often you say ‘insurance’ and it can be very nebulous. You can bring it back down when you talk about the fact that one employer provided the ability to have supplemental life insurance, and one of their key employees was diagnosed with cancer. And because of the living benefits, they were able to pull part of that death benefit out, plan all their wills, a final trip taken – all of those things – before that employee ultimately passed away.”

Then he takes examples to show how the products benefit future generations and radiates through that legislator’s own district. “Here are the children who have been educated because people planned ahead and used the products to help fund for their education,” Erstad said. “Here is the business that was allowed to continue on in the event of the loss of a key person and save jobs. Nobody likes to talk about insurance and nobody wants to contemplate death, but the fact of it is, we are all mortal. It’s our job to plan for the inevitable and make sure that, whether it’s a family, an individual, or even a small business, that when the inevitable does happen, that they’re in a position of financial security.”

Fighting Back

Roach said he understands that his colleagues get the sense of déjà vu on these alerts, but advisors are gambling with their livelihood if they’re caught sleeping.

“Congress is not very good about moving very fast and it seems like their feet have to be totally in the fire before they make a decision,” Roach said. “But one of the reasons we have to be vigilant is because when it moves, it seems to move in light speed. Something can happen so much more quickly than it used to be able to happen. That’s because now people don’t even have to read bills and legislation gets attached to other pieces of legislation. Then you pick up the paper one day and find out something’s been passed before you even knew it was being considered.”

The first objective is to provide a background of understanding of value that Americans derive from the tax treatment of insurance. The second one is to act fast and massively if needed. 

“About 10 or 15 years ago when it was published that it was going to be the taxation of inside build-up, we put on a public relations campaign and just showered D.C. with 200,000 postcards and tens of thousands of phone calls and we rallied everybody,” Roach said.

Roach had a very influential legislator in his clientele, but Erstad makes sure many of his clients know what’s at stake for them to help make the taxation issue less esoteric.

“We’ve been having an ongoing discussion since last fall with a number of our clients,” Erstad said. “We just say, ‘This potential change could be coming down the pike, and it could really impact what you’re doing, or what you may want to do into the future, too.’ ”

When the time comes to rally opposition, Erstad can enlist his own clients to help and he has done so for state issues.

The Wealth Gap

Life insurance might seem like a tough sell with legislators, but the industry does have the advantage of being able to say it protects 75 million families, holds 20 percent of America’s savings and pays out $1.5 billion in benefits a day. The industry also has a wealth of personal stories that can connect legislators to the value of insurance products.

This defense is sometimes cynically called the “widows and orphans” strategy. But the industry has become a little more vulnerable on this because fewer families in the lower and middle market are being covered and more are in the high-net-worth group.

Some media reports, most notably an Oct. 3, 2010, Wall Street Journal article titled, “Shift to Wealthier Clientele Puts Life Insurers in a Bind,” point out the industry’s vulnerability.

This is the section that can come back to bite industry advocates: “According to Federal Reserve survey data, 22 percent of assets accumulated tax-free in whole-life and universal-life policies were held by the wealthiest 1 percent of U.S. families in 2007 – those with more than $8.4 million in net worth. More broadly, 55 percent of the assets in such policies were held by the wealthiest 10 percent of families. The bottom half by net worth held 6.5 percent of these assets.”

Boyle said NAIFA members can remind legislators that they represent middle America, with 58 percent of their clients earning less than $100,000 and just 11 percent making more than $250,000 annually. She also points to the savings, jobs and bond purchases the industry represents. But perhaps most importantly, there’s the promise.

“Changes to public policy that make it harder and more expensive to obtain retirement security will have a negative effect on all families,” Boyle said. “It would be wrong to change the rules on these families.”


Timeline: Taxes & Life Insurance

1913 – States ratified the 16th Amendment, giving Congress the authority to enact an income tax. An appeal directly to President Woodrow Wilson helps codify special treatment of insurance products, such as the tax-free death benefit and tax-deferred increases in the cash surrender value of life insurance contracts, also known as inside build-up. But the income tax was extended to life insurance proceeds exceeding $40,000 that were receivable by the estate or its executor and property subject to a general power of appointment.

1918 – During World War I, the top rate of the income tax rose to 77 percent to help finance the war effort. It dropped sharply after the war, down to 24 percent in 1929.

1930s – Tax rates rise again during the Depression.

1942-1945 – During World War II, Congress introduced payroll withholding and quarterly tax payments.

1954 – The estate tax treatment of life insurance was changed so that the estate tax applied to life insurance proceeds paid to the decedent's estate or executor or if the decedent retained "incidents of ownership" in the life insurance policy.

1977 – Jimmy Carter administration proposes to tax the deferred growth of annuities.

1984 – Ronald Reagan administration proposes to tax interest and dividends of new permanent life insurance.

1990 – Government reports target inside build-up. George H.W. Bush administration advocates taxing build-up.

1994 – Bill Clinton administration considers but rejects a proposal to finance higher welfare spending by taxing at least some of inside build-up in an annuity holder's policy.

2005 – President George W. Bush’s Advisory Panel on Federal Tax Reform proposes to tax life insurance inside build-up like gains on other types of savings.

2009 – President Barack Obama also proposes reforms to corporate-owned life insurance policies, or COLI, taken out by businesses on their executives and employees, which have sometimes been used for tax arbitrage.

2012 – Many proposals are made to eliminate almost all tax expenditures, including inside build-up, which has been identified as a tax expenditure projected to cost $157.6 billion for the five years from 2013 to 2017.

2013 – House Ways and Means Chairman Rep. Dave Camp vows, “We intend to move a comprehensive tax reform bill in 2013 – no matter what.”


·         Life insurers are the single largest source of bond financing for American businesses, holding more than 18 percent of all U.S. corporate bonds. This helps fuel the growth of private sector research, innovation and jobs.

·         Life insurers pay out $1.5 billion to families and businesses every day.

·         The life insurance industry generates approximately 2.5 million jobs in the United States, including direct employees, those who sell life insurance products, and non-insurance jobs supported by the industry.

·         One out of every five dollars of Americans’ long-term savings is in life insurance and annuities.

·         With $4.9 trillion (90 percent of the industry’s total assets) invested in the U.S. economy, life insurers are one of the largest sources of investment capital in the nation.

Steven A. Morelli is editor-in-chief for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers, magazines and insurance periodicals. He was also vice president of communications for an insurance agents’ association. Steve can be reached at [email protected].

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