By
Washington
The life insurance industry took a hit at the hands of Congressional tax writers when they agreed on a $350 billion tax cut that would reduce taxation on dividends but not provide parity for variable annuities.
"We are certainly disappointed that Congress did not provide tax cut parity to variable annuities," says Jack Dolan, a representative of the American Council of Life Insurers, Washington.
The action came despite the fact that some 10 leading members of the House Ways and Means Committee signed letters during the course of the debate calling for parity for annuities.
Dolan says that annuities still enjoy strong support on Capitol Hill. While it is unfortunate that the tax conferees left annuities out of the final package, it remains high in the minds of many members that this issue must be addressed.
In the meantime, Dolan says, annuities remain the only financial product with the unique feature of a lifetime income option.
In addition, he says, annuities are tax-deferred. These powerful features, Dolan says, will continue to attract consumers.
An analysis by UBS Warburg terms the lack of parity a "moderate negative" for variable annuities that likely will reduce sales by less than 20%, perhaps in the 5-10% range.
This is due to factors mitigating the lack of parity, UBS Warburg says, including the fact that dividend and capital gains taxes would still exist and the tax bill has a sunset clause.
Under the legislation, the dividend tax cut expires in 2008.
Overall, the political wrangling surrounding the controversial tax stimulus package proved to be a mixed bag for the life insurance industry.
While the industry was disappointed with the outcome of the dividend tax issue, it scored a victory when tax writers deleted a provision from the Senate bill that would have taxed nonqualified deferred compensation plans.
Bob Plybon, president of the Association for Advanced Life Underwriting, Falls Church, Va., says AALU is very pleased with the outcome.
He says that the issue of nonqualified deferred compensation will likely be addressed again later this year.
AALU, Plybon says, hopes to work with both the House Ways and Means Committee and the Senate Finance Committee to design a provision that makes sense and not destroy a retirement vehicle that benefits not just senior executives, but middle managers as well.
The nonqualified deferred compensation provision was scored as raising between $4 and $5 billion in revenue, but many in the industry question whether it would have raised that much.
The industry scored another victory when the Senate, by a 63-37 vote, rejected a proposal by Sen. John Edwards, D-N.C., that would have taxed the proceeds of corporate-owned life insurance policies unless the policies cover key employees only.
