Tax breaks for annual investments in life insurance and annuities could be limited to $10,000 under a proposal for sweeping tax reform being advanced by a presidential advisory panel.[@@]
Members of the President's Advisory Panel on Federal Tax Reform talked about the proposal at a hearing Tuesday, but their written report is not due until Nov. 1.
The Treasury Department may work with the White House include some or all of the proposals in President Bush's State of the Union address in January 2006.
The report also is expected to set the stage for debate in Congress.
"With 2006 being an election, the likelihood for these proposals moving ahead are slim in the near term," Nigel Dally, a securities analyst at Morgan Stanley, writes in a note about Tuesday's hearing.
But the proposal "has the potential to emerge as a major new risk for the life insurance industry," Dally warns. "While any action is unlikely until 2007, at the earliest, these proposals could have far-reaching repercussions for life and annuity companies, including significant reductions in the amount of life insurance sold."
If the tax-free buildup of life insurance policy and annuity contract assets were eliminated, "life insurance sales, of which 77% incorporate some savings element, could come under severe pressure," Dally writes. "Annuity sales could also be hit, although we expect many investors now purchase these products for the protection features rather than the tax-free build-up. The impact on pension companies is more difficult to gauge without additional details."
"This is a very, very substantial proposal, a significant event that the life insurance industry must pay close attention to," says a life insurance industry executive who requested anonymity.
But "overt assaults on the authors and the administration will be counterproductive," the executive says. "The industry must give the Treasury Department and the White House, to which the proposals will now go, the latitude to move away from this quietly."
Observers believe the Tax Reform Panel will unveil 2 tax reform packages that will include one proposal to eliminate tax-free buildup in life and annuity products and another to limit investments in these products to $10,000 in premiums annually.
