Obama Tax Plan Draws Bead on Insurers

The proposal would also not allow interest deductions allocable to COI policies unless the contract is on an officer, director, or employee who is at least a 20 percent owner of the business.

Industry officials said they were analyzing the proposal and would comment as soon as possible. But one industry official said the industry is getting tired of having COLI and other products repeatedly targeted for revision by various administrations. 

The insurance proposals are part of a five-pronged program that the president said are designed to "eliminate dozens of different tax expenditures and fundamentally reform the business tax base to reduce distortions that hurt productivity and growth."

He said the closing of the loopholes would be used to lower the corporate tax rate to 28 percent, "putting the United States in line with major competitor countries and encouraging greater investment in America."

Robert Miller, president of the National Association of Insurance and Financial Advisors, added that, "Corporate owned life insurance provides an important safety net for businesses that employ millions of Americans."

Miller said that businesses use life insurance to protect against the financial uncertainty associated with the death of an owner or key employee and to fund important employee and retiree benefits. "We believe it would be shortsighted to reduce the effectiveness of these important policies," he said.

Unfortunately, Miller said, this proposal is nothing new. "We've seen efforts to change the rules on business owners and tap COLI policies in the name of tax reform before."

He said that, "We're hopeful that with input from the experts at the new Federal Insurance Office (FIO), policymakers will soon come to realize the importance these and other insurance products have in providing security and fueling the U.S. economy." 

Moreover, he said, the "framework would refocus the manufacturing deduction and use the savings to reduce the effective rate on manufacturing to no more than 25 percent, while encouraging greater research and development and the production of clean energy."

Jack Dolan, a spokesman for the American Council of Life Insurance, said that the framework appears to recycle proposals made in the budget including one on COLI.

"We regret that the administration mischaracterizes COLI in its proposed framework," Dolan said. "COLI is an important financial product that businesses use to protect employee benefit programs."