Tax law changes proposed in a discussion draft of the U.S. House Ways and Means Committee could prove devastating to the industry, notably in respect to sales of permanent life insurance products used to fund non-qualified deferred compensation plans for business executives.
So warned the AALU executive leadership team during the opening general session of the association's 2014 annual meeting, held in Washington, D.C., May 4-6. The gathering touched on tax policy issues of most concern to the industry, talking points that AALU members will be expected to take up when they meet with lawmakers on closing day of the conference, and on association-building efforts underway to make AALU a more powerful force on Capitol Hill.
"We are an integral part of the financial security of Americans — not part of the fiscal problems of the government," said incoming AALU President Anthony Domino. "The state of our association is sound and stable, which is good because the environment in which we now operate is the most precarious we've seen in the last decade, if not the last generation."
To prepare for comprehensive tax reform, he added, AALU has beefed up the "number and quality" of the organization's relationships with Congressional leaders. AALU is also investing in resources to communicate its positions on tax and regulatory policies that impact the industry. Topping its message list: that life insurance is now taxed appropriately.
The product's tax-favored treatment has been at risk, however, since the House Ways and Means Committee Chair David Camp (R-Mich.) released a 1,000 page-plus discussion draft earlier this year that, warned Domino, would "devastate" the life insurance profession. If enacted, the draft would levy $60 billion in new taxes on the industry and, insists AALU outgoing president Thomas Von Riesen, all but end the use of life insurance to fund non-qualified deferred compensation plans for business executives.
Riesen said that it would be dangerous to assume, as some Congressional-watchers have suggested, that the discussion draft is "dead on arrival." That assumption hinges on the brief that something so contentious and complex as tax reform can't be passed in a Congress that's nearly paralyzed by partisan gridlock.
However real or remote the threat, Domino observed, AALU needs to increase its ranks and engage more members in the association's advocacy efforts. Most prominent among these is the Tuesday meeting on Capitol Hill between AALU members, lawmakers and their staff.
When making the case to maintain the current tax regime governing the industry's products, AALU's leadership team urged members to address a list of talking points. Among them: That life insurance is wrongly labeled a tax expenditure because the product doesn't produce revenue losses arising from special treatment under federal tax laws.
The association notes that no provision in the Internal Revenue Code excludes, exempts or deducts inside buildup — the cash value component of permanent life insurance policies — from gross income or imposes a preferential tax rate on gains actually received (or realized) by the policyholder.
In support of its tax position, AALU points out that life insurance is purchased with after-tax dollars. Gain on inside buildup is not taxed when held within the contract — consistent with the treatment of appreciation on stock or home value. If and when proceeds are received, ordinary income tax, not the preferential capital gains tax, is imposed.
Capping the list of talking points for AALU members going to the Hill is this: Throughout the 100-year history of the federal income tax system, gain from inside build-up has never been viewed as gross income until the policyholder receives the proceeds, typically through a sale or surrender of the contract.
Whether the AALU's members can win over lawmakers with these talking points may, however, hinge less on the strength of the arguments than on whether they have enough members engaged in the political process to be a force to reckon with. AALU's executive team acknowledged as much during the opening general session.
