IRI Stresses Continued Tax-Deferred Treatment Of Annuities

October 29, 2012 by Fran Matso Lysiak

Lee Covington, general counsel and senior vice president for the Insured Retirement Institute, said the number one threat facing the industry today is not interest rates but the tax treatment of annuities.” It’s not the time in our country to hit the middle class again by eliminating or reducing the tax deferred treatment of annuities,” Covington, previously director of the Ohio Department of Insurance, told BestWeek. He spoke about the upcoming fiscal cliff, tax reform and the impact of the upcoming elections on business.

Q: As we sit here today it’s about two weeks away from the U.S. presidential election as the clock is ticking down toward the event dubbed the fiscal cliff. What are the annuity/life insurance industry’s concerns when it comes to their products?

A: Wall Street leaders, business leaders across the country have been urging policy makers to work in a bipartisan way to address the fiscal cliff and, obviously, our industry currently — the annuities that people invest in today are tax deferred from a federal income tax standpoint and in order to address the fiscal cliff, lawmakers are going to be looking at what they call in Washington, tax expenditures.

Q: A lot of the life products have inside cash buildup — permanent life insurance policies — whole life, universal life. Explain this issue on inside tax deferred cash buildup on these policies and the expenditure debate on this.

A: I think most people in the industry know annuities are taxed on a deferred basis, not when the contributions are made to the annuity product. The tax deferral of retirement savings products rates in the top five expenditures as lawmakers like to refer to it along with home mortgage interest deduction, employer health insurance costs, charitable deductions. So these tax deferrals are right in the bullseye and the focus of policymakers in Washington. But what we’re working on is getting the word out about the importance of the tax deferred treatment of annuities. First of all, eight in 10 annuities are middle income, have a household income under $100,000 per year, 64% under $75,000. We know the tax-deferred treatment is an important criterion in selecting these products. Seventy-six percent of middle income boomers say that it’s important criteria in selecting annuities.

Q: An equity analyst in the Chicago office of Raymond James said “the mad scramble for revenues to lessen or eliminate the federal deficit is the number one near term threat facing the life insurance industry, bigger than federal regulations, bigger than the interest rates.” What’s your take?

A: Absolutely. This is our number one issue. It is absolutely our number one issue. We’ve had over 250 Capital Hill meetings this year. We have people on the ground today that are meeting with members of Congress and their staff to educate them about number one, what does it mean to be tax deferred, so these taxes are collected later. We’re educating members that annuities primarily are used by middle income consumers and citizens across the country — by women, by farmers, by small business owners who don’t have access to tax deferred savings vehicles. So this is very important. It’s not the time in our country to hit the middle class again by eliminating or reducing the tax deferred treatment of annuities.

Actually this is about middle income Americans and (Republican presidential candidate Mitt) Romney has been more explicit about looking at the tax expenditures but the reality is that all of these tax deductions that are on the books today will be examined. As one leading staffer told us recently that if something is taken off the table, it’s been taken off the table consciously. Now with that said we’re headed toward the fiscal cliff. Most people believe that they will find some way to defer decisions about this into 2013 and give time for a robust debate about how we deal with the fiscal issues of our country.

Q: Tell me about the IRI’s work concerning the summary prospectus for variable annuities.

A: Absolutely. This is a part of our effort to increase knowledge about guaranteed lifetime income products. Today when an investor invests in a variable annuity they’ll receive a prospectus that can be 150 to 300 pages long. Our research shows that 95% of investors would prefer to receive a shorter summary document if that more detailed information was available upon request or online. So we have a proposal before the SEC to allow the industry to provide at the point of sale a 10- to 15-page summary document that will enhance a consumer’s ability to understand the product, to be able to comparison shop and also help financial advisers. We know through our research that six in 10 individuals indicated that if they received a summary prospectus they’d be more likely to consider the product or discuss the product with their financial adviser and that’s kind of common sense if someone would rather receive a summary 10-page document versus a 150-page ‘phonebook’ as we sometimes like to refer to it. So we think this is very, very important.

The full video interview with Covington will be available soon at www.ambest.com.

(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)

Originally Posted at InsuranceNewsNet on October 25, 2012 by Fran Matso Lysiak.