US life insurers may have to fight to keep tax sops

WASHINGTON: Life insurance is sold with the promise that policy-holders can beat at least one of life���s two certainties: taxes. That pitch may have to change.

Northwestern Mutual Life Insurance, Prudential Financial, MetLife and other insurers may be facing a new fight to preserve a tax break that has grown to $28 billion a year since it was first written into US law in 1913. As Congress looks for sources of revenue to curb the federal budget deficit, that benefit ��� which allows life insurers to market their policies as tax-free savings accounts ��� may make an attractive target.

The life insurers��� break is one of hundreds of so-called tax expenditures that cost the federal government $945 billion a year in foregone revenue, according to the Congressional Research Service. It���s also the largest to benefit a single industry and is overdue to be examined by a fiscally responsible Congress, says Comptroller General David Walker, who heads the congressional agency charged with auditing the budget.

���There is absolutely no question that the tax preferences associated with life insurance represent one of the reasons why you���ve seen the proliferation of the use of life-insurance products,��� says Walker, who heads the Government Accountability Office. ���We need to review and reconsider all major tax preferences, including this one,��� he adds.

Life insurance���s special treatment means funds invested in policies and deferred-annuity contracts can accrue untaxed. Such investments contained $99.5 billion in 2005, according to the Insurance Information Institute, a non-profit New York-based trade organisation funded by the industry. Some financial analysts question the value of life insurance as an investment and say better returns can be found elsewhere.

���As a savings vehicle, life insurance is ���garbage���, says Errold Moody, author of ���No Nonsense Finance��� and a life and disability insurance analyst in San Leandro, California. ���There are things cheaper and better that the people can utilise to save and invest. Insurance with an investment element in it is not insurance.���

As evidence, Moody says about 90% of policy-holders cash out before the term of their contracts, settling for a lower ��� and taxable ��� payout.

Walker says the tax-free feature also has been linked to questionable business practices that have drawn scrutiny from Congress, the Internal Revenue Service and the courts. In the 1990s, Dow Chemical and grocer Winn-Dixie Stores lost court decisions when the IRS challenged deductions related to the purchase of insurance on company employees.

So far, though, congressional reviews of the industry���s tax advantage have been rare. Moody says the longevity of the tax break is tied to the influence of the industry���s lobbying groups, which collectively spent more than $10 million in 2005, according to federal filings