By Raymond Nash
Election Matters
Life Insurance Industry Considerations
November is election month, which creates an atmosphere of scrutiny around policies that might be included in each party’s platform. While life insurance is regulated by the government on a state-by-state basis, the federal government can impact life insurance via legislation, economic challenges, or new regulations.
The biggest predictable effect to the insurance industry is the expiration of the Tax Cuts and Jobs Act of 2017 (TCJA). Among many other items, future provisions for the estate tax exemption ($13.99M for 2025) and gift tax exclusion ($19,000 for 2025) will be re-considered when the TCJA sunsets on December 31, 2025. The Democratic policy includes a plan to lower the estate tax exemption to $3.5M (adjusted for inflation from 2017) and a gift tax exclusion of $10,000. The Republican policy remains unclear, but this party has traditionally supported eliminating estate and gift taxes altogether. In the insurance industry, estate planning with life insurance is based on the taxable amount above and beyond the estate tax exemption. Life insurance uses discounted dollars in the way of premium payments in exchange for a large death benefit to cover the tax cost upon the mortality of the insured. Without an estate tax, these large death-benefit-focused policies will not be necessary, and fewer policies will be written. The insurance carriers might adjust by increasing the premiums for their life insurance products.
Also of note is that the Senate Finance Committee’s Democratic staff is proposing legislation to eliminate the tax advantages of private placement life insurance (PPLI), private placement variable annuities (PPVA), and “similar contracts.” They believe that at least $40B is being sheltered offshore in 3,061 domestic PPLI policies and the ultra-wealthy are using PPLI to limit tax liability, grow wealth, and pass it on tax-free. Since domestic PPLI policies are not required to be disclosed on a tax return, the IRS can’t track them unless they show up in an audit. Per a Treasury spokesperson, the new legislation would “require reporting by insurance companies and policyholders… to ensure that payments from covered contracts are identified and taxed appropriately, including information on policy distributions and premiums.” Permanent life insurance policies accumulate cash value on a tax-deferred basis. Tax is only paid on gains if the cash value is accessed inside the policy. The Treasury spokesperson has provided assurance that the legislation “will not affect the tax treatment of the 99.9% of insurance policies used by typical families, but will instead strengthen guardrails against the use of PPLI as a tax-free piggy bank for multi-millionaires and billionaires.” As long as the Senate Finance Committee is solely focused on correcting taxation of distributions from offshore PPLI policies, this legislation will not affect the greater insurance industry. Still, it’s worthy of note, since taxation on unrealized gains inside a life insurance policy would create a disadvantage for those who are implementing the policy for the sole purpose of collecting the death benefit.
A more indirect effect to the insurance industry is the corporate tax rate. The Republican policy includes a plan to decrease the corporate tax rate to 15% (from the current 21%). The Democratic policy includes a plan to increase the corporate tax rate to 28%. An increase to this tax rate will affect the premium-paying ability for business owners when they need to implement or maintain coverage for buy/sell funding. A decrease to this tax rate not only helps the business owners with cashflow to pay premiums but incentivizes the insurance carriers to lower prices and create more competitive products.
Unsurprisingly, economic uncertainty surrounding the election affects the insurance industry. Any legislation that promotes the economy can increase investments in businesses and drive the demand for more corporate coverage. Any market volatility can impact investor confidence and affect the performance of variable and indexed policies. Even the insurance carriers’ investments might suffer, leading to increased premium rates for policies, more stringency with underwriting ratings, or a decline to write policies for any high-risk individuals. In 2024, the market did not experience gains across all sectors. In September, the Feds lowered the interest rate for the first time since 2020. Sustaining a low interest rate environment can cause insurance carriers to lower their policy rate of return, which affects the cash value inside the policy and can affect the performance of the product.
We are focused on the consequences of the election when related to the life insurance industry and are prepared to monitor these issues as they evolve in the months and years to come.
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