NAIFA recently completed its PIC and PAC training for volunteer leaders in Washington, D.C., prior to Congressional meetings on Capitol Hill.

PAC is NAIFA’s Political Action Committee (commonly known as IFAPAC), with responsibilities for collecting funds that are distributed to elected officials for election campaigns.  PIC is our Political Involvement Committee, responsible for finding and matching NAIFA members with members of Congress in corresponding states and Congressional districts.

NAIFA is the only member association in the insurance and financial-services industry to have members in each congressional district in the United States.  The grassroots capability for advocacy by our members is one of NAIFA’s greatest strengths, and it distinguishes NAIFA from all other industry associations.  One of the greatest values of NAIFA membership is what each of us brings to each other as part of our grassroots power base.

Part of our PIC/PAC training involves telling volunteers what to say when asked about the value of the products and services they provide during their visits with lawmakers. We ask that our members be clear, concise and consistent so that every office visit on the Hill gets precisely the same message. NAIFA Government Relations staff also provides our volunteer leaders with a script to follow and a leave-behind fact-sheet, and encourages members to share real-life stories about our clients and how the products and services we provided helped them through personal and financial hardship.

Responding to questions

During the last PIC/PAC training session, volunteer members raised two questions and requested guidance as to how to respond to them:

Question: Why should life insurance and annuities receive special tax treatment?

Answer:  Our products actually receive less favorable tax treatment than capital assets such as stocks, bonds, real estate, mutual funds and other similar assets.  The tax-deferred growth of cash values in life insurance and annuities is not taxed until gain is    realized when the policy is surrendered, sold or exchanged.  That is the same tax treatment afforded capital assets, namely gain is not recognized until the asset is sold.

However, when gains in life insurance or annuities are recognized, taxation occurs at ordinary income tax rates, which can be as high as 39.6 percent.  Gains on capital assets, if long-term (held over 12 months), are taxed at capital gains rates, which currently top out at 20 percent.  Also, capital assets are entitled to deductions for losses.  Life insurance and annuities do not receive the same tax break.

Death benefits paid on life insurance policies are generally income-tax-free.  Annuities do not receive the same tax-free status at death of the annuitant. Capital assets receive a tax break similar to that of life insurance because the tax basis of stocks, bonds, real estate, etc. gets “stepped-up” to the fair market value of the asset as of the date of death of the owner. That means that capital assets can be sold by an estate or heirs following the death of the owner and no income tax would be due, regardless of the amount of gain.

In summary, life insurance and annuities are afforded less favorable tax-treatment than capital assets. We are not asking for more or that the tax treatment of capital assets be changed.  However, we believe there is misperception of the tax treatment afforded our products when placed in context of comparable long-term assets.

Question: We have compelling real-life stories to justify the benefits of our products to families and small businesses on Main Street.  How do we justify the multi-million dollar policies purchased by wealthy individuals and large companies?

Answer: The numbers may be larger but the problems solved by life insurance are the same.  Financial obligations become realized when the insured dies.  Life insurance proceeds can pay off the federal government, allow a business to be sold as a going concern, and allow the family farm to remain in the family.  It is often the many families of employees who work for a deceased business owner who are saved by insurance proceeds because the business is saved.

In April, NAIFA will host a Congressional Conference, when we expect 1,000 NAIFA members to converge on Capitol Hill to make our case for continuing the tax treatment currently afforded life insurance and annuities.  We will be using this fly-in to train attendees to lead a “walk-in” to all the congressional offices throughout the country before the government goes back in session this fall.

We hope to have these members visit face-to-face with their U.S. Representatives and Senators at that time. Whether the officials are Republican or Democrat, our real-life stories will be compelling to both parties.

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By Robert Smith, CLU, ChFC, J.D., LIC
NAIFA President, 2012-2013

Robert Smith, CLU, ChFC, J.D., LIC, is president of NAIFA and a financial representative with Northwestern Mutual Financial Network in Grand Rapids, Michigan. Contact him at president@naifa.org.