WASHINGTON -- Life insurance is sold with the promise that policyholders can beat at least one of life's two certainties: taxes. That pitch may have to change.
Northwestern Mutual Life Insurance, Prudential Financial Inc., MetLife Inc., New York Life Insurance Co. 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 U.S. 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 that cost the federal government $945 billion in 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 M. 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."
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 trade organization in New York.
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 F. Moody, author of No Nonsense Finance and a life and disability insurance analyst in San Leandro, Calif. "There are things cheaper and better that the people can utilize to save and invest. Insurance with an investment element in it is not insurance."
As evidence, Moody says about 90 percent of policyholders 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 Co. and grocer Winn-Dixie Stores Inc. lost court decisions when the IRS challenged deductions related to the purchase of insurance on their 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.
The largest of these groups, the American Council of Life Insurers, successfully headed off efforts to reduce the benefit in 1986.
Former Republican Gov. Frank Keating of Oklahoma heads the group. One of its senior lobbyists is Kim Dorgan, wife of Sen. Byron L. Dorgan of North Dakota, a member of the Democratic leadership in Congress.
Scrutiny of the industry's tax-free benefit "just never gets anywhere," said Joseph M. Belth, publisher of the Insurance Forum newsletter and a retired professor who taught risk and insurance at Indiana University in Bloomington for 31 years. "It's considered a political third rail."
Still, in recent years, life insurance has lost some of its privileged status as it faced competition from an increasing number of tax-advantaged savings vehicles such as individual retirement accounts.
That pressure may intensify. President Bush has proposed creating new types of untaxed accounts to help Americans save. He has also called for a permanent repeal of the federal estate tax, which, if enacted, would put further pressure on the industry because many insurers have promoted their policies as a way to set aside money for heirs to pay the levy.
The industry seems unconcerned. Ann B. Cammack, senior vice president for taxes and retirement security at the American Council of Life Insurers, says her group is confident the tax preferences are secure because the insurance policies stimulate savings and retirement security.
"The justification is exactly the same as it was in 1913," she says. "We clearly in this country have a strong need to encourage personal savings."
Sy Sternberg, chairman and chief executive of New York Life, the largest U.S. mutual life insurance company, says the policies provide "fundamental protection that can mean the difference between keeping or losing the family home, college educations, and fulfilling retirements for millions of Americans."
Insurers paid out $365 billion in life insurance and annuity benefits in 2005. They hold about $4 trillion in long-term savings, according to the American Council of Life Insurers, which counts Northwestern Mutual, New York Life and MetLife among its members.
Kenneth J. Kies, a lobbyist at the Washington firm Clark Consulting who represents the Association for Advanced Life Underwriting, says he, too, believes Congress is unlikely to touch the insurance industry's tax advantage. "My judgment is, nothing like this will happen," he says.