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M Intelligence Update: Tax Reform and In-Force Insurance Products

M Financial | 7 February 2018 | Products
Advocacy, Cash Value, Expertise, Life Insurance, M Intelligence, Private Placement, Regulation, Ultra-Affluent Life Insurance, Universal Life (UL), Variable Life Insurance
In light of the recent Tax Cut and Jobs Act’s reduction in the corporate tax rate, some groups are calling on state insurance regulators to force insurance companies to use their perceived profit windfall to reduce charges on in-force policies.

While this may be a logical thought, and an easy requirement to execute for health and P&C insurers, it is complicated for life insurance because of the longer time horizon of life insurance products and the timing of when life insurance companies recognize income and incur expenses. Performing analysis on these factors is complicated and unique to each company’s circumstances. For example, in products like UL and NLG it is common for companies to have previously recognized income on in-force policies in policy years prior to 2018 at the higher corporate rate (i.e., before the new tax law went into effect). These companies may then incur current expenses for future items such as reserve growth and increasing claims cost. In this regard, lower tax rates actually serve to limit the benefit of tax deductions. Stated simply, companies may have already paid taxes on income at a higher rate and will have to deduct future expenses at a lower rate thereby increasing companies’ after-tax costs. As such, the perceived benefits of lower taxes do not materialize.

Although some expect that lower tax rates will benefit companies and products when measured in aggregate, it is noteworthy that other taxes incurred by life insurance companies (such as the Deferred Acquisition Cost or DAC tax) were increased. This will offset the benefits of the lower corporate tax rate. Insurance companies are still evaluating the impact of the changes and there are many technical details to be resolved.

As the impact of the lower rates emerge, and future gains become sustainable, M Financial’s ongoing commitment to active in-force management and passing savings along to policyholders will come into play.

Please see the recent M Intelligence piece (“Impact of the Tax Cuts and Jobs Act on Life Insurance Product Pricing”) for additional detail on how specific product types may be affected.

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