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Life insurers are unhappy about proposed tax changes for their industry proposed in President Barack Obama's 2012 budget, but their concern is tempered by dim prospects for the moves in Congress.

The budget's implications for corporate-owned life insurance(COLI) and companies' dividends received deductions are reminiscent of the film "Groundhog Day,". The same provisions were included in administration budgets for fiscal years 2011 and 2010, but each year, Congress gave them a cold reception.

The Obama administration proposes to disallow deductions for the pro-rate interest expense of COLI policies, at a five-year savings of $979 million. "This would effectively do away with the benefit of COLI" The COLI shift would effectively be a new tax on business, according to a joint statement from ACLI, the Association for Advanced Life Underwriting, the National Association of Insurance and Financial Advisors, the National Association of Independent Life Brokerage Agencies and GAMA International. "Many businesses use COLI to protect against financial or job loss stemming from the death of owners or key employees. COLI is also used to ensure business continuation. In addition, COLI is a widely used funding mechanism for employee and retiree benefits," they said.
Congress last passed legislation on the use of COLIs for tax advantages in a bill signed into law in August 2006. A provision within a pension bill specifically limited the use of COLI policies to the top 35% of income earners in a company, or those earning more than $100,000 per year - to allay concerns about "janitor's insurance," the use of COLI policies to insure the lives of employees who earn minimal wages and who are not crucial to the continuation of a business. That legislation also required companies to report information on their COLI practices to the Service.
The administration's spending plan would also reduce the dividend received deduction life insurers utilize in accounts that fund variable life insurance and variable annuity contracts, at a savings of approximately $2.4 billion over the next five years.