The Tax Cuts and Jobs Act ("Tax Law"), which became effective on January 1, 2018, includes several provisions that impact life insurance companies and the products they offer.
The Joint Committee on Taxation estimates the 10-year cost for the industry to be $23 billion. While a lower corporate tax rate (21% under the Tax Law, down from 35%) will offset some of the impact, there are a number of implications to consider.
The good news is that for products with strong cash values — including current assumption Variable Universal Life (VUL), Universal Life (UL), and Private Placement Life Insurance (PPLI) — the impact for many product structures is neutral or better as the reduction in the corporate rate offsets the insurance-related tax increases.
In addition to the reduction in the corporate rate (a positive for the industry), the primary provisions of the Tax Law that impact life insurance products include:
In general, the Tax Bill will make products more capital intensive, a result of the DAC Tax change and the limit on the deductibility of life insurance tax reserves. Since tax deductible reserves are still able to use a cash value floor, products where the reserves equal cash values (PPLI and VUL) will feel less of an impact.
Products without cash values (Term and NLG) will feel more of an impact. There may be insurer specific situations where the interplay with other sections of the Tax Law (e.g., limits on deducting interest expense, foreign reinsurance transactions, etc.) will come into play.
At this time, M Financial Carriers have not indicated that any provisions of the Tax Act will directly affect the pricing of their products. Going forward, it is likely the industry will identify product designs that take advantage of the lower corporate rate and minimize the negative impact of these other changes. These products would be introduced over the next couple of years as insurers continue revising product portfolios for the transition to 2017 CSO and PBR.