The life insurance industry is breaking with insurance agents and suggesting more moderate taxation of single-premium life insurance.

Such life insurance is purchased with a single premium payment and combines investment performance with death benefits. Richard Schweiker, president of the American Council of Life Insurance, a trade group representing life insurance companies, told a Senate Finance subcommittee Friday that such insurance may become a major factor in financing long-term health care and should not be destroyed.Subcommittee Chairman Max Baucus, D-Mont., made it clear that he believes escalating sales of such policies by stock brokers stressing their investment potential has created a genuine tax loophole that should be closed.

We're going to address it the best way we can, Sen. Baucus said, adding that he hoped the issue could be resolved this year.

Mr. Schweiker advocated targeting only specific policy types and changing the tax rules affecting policy loans and withdrawals only from them, rather than from all these policies, rather than the broad changes advocated by Rep. Fortney Stark, D-Calif., of the House Ways and Means Committee.

Richard Minck, executive vice president of the American Council of Life Insurance, explained in an interview that the life insurance industry does not want to reopen taxation of the industry, which has had two new tax bills to

absorb since 1984.

He amplified the life insurers approach, saying Congress should identify a specific group of policies, possibly those requiring fewer than five level payments, and then tax policy loans or withdrawals as ordinary income.

The insurance group would also like Congress to change tax law to allow for tax-free withdrawals from all forms of life insurance for specific needs such as long-term care.

The National Association of Life Underwriters, who represent insurance agents, wants policies that are funded more rapidly than over a five-year period to lose their designation as insurance products eligible for preferential tax treatment.

But Mr. Minck says if no dollars are withdrawn, single-premium life insurance should indeed be treated as insurance.

The concern with the life agents' proposal, he said, is that it would cut off sales of single-premium life insurance when these policies would be a useful way to fund long-term care.

The idea behind the life insurers' position is that a widow could invest life insurance proceeds she receives into a single-premium policy that could be used for long-term care or as death benefits.

Gordon N. Oakes Jr., president and chairman of the board of Monarch Capital Corp., the leading writer of single-premium life insurance, endorsed this approach saying that Congress could prevent tax-free borrowing for the first five years.

Mark V. Heitz, representing the National Association of Life Companies, a group of small to medium-sized life companies, suggested a ceiling on tax-free policy loans of $100,000 to permit liquidity for medical emergencies but cut out abuses by those taking annual large policy loans.

But Albert J. Schiff, executive vice president of MONY Financial Services, warned that if Congress does not curtail these policies, our company and many others will substantially get into this market.