Congress moves to crack down on investor-owned life insurance.
The leadership of the Senate Finance Committee said it would introduce legislation designed to shut down writing of so-called "stranger-owned life insurance," as well as discouraging states from broadening their definition of "insurable interest."
The bill would impose a 100% excise tax on money invested into "investor-owned life insurance" arrangements, according to officials at the American Council of Life Insurers. In effect, for every $1 invested in such an arrangement the investor would immediately incur a $1 federal tax liability.
A statement from the committee said it also will include a provision that imposes a reporting requirement to the IRS, which will allow the agency to examine previous deals to "determine their compliance with even current law."
The legislation builds on the Bush administration's proposal, through the budget for fiscal year 2006, that also sought to deal with life insurance contracts that inappropriately afforded benefits to private investors that would not otherwise be available without the charity's involvement.
The insurance industry is supportive in principle of the latest initiative. "Commoditizing the insurance business, under the guise of a charitable purpose, needs to be closed down," said Ken Cohen, an associate general counsel and government relations official at Massachusetts Mutual Life Insurance Company.
LIFE INSURERS WELCOME MOVE
"Life insurance is designed for financial protection," said Frank Keating, president and CEO of the ACLI. "It is no surprise that life insurers welcome this legislative proposal. It would effectively put an end to arrangements designed to use life insurance for something for which it never was intended.
"We look forward to working with the Congress on this issue and hope that legislation to curtail IOLI arrangements is enacted quickly," Keating added.
But Arthur Bailey, a partner in insurance and tax law at Steptoe & Johnson in Washington, D.C., defended the programs. "Most tax experts believe as a technical matter that many of these programs satisfy the basic requirements of existing statutes, assuming the charity has a valid insurable interest [which varies with state laws] and that the program otherwise has validating tax characteristics such as economic substance."
But, as always, Bailey said, "When Congress gets involved, the question is whether the members of the tax writing committees approve of a particular application of the existing statutes. If changes are made to existing statutes, the treatment of existing policies will undoubtedly be addressed."
The Bush administration's plan is to shut down "Life Insurance and Life Annuities Based Certificates," or LILACs. Under these programs, the investors get the benefit of the inside buildup if they agree to give a small part of the benefits to charities, such as colleges or affiliates of colleges.
The latest action by the Senate Finance Committee further justifies the concern of the life insurance industry about the practice.
But it is unclear how the industry will react to the latest proposal when it is released and analyzed. That is because the industry has voiced concern about the specific language contained in the administration's budget. Cohen said the industry "appreciates the idea" of shutting down LILACs, but "does not like the particulars." As a result, he said, the industry is working with Congress "to craft an alternative" that the industry would find more acceptable. The ACLI has made similar statements.
Officials of the National Association of Insurance and Financial Advisors were more specific. They "applauded" the committee's leadership for introducing the bill and supported the committee leadership's decision to move away from the administration's proposal to impose an excise tax on death benefits and toward a plan to tax funds going into these arrangements.
"NAIFA believes theirs is a sounder approach," its officials said. "NAIFA has not yet determined the full extent of the tax-exempt organizations affected by the Grassley/Baucus proposal as contrasted with the administration's proposal."
Specifically, they said, "NAIFA supports legislation that would affect a fuller range of tax-exempt organizations than the administration's proposal without curtailing the legitimate use of life insurance by charities."
The new Senate proposal was unveiled by Sen. Charles Grassley, R-Iowa, and Sen. Max Baucus, D-Mont., chairman and ranking minority member of the committee.
"I'm very concerned about snake oil salesmen taking advantage of tax-exempt organizations to line their own pockets with life insurance schemes," Grassley said. "Many states are now considering legislation that would allow this kind of exploitation. The bill we're announcing today will toll the bell on this scam."
Cohen said MassMutual, as well as others in the industry, had so far this year persuaded Maryland not to expand the definition of insurable interest, and for the Virginia legislature to narrow a recent expansion of its definition.
Besides individual institutions, the ACLI, the Association for Advanced Life Underwriting and its sister trade group, NAIFA, have all been working to shut down LILACs and similar products.
Cohen disclosed that MassMutual several years ago was approached by a "major investment bank" first to underwrite LILACs, and later to be one of the investors who would profit from the deal, but declined. He said the company did not want to participate "in a scheme that involves commoditizing the value of someone's life."
But Bailey disagreed. "Charities have long been encouraged by federal tax law and state insurance laws to use life insurance as a way of encouraging individuals who have donative intent to benefit their favored charities," he said. "This has traditionally been accomplished by making a charity the beneficiary of a life insurance policy, or gifting an existing policy, or by allowing the charity to purchase a policy and gifting the annual premium."
Bailey said what might be upsetting Congress and the administration is that what is different in some of the programs offered currently is that the policy benefits may be financed with loans or other funds provided by third parties, "and consistent with that involvement, some portion of the policy benefits are used to repay those third parties."
ARTHUR D. POSTAL
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|Comment:||Congress moves to crack down on investor-owned life insurance.(LEGISLATION)|
|Author:||Postal, Arthur D.|
|Publication:||National Underwriter Life & Health|
|Date:||May 9, 2005|
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