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IRS Eyes Investor-Owned Life Insurance

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The Internal Revenue Service is reviewing arrangements in which investors work through charities to purchase life insurance policies on unrelated third parties, says IRS Commissioner Mark Everson.

Everson’s comments came in response to a question from Sen. Jeff Bingaman, D-N.M., on what is called investor-owned life insurance during a Senate Finance Committee hearing on whether tax-exempt organizations are abusing their status.

Everson did not elaborate on the IRS review of these arrangements, except to say it is an area of concern.

However, J.J. MacNab, a life insurance analyst who runs a Bethesda, Md.-based company called Insurance Barometer, blasts the arrangements, adding that life insurance agent groups are also warning their members against them.

“Investing in life insurance dead pools clearly goes against public policy,” MacNab says. “The insurable interest laws pre-date the American Revolution and were put into place to prevent gambling on the lives of others.”

She notes these arrangements involve a trust set up by a charity, which then sells fixed income security interests in that trust to institutional investors. The money raised by the charity, MacNab says, is used to purchase immediate annuities on the lives of the charity’s donors.

Then, she says, the income from the annuities is used to purchase life insurance on the same donors. The charity benefits by receiving the arbitrage from the program, MacNab says, in that the annuity rates received are more favorable than the life insurance rates paid out.

Those who participate in these arrangements, she notes, have lobbied states to change their insurable interest laws to allow them.

MacNab notes that the institutional investors participating in these plans, which she says includes insurance companies and hedge funds, would not be able to purchase the life insurance contracts on their own. Rather, she says, they must borrow or rent the charity’s interest.

MacNab says that in the 18 years she has worked in the insurance industry, usually as a harsh critic, this is the first time she has seen the two largest agent associations the Association for Advanced Life Underwriting and the National Association for Insurance and Financial Advisors jointly publish a statement warning their members away from these plans.

In a joint statement to National Underwriter, AALU President Gus Comiskey and NAIFA Chief Executive Officer David Woods say life insurance agents, along with the American Council of Life Insurers, are working hard to oppose state law proposals that would loosen insurable interest laws.

Last week, they note, the Louisiana legislative session ended without the enactment of such legislation. In New York, they say, the legislature recessed without enacting insurable interest legislation, and the industry will continue its efforts during the time remaining on the legislative calendar.

Meanwhile, Comiskey and Woods say, they are fighting a significant last minute effort to enact legislation in North Carolina.

In addition to their efforts to oppose legislation where it is introduced, Comiskey and Woods say, the industry will work proactively to communicate its position in states where the issue has not yet arisen.

In a statement to the Senate Finance Committee, ACLI says it has set up a CEO-level task force specifically to address the use of life insurance and annuity products in connection with third-party investors.

The task force, ACLI notes, is unanimous in its opposition of expansion of insurable interest laws.

“The task force directed the ACLI to oppose this legislation and to work to educate state legislators about our concerns,” the statement says.

In opposing legislation, the statement says, ACLI is working to focus the attention of state legislators on the traditional uses of life insurance while stressing the importance of maintaining reasonable limits on insurable interest as part of state-regulated systems.

Reproduced from National Underwriter Edition, June 25, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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