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.