Anchorage, Alaska

Insurers say that they have tax policy concerns about new life insurance products and are asking regulators to step in and help them remedy perceived problems.[@@]

Representatives of the life, health and property-casualty insurance industry spoke during a newly created tax policy working group that met during the fall meeting of the National Association of Insurance Commissioners here.

In response to concerns expressed, John Oxendine, Georgia insurance commissioner, said that regulators would try to meet with representatives at the Internal Revenue Service prior to the NAIC winter meeting in December.

For life insurers, the issue of insurable interest and its potential impact on future tax policy is of paramount concern, says Bill Anderson, a representative with the National Association of Insurance and Financial Advisors, Falls Church, Va.

Traditionally, life insurance has been sold based on insurable interest, a connection between the life being insured and the beneficiary. But in states like Texas and Alabama, that traditional concept is being revisited. In Texas, third parties with no insurable interest already can take out life insurance on individuals, according to Jose Montemayor, Texas insurance commissioner. And in Alabama, a bill that would have allowed this practice in the “growing area of megabuck life insurance” was defeated in the state House of Representatives, says Walter Bell, Alabama insurance commissioner.

Anderson says that the issue is likely to start showing up in more states, prompting NAIFA, the American Council of Life Insurers, Washington; and, the Association for Advanced Life Underwriting, Falls Church, Va., to begin an effort to alert state legislators. And Frank Keating, ACLI president, raised the issue with U.S. Senators Kent Conrad and Gordon Smith.

Investor owned life insurance includes a new type of offering called life insurance life annuity combinations (LILACs), in which a life insurance contract is purchased along with an immediate annuity, both on the life of a donor. The annuity income pays for the insurance policy premium.

North Dakota Insurance Commissioner Jim Poolman asked Anderson to differentiate between these new investor owned life insurance contracts and corporate-owned and bank-owned life insurance (COLI/BOLI.)

Anderson said that with COLI/BOLI, there is an insurable interest when the contract is issued, while with investor-owned life insurance, there is no such interest.

Poolman countered that it would seem that the insurance industry would want to sell more insurance. He asked if the industry is concerned that these large contracts will remain in force until death, and hence a death benefit will have to be paid out.

Oxendine asked what the difference would be if a university went to a bank and took a loan to buy a policy and then paid off the loan when the death benefit was paid.

Anderson responded that if a charity such as a university buys a contract on an alumnus, with the university named as beneficiary, there is an insurable interest. But if an outside investor buys the policy, then there is no insurable interest. The problem is that in the first case, the charity would get all of the proceeds, but in the second, a charity might get only a small part of the proceeds, Anderson explains.

If the practice gains ground, he added, life insurance could be turned into a commodity. Currently, it is given many tax benefits, but once it is used like this, Congress might revisit the tax status of life insurance contracts.

He says that although AALU opposes this kind of use of life insurance, some of its members are selling these plans and will continue to sell these plans.

“They’re not going to stop doing this,” Anderson says.

Over the last several years, brokers and attorneys have been pushing these plans, but MetLife does not see how they can work economically, says Robert Lynch, a MetLife representative. “There is not even enough money for investors,” Lynch says. “We have pressed them to show us where the value is added.”

Advocates have said that there is no tax arbitrage and that the benefit would come from errors in pricing annuities and life insurance, he says.