President Bushs new budget calls for curbing sales of an emerging life insurance product, criticized by many in the industry, through which investors buy life insurance on major charitable donors and then pay the premiums in hopes of capitalizing on the tax-free inside buildup.
Under the administrations budget, a 25% excise tax would be imposed on the product, one of the most popular of which is called 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.
Under the proposal, the tax would be imposed upon any person who receives death benefits, dividends, withdrawals, loans or surrenders under a life insurance contract, if (i) a charity has ever had a direct or indirect ownership interest in the contract, and (ii) a person other than a charity has ever had a direct or indirect interest in the same contract (including an interest in an entity holding an interest in that contract).
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The product has been criticized heavily by Stephan Leimberg, an author and estate planner in Pennsylvania, who says LILACs are part of a group of insurance products called “stranger-owned life insurance” that threaten to make life insurance a commodity and increase the chances that Congress will move to curb inside buildup.
According to Leimberg, the product has been criticized by the three main industry trade groups, the American Council of Life Insurers, the National Association of Insurance and Financial Advisors, and the Association for Advanced Life Underwriting.
All three have been working with states to thwart efforts to change the definition of “insurable interest” that is needed to increase sales of these “stranger-owned” life policies.