Congress Moves To Crack Down On Investor-Owned Life Insurance

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, respectively, 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. Moreover, he said, MassMutual officials “just testified before a Senate committee in Florida in opposition to similar legislation.”

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.”

I’m very concerned about snake oil salesmen taking advantage of tax-exempt organizations to line their own pockets with life insurance schemes,” said Sen. Charles Grassley, R-Iowa. “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.”