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Life Health > Life Insurance

Be Careful What You Ask For

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In the battle over stranger-owned life insurance, the American Council of Life Insurers upped the ante considerably on May 8 when its board voted overwhelmingly to support the creation of a federal excise tax on life insurance contracts that are settled in less than five years.

SOLI, the target for this extraordinary move, is an issue that is roiling the business like few others in recent times.

The stakes here are great. Indeed, in some respects, it is not hyperbolical to think that the very future of life insurance as we know it, with its tax-free inside buildup, could be in danger if SOLI is allowed to persist and be abused. But there is also danger if ACLI’s move goes awry.

The ACLI’s board, made up of some of the industry’s top executives, obviously weighed the issues very carefully before voting on this subject. But even so, there is an unavoidable feeling of trepidation about the possible consequences of the proposal.

The idea of asking Congress to tax anything connected with life insurance is a momentous step, whatever your views on life settlements and the issue of stranger-owned life insurance. The danger is that Congress will brush away the niceties and distinctions in the ACLI proposal and will operate with an axe instead of a scalpel. This would not be the first time it butchered something the industry holds dear.

The old adage about the camel’s nose inside the tent has withstood the test of time in this business for precisely that reason. Once you put forth a proposal like this, especially directing it at Congress, you essentially lose control of what will happen to it once it gets thrown into the ring with the lions. And make no mistake, tax money is like bloody fresh meat to our solons on the Hill, whom I would not otherwise grace by calling them lions.

Life insurers will have to convince Congress that certain transactions with life insurance are bad and that the industry with this proposal is taking a stand against these transactions in order to protect the product and keep its sale within the confines of what’s on the law books.

With SOLI, this should not be all that difficult. This is true particularly in those cases where investors are providing funds for purchasers to take out a policy with the express intent of having proceeds go to the investor. Where is the insurable interest?

But the industry is going to have to justify–to Congress–why it picked a five-year period within which to levy an excise tax. And it also is going to have a much harder time if it tries to lump in all life settlements instead of simply targeting abusive SOLI transactions.

Life settlements have their vocal critics within the life insurance business, but it is difficult to believe the secondary market would have grown so big so fast if policyholders had not seen benefit and value there. If the accounts are true that one reads about policyholders getting considerably more in a life settlement than the cash value of the policy, then the industry’s case becomes that much harder.

My fear is that the ACLI may have opened a Pandora’s box here, so it had better be prepared for anything to happen, not just what it thinks, or hopes, might occur.

Pandora may be a millenia-old myth, but she has had the unfortunate habit of recreating herself in generation after generation through the years. Let’s hope she didn’t make an appearance in Washington, D.C., on May 8.

Steve Piontek



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