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NAIC Resolution On Investor-Owned Life Affirms Insurable Interest

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Regulators meeting here voted to adopt a resolution opposing the expansion of state insurable interest laws.

Action was taken during the summer meeting of the National Association of Insurance Commissioners.

The resolution calls on the Life Insurance and Annuities “A” Committee of the NAIC to “strongly oppose efforts to expand state insurable interest laws to permit the use of charities to allow private investors to purchase life insurance on individuals with whom investors have no relationship.” The resolution now passes to NAIC executive and plenary committees.

Jim Poolman, chair of the “A” Committee and North Dakota insurance commissioner, said the resolution will emphasize regulators’ interest in preserving insurable interest and their concern that current laws not be exploited.

There is also the potential for regulators to tell Congress that preserving insurable interest is important. Currently, a bipartisan bill, S. 993, builds on a proposal in the President’s fiscal year 2006 budget by creating an excise tax on investor-owned life insurance.

“I’m astounded that insurance companies would be in Congress asking that there be legislation to tax insurance,” said Walter Bell, Alabama insurance commissioner.

He noted that “it is a slippery slope” and wondered whether at some point in the future he might end up paying tax on his own life insurance.

A person is trying to buy life insurance for free when he/she enters into one of these (investor-owned) transactions, Bell said, and often when there is something for free, there is also something wrong.

J. Leigh Griffith, a Nashville attorney representing LILAC Capital, Nashville, explained that investor-owned life insurance was really an arbitrage between the pricing of two different products, an annuity and life insurance.

“This is the crux of the whole debate,” Poolman responded.

Griffith said that if investor-owned life insurance was going to be examined by regulators, then so should COLI/BOLI and life settlements.

But representatives of the life settlement industry said investor-owned life insurance and life settlements are two very different transactions.

The difference, according to comments from Doug Head, executive director of the Viatical and Life Settlements Association of America, Orlando, Fla., and Bryan Freeman, president of Habersham Funding LLC, Atlanta, is that an investor-owned life insurance transaction is initiated by an investor whereas a life settlement transaction is initiated by the policy owner.

IOLI contracts establish a trust with a charity as a participant. The trust is funded by an investor and usually, a single-premium immediate annuity is purchased. The payments from the annuity pay the premium on a life insurance policy that is purchased and provide a regular fixed yield to an investor. Upon death, the investor receives the amount invested and the charity receives a portion of the death benefit proceeds.

Griffith said that in LILAC’s case, the return is 5.77% and that investors want clients to live and do not benefit from their death as would be the case in life settlement transactions. He estimated that LILAC currently has approximately $1.2 billion in face amount of IOLI contracts.

Linda Lanam, vice president-annuities and market regulation with the American Council of Life Insurers, Washington, said the issue of insurable interest is an important public policy matter.

In response to a comment during the hearing that many charities could not afford to purchase large insurance contracts, Lanam said if a charity is receiving $500,000, then that charity could probably buy $500,000 in life insurance. Or, if the donor is wealthy, then that donor could make a donation directly, she added.

Alan Buerger, CEO, Coventry First, Fort Washington, Pa., maintained that IOLI contracts are “an unholy alliance,” renting off of the reputation of charities and the tax benefits of insurance.

And Gary Sanders, associate general counsel with the National Association of Insurance and Financial Advisors, Falls Church, Va., warned against insurance contracts being turned into commodities.

Jim Poolman, North Dakota insurance commissioner, said the resolution will emphasize regulators’ interest in preserving insurable interest and their concern that current laws not be exploited