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Industry Hopes For Changes In IOLI Provision

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Life insurers and producer groups believe they may succeed at persuading the Senate to remove an investor-owned life insurance provision from a tax cut bill.

The House and Senate have been trying to reconcile different versions of the bill, the Tax Relief Act of 2005, since December 2005.

Life industry observers are hoping that members of Congress will resume work on a compromise when they return April 24 and enact an updated version in May.

The IOLI provision in the Senate version of the tax relief bill, S. 2020, would impose a 100% excise tax on the cost of any “taxable acquisition” of an interest in affected insurance contracts. The provision could raise $264 million over a 10-year period, officials estimate.

The IOLI provision is supposed to address involvement of charities in arrangements permitting investors to buy stakes in life insurance policies covering the lives of strangers.

Life insurers and producers worry that efforts to use IOLI to circumvent state insurable interest rules could encourage lawmakers to take away the tax breaks that life insurance products now enjoy.

Meanwhile, members of the House and Senate have engaged in heated negotiations over the overall bill, including provisions that would extend the 15% rate on capital gains and dividends first enacted in 2003. Unless Congress enacts an extension, the provisions will expire in 2008.

Lawmakers appear to be close to agreeing to a 2-year extension of the cut in the tax rate for capital gains and dividends, says Marc Cadin, a vice president at the Association for Advanced Life Underwriting, Falls Church, Va.

“It appears that the deal that was nearly reached before the Easter recess did not include Section 312, the so-called ‘IOLI’ provision,” Cadin says. “This would be consistent with the historical precedent of the House not taking action on provisions until they have been properly considered by the Ways and Means Committee.”

But “we intend to watch this issue until the final deal is completed and signed into law,” Cadin says.

The AALU supports the goal of the IOLI provision, but “it is AALU’s strong view, and that of the broader industry, that [the provision] should not be included as part of the tax reconciliation bill,” Cadin says.

“The current version would harm legitimate uses of life insurance, and it may not effectively address techniques that evade the spirit of insurable interest laws,” Cadin says. “More attention and study is needed to assess what should be done and to get this right.”

One concern is a section of the IOLI provision that deals with insureds who use life insurance policies to secure loans.

Simply using a life insurance policy that earmarks some death benefits for charity to secure a loan could trigger the 100% excise tax, according to a note AALU officials sent to members in November 2005.

AALU describes 2 hypothetical examples of arrangements that could trigger the 100% excise tax:

- An insured borrows money to purchase a life insurance policy and makes a family member the beneficiary for 90% of the proceeds and a charity the beneficiary for the other 10%.

- An insured borrows money to buy a life insurance policy that is needed for purely personal reasons. Years later, the insured no longer needs the policy and gives the policy to a charity.


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