Letting speculators insure strangers’ lives could make all life insurance tax breaks vulnerable to tax reform efforts.

Officials at the Association for Advanced Life Underwriting, Falls Church, Va., have been making that argument here at the AALU’s annual meeting.

The AALU has issued a statement strongly condemning “stranger-owned life insurance,” or arrangements that help wealthy investors reduce their taxes by buying life insurance policies insuring the lives of strangers.

SOLI is a cousin of investor-owned life insurance arrangements. Investors participating in IOLI arrangements use a charity’s right under insurable interest laws to insure the lives of unrelated individuals.

“IOLI and SOLI arrangements are not consistent with the intended purposes of insurable interest statutes within the various states,” the AALU says in its statement. “These practices erode principles designed to ensure that life insurance is used to protect the long-term interest of parties associated with the insured: families, businesses, business associates, and/or charities.”

If investors without an insurable interest in the lives of the insureds frequently receive policy benefits, Congress could subject life insurance products to the same tax rules applied to ordinary investment products, the AALU warns.

AALU is an affiliate of the National Association of Insurance and Financial Advisers, Falls Church, Va. NAIFA is likely to support a resolution criticizing SOLI and IOLI at its own meeting next week, a NAIFA staffer says.

AALU meeting speakers have noted in several sessions here that officials are looking for additional sources of tax revenue because of soaring federal budget deficits.

The President’s Commission on Tax Reform suggested in November 2005 that elimination or reduction of the tax break now accorded to the buildup of cash value inside life insurance policies and annuities is one of the ideas that should be on the table.

“Tax reform is going to happen,” AALU President Roger Sutton said during his opening remarks. “It is only a question of who will be the winners and the losers.”

SOLI is a “potentially abusive transaction,” and its sale “puts our entire industry in jeopardy,” Sutton said.