Issuance of stranger-owned life insurance is coming under renewed fire from the insurance industry, especially the Association for Advanced Life Underwriting.

In a policy statement issued at its annual meeting here, the AALU strongly condemned SOLI.

At the same time, a staff official of the National Association of Insurance and Financial Advisors said its board is likely to support the same resolution at its meeting this week.

The concern of the AALU as voiced by several speakers at the meeting is that the soaring federal budget deficit is going to force action on tax “reform” within several years, regardless whether Democrats or Republicans are in power. When that occurs, elimination or reduction in inside buildup will be on the table, as has already been shown by the recommendation of the president’s Commission on Tax Reform in its report last November.

These comments were made by Roger Sutton, AALU president, in his opening remarks, by Ken Kies, AALU legislative counsel and head of the Federal Policy Group, Washington, and Dan Rigby, chairman of the AALU Best Practices Committee.

“Tax reform is going to happen,” Sutton said. “It is only a question of who will be the winners and the losers.”

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

“The greatest lesson I learned is that we must play offense and defense in the face of the unprecedented threats faced by our industry, and the real vulnerability of the ‘three thin threads,’” Sutton said. “This phrase, coined by former AALU President Lawton M. Nease, is one that I think aptly describes the major focus of our efforts–the ‘three thin threads’ are the fundamental tax preferences afforded to life insurance.”

Rigby added, “The AALU position on stranger-owned life insurance recently approved by the board of directors is based upon one overarching concern: If a significant amount of life insurance ultimately benefits those without traditional insurable interest, but rather with an investment return objective, then we risk the product being taxed under investment principles.”

He called SOLI sales “a significant threat,” adding that the threat is expanding and growing rapidly.

Rigby also commented on efforts by insurance lobbyists to restrain state efforts to rewrite insurable interest laws to support SOLI and investor-owned life insurance. A provision in tax reconciliation legislation passed by the Senate, and now being dealt with by a reconciliation committee, also contains a provision tightening insurable interest laws–too tightly in the view of the industry.

Agreement was reached May 2 by Republicans on a final bill that does not include the provision, according to AALU officials.

That could be the rub, another industry official, who asked not to be named, said.

“The concern about IOLI does not end with the tax reconciliation deal, however,” the tax lobbyist said. “A number of provisions originally in tax reconciliation have been moved into a second bill, possibly the pension conference bill or a separate bill, which will not be reconciliation-protected in the Senate and for which revenue will be a key consideration.”

IOLI raised $267 million over five years, the lobbyist said, and is supported by the Bush administration and Sen. Charles Grassley, chairman of the Senate Finance Committee. “So, we need to assume that while it appears to be out of tax reconciliation, it may not be gone for good,” the lobbyist said.

In its statement released at the meeting, the AALU said it “believes that IOLI and SOLI arrangements are not consistent with the intended purposes of insurable interest statutes within the various states.

“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,” the statement continued.

“Where it is a common practice to take out a life insurance policy with resources provided or guaranteed by those who have no insurable interest in the insured and who expect to control the beneficial ownership of the policy in the future, we believe it puts our product in jeopardy of being taxed under rules more consistent with those applied to investment products,” the statement added.