Life settlement companies are criticizing life insurers’ plan to ask Congress for an excise tax on life insurance policies that are resold less than 5 years after purchase.
The board of the American Council of Life Insurers, Washington, voted 26-4 with 1 abstention May 8 in favor of exploring the option of imposing a federal excise tax on stranger-owned life insurance, according to individuals familiar with the vote.
The board said premium financing can have a place in the life insurance industry but that the SOLI arrangements in question give parties who are unrelated to the insureds a mechanism for ignoring state insurable interest laws.
“ACLI is addressing the [SOLI] issue at the NAIC and in the states by seeking amendments to the NAIC Viatical Settlements Model Act to address these transactions when they are first arranged,” Whit Cornman, an ACLI spokesman, said in response to questions about the ACLI board vote. “We also are exploring the option of pursuing legislation that would impose a federal excise tax of 100% on the money invested in SOLI transactions.”
The ACLI board voted on the SOLI excise tax measure shortly after the Life Insurance Settlement Association, Orlando, Fla., held its spring meeting in New York and after the National Association of Insurance Commissioners, Kansas City, Mo., held a premium financing hearing in New York.
At the NAIC hearing, critics described SOLI as a mechanism for giving “speculators and investors who have no relationship to insured persons and no interest in their continued good health” the ability to “profit from the insured’s death.”
“Clearly, these types of transactions abuse the social purpose of life insurance, circumvent the letter and spirit of insurable interest laws, and threaten the viability of a product that has provided essential financial security to generations of Americans,” ACLI President Frank Keating told state insurance regulators at the NAIC hearing.
Executives in the life settlement industry are objecting to the ACLI board vote.
“Why are you asking Congress to tax your insurance?” asks M. Bryan Freeman, LISA board president and president of Habersham Funding, Atlanta.
ACLI support for an excise tax is akin to “splitting the baby,” or asking the government to place an excise tax on contracts settled within 5 years while holding back from taxing the cash value in a contract, Freeman says.
Once the “camel’s nose is in the tent,” Congress could decide to tax a contract’s inside buildup and death benefit, Freeman says.
Imposing an excise tax on policyholders who sell in less than 5 years also would discriminate against one set of policyholders, Freeman adds.
Moreover, Freeman says, proposals to impose an excise tax equal to 100% of premiums would generate no tax revenue because they would kill the market for sales involving policies that were less than 5 years old.