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May 21, 2006 at 04:00 PM
A plan by life insurers to ask Congress to establish an excise tax on life insurance contracts that are settled in less than five years is drawing the ire of life settlement companies.
On May 8, the board of directors of the American Council of Life Insurers, Washington, voted to support creating a federal excise tax on stranger-owned life insurance. 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.
The vote to pursue the policy was 26 directors in favor, four opposed and one abstention, according to sources. ACLI confirmed it will “explore” pursuing the policy in Congress.
The decision was made less than a week after a May 3 hearing by state insurance regulators of the National Association of Insurance Commissioners, which was happening at the same time the Life Insurance Settlement Association, Orlando, Fla., was having its 12th biannual spring meeting in New York.
During testimony at the NAIC hearing, stranger-owned life insurance was described by the ACLI as “an arrangement in which speculators and investors who have no relationship to insured persons and no interest in their continued good health are allowed to profit from the insureds’ death.”
Executives in the life settlement industry reacted to the ACLI board vote, the hearing and other topics that were raised during the LISA meeting.
“Why are you asking Congress to tax your insurance?” is the question that M. Bryan Freeman, LISA board president and president of Habersham Funding, Atlanta, said he has for life insurers.
It is akin, Freeman says, to the life insurance industry splitting the baby, saying don’t tax the cash value in a contract but place an excise tax on contracts settled within five years.
Once the “camel’s nose is under the tent,” he warned, it may open up life insurance contracts to the possibility of further taxation including a contract’s inside buildup and death benefit.
It also would create a system that would discriminate against one set of policyholders, he adds.
Further, Freeman says, an excise tax of 100% of premium, in effect doubling the premium, would kill the market for these contracts. “There would be no excise tax because there would be no revenue.”
“This is a clear assault on the life settlement market,” says Doug Head, LISA’s executive director. In an election year in which balanced budgets are considered important, Congress could look at this proposal, Head adds.
Whit Cornman, an ACLI spokesman, referred to testimony presented by Frank Keating, ACLI president and CEO, in which he told state insurance regulators that “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.”
Cornman added, “ACLI is addressing the issue at the NAIC and in the states by seeking amendments to the NAIC Viatical Settlements Model Act to address these transactions when they first are arranged.
“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.”
Freeman said the secondary life insurance market is important to the primary market. He used the analogy of how the real estate market opened up when loans were made not only to those known to small town bankers but to a wider population through national lending organizations that package and sell those mortgages in a secondary market.
It was an analogy he made again when he spoke during a Bear Stearns teleconference moderated by insurance analyst Saul Martinez. During that call, Freeman noted the interest in the life settlements market is growing, as witnessed by senior management from banks and investment companies inquiring about them and as witnessed by interest from German closed-end funds and European banks.
