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ACLI Board Votes To Seek SOLI Excise Tax

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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.

For this market to develop, it must be compliance-driven, Freeman said during the call. And, for those who approach brokers with contracts that violate the insurable interest principle, they might find they have no market to which they can sell these contracts, he noted.

The issue of an excise tax is just one of a number of issues those in the life settlement industry currently are addressing.

During its meeting, LISA members also discussed broker compensation and collection of data to better quantify the life settlement market.

A total of 15 states through viatical laws already have disclosure requirements for brokers, according to Freeman. But the industry will look at further disclosure possibilities, he added.

Industry participants will be looking at requirements similar to those filed with state insurance departments by carriers, said Rob Haynie, managing partner, Life Insurance Settlements, Fort Lauderdale, Fla. Language stating the maximum compensation that a broker could be paid will be discussed, he added. “We are not afraid of what brokers make. It represents payment for a service,” Haynie said.

LISA’s Head said life settlement brokers want disclosure to prevent abuses from occurring and to prevent commissions from an initiating agent being out of line.

He said the industry also wants better data on the life settlements industry. That data needs to be national and not just numbers gleaned from state filings, Head continued, adding it should include how much face amount was settled, what was paid, and how long settled policies were held.

If the project proceeds, roughly 20 industry participants would contribute data to a confidential repository, Head said.

Scott Kirby, co-president of Advanced Settlements, Orlando, Fla., said his firm will participate in the data project because “it is important for the industry and for anyone who looks at the industry.”

Advanced Settlements also maintains that data collection will illustrate consumer value by “accurately showing the amount beyond cash surrender value.” The goal would be to provide data starting with 2004, according to information provided by the firm.

Another issue raised during the LISA meeting was whether life settlements would fall under the purview of securities regulators.

During the meeting, Joseph Borg, director of the Alabama Securities Commission and president-elect of the North American Securities Administrators Association, Washington, said life settlement transactions could under certain conditions come under the jurisdiction of securities regulators.

In an interview with National Underwriter, Borg said as the market grows and purchasing agents for brokers are looking for policies to buy, if those agents are acting as unregistered investment advisors, then it could affect the brokers for whom they are working. If this happens, “it may go up the chain,” he added.

And, if industry representatives go and solicit investors to take out policies, they would fall under the requirements placed on investment advisors, he added.

If they encourage the sale of a policy and that impacts other areas such as the tax effect on an estate plan, then that raises the question of whether investment advice is being offered, according to Borg.

But Haynie said if it is simply a sale of a contract, then he is not convinced that life insurance is a security. Rather, he said, it is property that is being sold. “If life insurance is a security, then every time you have a yard sale and sell property, then that is a security,” Haynie added.


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