Life Settlement Institute Supports Efforts to Curb Abuses of Insurable Interest Laws; Efforts to Protect Primary and Secondary Market for Life Insurance Benefit American Consumers
WASHINGTON--(BUSINESS WIRE)--June 1, 2005--The Life Settlement Institute (LSI), the leading organization representing secondary market providers for life insurance, applauds recent federal and state legislative efforts aimed at stopping investor-initiated life insurance schemes that would misuse tax-exempt organizations for their own profit. With a retroactive effective date of May 3, 2005, the recent legislation announced by Senate Finance Chairman Charles Grassley and Senator Max Baucus, ranking member, further demonstrates that these abuses will not be tolerated.
The Grassley/Baucus legislation would impose a 100 percent excise tax on the acquisition costs of any "applicable insurance contract," which is defined as a life insurance, annuity or endowment contract in which both an applicable exempt organization and a person other than an applicable exempt organization hold an interest (whether or not the interests are held at the same time). An applicable exempt organization generally includes an organization that is exempt from Federal income tax by reason of being described in section 501(c)(3) (including one organized outside the United States), a government or political subdivision of a government, and an Indian tribal government.
The bill would put a stop to schemes where private investors take advantage of tax-exempt organizations in order to finance or purchase life insurance policies from these charities. The private investors in these programs stand to reap enormous profits, leaving the charities with little or nothing in return.
The National Association of Insurance Commissioners (NAIC), at their June Summer Meeting in Boston, will begin formulating a position on the expansion of insurable interest to allow third party investors, using charitable organizations, to purchase life insurance to cover the lives of individuals with whom the third party investors have no recognized relationship. The primary goal behind efforts to expand the ability of charitable organizations to acquire insurance on its members is to enrich investors, not the charity or the insured's traditional beneficiaries. The Life Settlement Institute and its members, together with the American Council of Life Insurers (ACLI), the Association for Advanced Life Underwriting (AALU) and the National Association of Insurance and Financial Advisors (NAIFA) have been strong opponents of these efforts.
Life insurance offers policyowners both protection and growth of their assets. In his revered 1911 opinion in Grigsby v. Russell, Justice Oliver Wendell Holmes stated that "life insurance has become in our days one of the best recognized forms of investment and self compelled saving." The secondary market, particularly, serves to make life insurance more valuable to life insurance consumers by providing a competitive market value for life insurance. In recent years, life settlements have given life insurance policyowners over $1 billion over the cash surrender value in unneeded, underperforming or unaffordable policies. Likewise, properly structured non-recourse premium finance programs which utilize the secondary market value of life insurance enable people with a true need for life insurance to tap into the market value of life insurance.
The long standing public policies that protect owners of life insurance must be upheld and, where appropriate, strengthened. These federal and state legislative efforts protect both the primary and secondary markets for life insurance and the benefits of life insurance to American consumers.
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