SOURCE: The Life Insurance Settlement Association

March 20, 2007 11:39 ET

Settlement Association: Life Insurors Hypocritical on Investor-Initiated Issue

ORLANDO, FL -- (MARKET WIRE) -- March 20, 2007 -- In light of recent revelations regarding the mass purchase of investor-initiated life insurance at Oklahoma State University, state legislators and regulators should beware of protectionist measures sponsored by life insurors, says Doug Head, executive director of the Life Insurance Settlement Association.

"It is the height of hypocrisy for life insurors to attack the secondary market for life insurance because of their concerns that Congress will repeal or limit the tax advantages on the inside build-up of life insurance when it is the carriers themselves that promote the most egregious form of investor-initiated life insurance schemes that abuse the tax treatment for life insurance and the tax status of charitable organizations," he says.

At issue are reports that the Oklahoma State University athletics department received a fundraising boost from a plan to manufacture life insurance policies worth at least $250 million on wealthy, elderly alumni. The policies would be purchased not by alumni or their loved ones. Rather, the school is purchasing the policies on its graduates -- as an investment. According to Congressional Quarterly, businessman T. Boone Pickens, "hatched a plan with the university that amounts to a form of life insurance roulette."

The policies are pure wagering contracts, Head says, and a subject of humor at the school, according to Bloomberg News. "We'd always joke around that we're all going to go to that great 'Cowboy nation' in the sky one day," says OSU's executive director of major gifts and development, Larry Reece, according to Bloomberg. "And this is a chance to leave a legacy and an impact on the future."

"This is no joking matter," Head says. "The scenario playing out at OSU is the essence of investor-initiated, stranger-originated life insurance (STOLI). The fundamental rule is that insurable interest must apply at policy inception. But here a large institution is purchasing coverage on individuals in whom it has absolutely no insurable interest. That's an abuse of life insurance, and it makes a mockery out of the tax-exempt status of life insurance."

According to Congressional Quarterly, Sen. Charles Grassley, ranking Republican on the Finance Committee, has begun an inquiry into the potential abuse of the university's tax-exempt status. The Senator's renewed concerns follow his leadership against such abuses in 2006 that led Congress to enact a reporting requirement on charities that acquire an interest in life insurance policies.

"In fact, this is a double whammy," Head says. "The OSU scheme abuses the tax-exempt status of life insurance and the tax-exempt status of the not-for-profit university."

Life settlements, by contrast, are fully taxable transactions, he notes. The sale of the policy is taxable to the seller, and the death benefit may be taxable to the purchaser. In light of these facts, "it continues to be a ridiculous argument for insurors to condemn the secondary market because it supposedly will jeopardize the product's tax-exempt status," says Head.

"All the while the American Council of Life Insurors (ACLI) and its members have gone to considerable lengths to convince state insurance regulators and legislators to pursue measures which punish legitimate life settlements and legitimate premium finance, both of which are a fundamental property right for consumers, while doing nothing about pure STOLI schemes like this one," Head says, referring to a proposed ACLI-driven model within the National Association of Insurance Commissioners and legislation pending in several states. These bills, he explains, would make it illegal in many cases for life insurance consumers to sell their policies for five years after policy inception, but do not regulate programs in which investors take a substantial or entire interest in a policy from inception.

The ACLI has repeatedly said these proposed bills are necessary to protect the industry's tax status. In asking the NAIC to pass model legislation to ban many legitimate life settlement and premium finance arrangements, ACLI President Frank Keating testified powerfully, underscoring that life insurance sold must take into account the concept of insurable interest. At the same time, Keating spoke out against investor-initiated life insurance transactions in which speculative investors are allowed to profit from the insured's death.

Referring again to the OSU scenario, Head asks, "Where is the protection to the family for the loss of a breadwinner and where is the insurable interest? Nowhere. Where is the investor initiated life insurance; where is the speculative investor; and where is the abuse of the social purpose of life insurance? It is found throughout this wagering scheme."

Head concludes: "Policymaking regarding STOLI should be focused on protecting insurable interest and legitimate concerns about the tax laws, not harassing the parties to legitimate life settlement transactions and legitimate premium finance arrangements, in which individuals take out insurance on their own lives by using the market value of the policy as collateral for a premium finance loan. The life insurance industry can't have it both ways; we intend to call them out on their hypocrisy."

Founded in 1994, the Life Insurance Settlement Association is the oldest and largest trade organization in the industry. Its goal is to promote the development, integrity and reputation of the life settlement industry, and to promote a competitive market for the people it serves. LISA now represents 140 member companies with a wide variety of interests in the industry.

A life settlement is the sale to a third party of an existing life insurance policy for more than its cash surrender value but less than its net death benefit. Such transactions are usually undertaken for the purposes of estate or financial planning.

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    Doug Head
    Executive Director
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