LIFA Commends Congress' Decision to Exclude a Provision for Excise Tax on Life Settlements in Pension Bill

The Life Insurance Finance Association (“LIFA”) commends the Congress for its decision to protect the retirement financial security of millions of Americans while also preserving the value of the secondary life insurance market for consumers, commonly known as “life settlements.”

Congress has enacted, and sent to the President for signature, the Retirement Security For Life Act (S.381, H.R.819) to encourage consumers to utilize retirement plans and annuities to secure their financial future. Unlike the previous version, this bill does not include the imposition of a 100% excise tax on the purchase price and ongoing premium payments of an in-force life insurance policy purchased in the secondary market during the first five (5) years after the policy’s issuance. Currently, the proceeds from the sale of a life insurance policy by a consumer in the secondary market are taxable as capital gains income and any net income realized by the investor upon collection of the death benefit is also taxable.

The proponents of the excise tax claimed that its only purpose was to eliminate abusive practices associated with “investor initiated life insurance”—a situation in which a life insurance policy is obtained solely for the benefit of a third party investor. Unfortunately, the effect of this proposal would have been unintentionally to penalize all consumers who can now legitimately sell their life insurance policies in the secondary life insurance market, usually for a value far in excess of the surrender values that life insurance companies pay.

Because many of the perceived abuses involved charities, the newly adopted provision governing charities requires the Treasury Secretary to undertake a study on the use by tax exempt organizations of “applicable insurance contracts” for the purpose of sharing the benefits of these organizations’ insurable interest in insured individuals with investors, and whether such activities are consistent with the tax-exempt status of these organizations. The study may, for example, address whether certain such arrangements may be used improperly to shelter income from tax, and whether they should be listed transactions within the meaning of the current Treasury Regulations. No later than 30 months after the date of enactment, the Treasury Secretary must report on the study to the Committee on Finance of the Senate and the Committee on Ways and Means of the House of Representatives.

LIFA believes that this measured action provides a prudent opportunity for Congress to make an informed decision regarding “investor initiated life insurance” and the preservation of the secondary life insurance market, which impacts fundamental property rights of consumers. We believe this is an important and proper step in assessing which direction or what action, if any, Congress should take in the future regarding these issues.

We look forward to assisting Congress in its further deliberations.

The Life Insurance Finance Association (LIFA) represents the life insurance premium finance industry, and other life insurance, financial planning and loan professionals who support that industry. Life insurance premium loans enable consumers to purchase and maintain valuable life insurance coverage for their family and business needs. The impetus for LIFA’s formation was the need for life insurance premium finance professionals actively to promote and embrace standards for “best business practices” and assist policymakers, insurance carriers and the public in understanding and differentiating between legitimate premium finance transactions from schemes merely cloaked as premium finance transactions that violate insurable interest, anti-rebating, anti-inducement, or other insurance laws. For additional information, contact Scott J. Cipinko, Managing Director, LIFA, .(JavaScript must be enabled to view this email address)