LIFE SETTLEMENT SOLUTIONS, INC. OPPOSES
PROPOSED EXCISE TAX ON LIFE SETTLEMENTS
Company Views Proposal as Anti-Consumer
and a
Counterproductive Tax Policy
Contact: Angie Robert,
Life Solutions International, 858/224–4729
SAN DIEGO – May 30 , 2006 –The valuable options life settlements provide consumers are being threatened by proposed legislation to impose an excise tax on life settlements and transactions related to the acquisition and financing of life insurance.
The effect of such a tax would be to eliminate valuable and needed financial options currently available to senior citizens in meeting their estate and financial-planning goals. The tax would also result in a reduction in actual tax revenues collected, since people currently recognizing taxable income upon the sale or collection of a life insurance policy would essentially be driven out of the market.
The board of the American Council of Life Insurers recently voted 26-4 (with one abstention) to support legislation that would impose a federal excise tax equal to 100 percent of any consideration paid to acquire or continue an interest in a policy, including premiums paid under covered premium-financing agreements, as well as any separate payments or fees to the insured (or policy owner). The excise tax would apply to any taxable arrangement entered into prior to or within five years following issuance of the policy. Under the council’s outline of the proposal, a taxable arrangement would include sale of the policy, an option to acquire an interest in the policy at a later date, or granting of a security interest in favor of anyone not within a specified class of exempt transferees. The classes of people exempt from the tax include those generally viewed as having an insurable interest in the insured (family members, etc.), life insurance companies (American Council of Life Insurers members), certain qualified lenders, and viatical companies only if the transaction involves a terminally or chronically ill person.
“This tax measure will take away the ability of seniors to do with their life insurance assets as they choose – a property right that has been upheld by U.S. courts since the 1800s ” said Larry Simon, founder and CEO of Life Settlement Solutions, Inc. “The management of Life Settlement Solutions strongly opposes this proposal. Many seniors who want to use life settlements as financial-planning tools will be unable to sell their policies during the first five years of their life-insurance contracts.” The five-year prohibition will severely impact the market, driving away the large institutional capital that has recently developed strong interest in the asset class.
While the council contends the excise tax is necessary because life settlements and premium finance programs circumvent insurable interest laws, the management of Life Settlement Solutions believes state insurance laws currently in place are already sufficient to protect insurable interest and prohibit policies being sold within well-established contestability periods.
“There are many seniors and business owners who obtain life insurance for traditional personal, family, estate planning and business protection needs,
but whose needs change during the first five years of their policies,” said Simon. “Seniors will be most severely affected. Those who experience significant changes in their personal or financial position, such as retirement
of the breadwinner or death of a spouse, will no longer be able to sell their unneeded or unwanted life insurance policies. Taxing the same life settlement transaction differently based on a pre- or post-five-year period is discriminatory against these people.”
By effectively eliminating institutionally funded life settlements as an option, there will be few good alternatives for senior citizens who find themselves with 2- to 5-year-old policies that they no longer need, or for which they can no longer afford to keep paying premiums. One alternative for them would be to let the policy lapse altogether, and another would be to surrender it back to the insurance carrier, often for a cash-surrender payment that is only a small fraction of what could have been obtained through a life settlement. The Life Insurance Settlement Association estimates that, where life settlements are an option, “Life settlements provide policy owners with an average settlement that is 300-400 percent greater than the cash surrender value of the policy.” (www.lisassociation.org/public).
American Council of Life Insurance members, the large insurance carriers that seek to push the excise tax through Congress, stand to benefit most from the proposed excise tax that would all but shut down the life settlement market. Without life settlements as an option for policy holders, insurance carriers increase their own profits by increasing their opportunities to buy back policies for cash-surrender value, often well below market value, and by having a higher lapse rate so that they never have to pay out the death benefits under policies for which they were paid premiums for up to five years. The council also proposes that these same insurance carriers (insurers and re-insurers) would be exempt from the provisions of the proposed excise tax. Ironically, many of the same insurers and re-insurers that would benefit from an excise tax on life settlements are strongly opposed to a proposed law that would tax the build-up value inside a life insurance policy.
There is also a clear risk of negative revenue impacts to the federal government,
counterproductive to sound tax policies. Currently, sale of a life insurance policy is generally a taxable event for the seller, and collection of the policy benefits by the institutional investor at maturity represents another taxable event. In between, premiums paid to keep the policies in force create taxable income for life insurance companies. Some industry experts estimate that more than $20 billion in face amount of life insurance has been sold through life settlements generating $2 billion in income to policy owners, almost half of which involved sales occurring two to five years from issuance
of the policies These sources of tax revenues will dry up if the council’s proposal is adopted.
Life Settlement Solutions encourages all insurance and financial professionals to contact their legislators and voice opposition to this anti-consumer proposal. In addition to senators and congressmen from their districts, those concerned may write to the House Committee on Ways and Means, The Honorable William Thomas, Chairman, U.S. House of Representatives, 1102 Longworth House Office Building, Washington, D.C., 20515, and to The Honorable Charles B. Rangel, Ranking Member, House Committee on Ways and Means, at the same address. The Senate Finance Committee may be contacted as follows: The Honorable Chuck Grassley, Chairman, U.S. Senate Finance Committee, Dirksen Senate Office Building, SD-219, Washinton, D.C., 20510, and to The Honorable Max Baucus, Ranking Member, U.S. Senate Finance Committee, at the same address. To find contact information for congressional representatives, visit the House of Representatives’ Web site at www.house.gov. The U.S. Senate’s Web site is www.senate.gov.
Life Settlement Solutions, Inc. is a life settlement provider, offering owners of qualifying life insurance policies the opportunity to convert their life insurance policies into cash. A pioneer in the non-viatical life settlement field, Life Settlement Solutions, Inc. and its management represent one of the largest
and most experienced institutionally funded life settlement companies in the market. Life Settlement Solutions, Inc. and its management have purchased life insurance policies in excess of $1 billion aggregate face value to date. For more information, visit www.lss-corp.com.
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