May 31, 2005

INVESTOR OWNED LIFE INSURANCE (IOLI) IN CROSSHAIRS

The basic premise of these techniques is to have a third party acquire insurance on the lives of non-related individuals. The individuals “sell” their insurability to an investor group, usually receiving some type of fee for the right of the group to purchase insurance on their lives. The investor group intends to make a profit by collecting the insurance proceeds at the death of the individual, after its expenses of premiums and the fee mentioned above.

There are potential downsides to the sellers in these transactions. Usually, the investor group is going to “max out” the amount of insurance the individual could have purchased for his own needs. Therefore, if the seller needs to purchase insurance for personal needs in the future, he or she may possibly not be able to acquire any additional insurance. There are insurable interest issues as well, where state law may prohibit someone or a group from speculating on other people’s deaths to make a profit. In addition, the tax issues associated with these transactions are uncertain at this time.

Due to the above and other reasons, Congress is floating various bills to create excise taxes on the death proceeds the investor groups might receive. These excise taxes are anywhere from 25% to 100%, which if enacted, would cause most investor groups to cease operations. In addition, most of the large life insurance companies are against this practice and have issued formal statements making clear they are not going to issue policies to owners that are investor groups or owners who intend to sell to investor groups after the policy is issued.

If you are interested in IOLI, you should ensure you have competent legal advice and a good understanding of how the program will work and the potential downsides to you. If you have further questions, please contact us directly.