Industry Wants To Weed Spreading Lilacs

A major worry is that lilacs could endanger the favorable tax treatment of insurance proceeds if Congress sees death benefits being used merely for investment purposes, says Frank Keating, president and CEO of the ACLI.

"If they start using it as a commodity, theres a fear Congress might look at it differently," he argues.

In North Carolina, legislation that would modify the insurable-interest definition to allow the use of lilacs has been inserted into the state budget proposal, a fact that makes it difficult to stop, says Bill Hale, an ACLI representative in North Carolina.

That bill, H.B. 1414, is currently in conference between committees of the state House and Senate, he notes.

"At this point, were not optimistic the [insurable interest provision] would be withdrawn from the bill, because the University of North Carolina General Alumni Association is supporting it," Hale says. "They see it as a good way to raise money."

It also doesnt hurt the measures chances that the treasurer of the UNC alumni association happens to be the state Senate majority leader, Tony Rand, a Democrat, Hale points out.

"The insurable-interest statute in North Carolina has worked very well for generations," says Keating. "This legislation raises the specter of the legalization of gambling on human life by unrelated third parties and, so long as the insured's consent is obtained, harkens back to the early days of life insurance when insurance policies could be taken out on individuals' lives without limit."

Proponents of lilacs argue investors only make back interest earned by the policy while the insured individual is still alive and the policy is generating interest. Once the individual dies, investors get back their original outlay, and the remainder of the death benefit goes to the charity.

Lilac proponents also contend that the charitable or nonprofit trust would ultimately earn between 5% and 8% of the face value of the policy at no cost. The ACLIs Keating, however, thinks the return would be more likely 3% to 5%.

As for investors in the lilacs, their return would ultimately be in the neighborhood of 5.5% to 6%, advocates estimate.

Such figures are, however, a matter of mere conjecture, in view of the fact that lilacs never existed before this year.

Meanwhile, members of the Senate Finance Committee have criticized lilacs as "counter to good public policy and important life insurance principals." (See NU, June 14, p. 6)

Reproduced from National Underwriter Edition, July 1, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.