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The last five years have witnessed tremendous interest in financial products linked to life insurance policies, due both to the value represented by these policies and the fact that they allow investors to diversify risk. The range of products and structures is broad and includes notes issued to permit life insurers and reinsurers to comply with the NAIC's statutory reserve requirements, debt secured by an interest in a pool of life-settled policies, and products featuring the donation to a charity of the death benefits payable upon the life of an insured donor.
These latter programs have raised significant concerns by Congress and the US Treasury Department about the potential for abuse of the tax-exempt status of the charities involved to improperly shelter income from tax. They also raise questions as to potential violations of state insurance laws governing insurable interest. Under the laws of some states, such as Texas and Oklahoma, charitable organizations are recognized as having an insurable interest in the lives of their donors. Certain transactions have taken advantage of these laws by establishing a special purpose vehicle to issue securities to investors where the proceeds were used to...