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N.C. Senator Says Future Of UNC Scholarships May Be In Life Insurance

Posted July 12, 2004

— An unusual fund-raising scheme is raising eyebrows in the insurance industry.

A proposed law would let investors buy life insurance on people they do not even know.

The measure is tied to the budget about to be agreed on in the Legislature. Sen. Tony Rand, of Fayetteville, who also is treasurer of the University of North Carolina at Chapel Hill Alumni Association, came up with the idea as a way to raise money for his alma mater.

Rand said the lifeline for scholarships at UNC system schools may lie in life insurance.

"It's innovative," Rand said. "It's unusual. We never thought of this before."

Rand is proposing a complicated fund-raising tool. In it, wealthy, elderly donors would allow investors to take out life insurance on them in a round-about way. The investors would buy bonds, which pay off annuities, which in turn pay the life-insurance premiums.

When the elderly donor dies, the proceeds would pay off the bonds and the investors. A small portion -- 5 percent -- would go to the charity.

"The investor group gets a huge payment; the charity gets a little," financial advisor Ron Erickson said. "That, to me, is inconsistent with the whole idea of charitable giving."

The insurance industry is working to kill the measure. It sees the measure as opening a Pandora's Box -- from encouraging the IRS to start taxing insurance payouts, to leaving the insured donors maxed-out on how much insurance they can get on themselves.

Insurance industry officials also said it sends an unsettling message.

"When total strangers insure other people's lives, and they have a stronger interest in their death than their life, I just find that unsavory," Erickson said.

Rand said he takes issue with the term "strangers" because the investors and elderly donors would be working toward a common goal. He said he sees nothing wrong with how it works.

"You're using legal products that are available on the market," Rand said, "and you're using them in an innovative, interesting way."

There may be a small window of opportunity to use this type of system. The law would sunset in a couple of years.

Rand admitted that even without a sunset, the financial markets would adjust so that it would not be profitable for long.

So far, three other states -- Texas, Tennessee and Virginia -- allow it.

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