NU Online News Service, May 17, 5:10 p.m. – Recent media coverage in The Wall Street Journal and other publications has created the impression that employers are using corporate-owned life insurance to profit from employee deaths.
The Association for Advanced Life Underwriting, Falls Church, Va., has responded by giving members information they can use to handle the negative publicity.
“There were so many articles that gave the impression that this was abusive, we needed to address it,” says Albert J. ‘Bud’ Schiff, president of AALU. “We felt it was not a fair representation of what COLI was all about.”
When employers set up broad-based COLI programs, they buy life insurance contracts that name their employees as the insureds and themselves as the beneficiaries.
Employers use narrow-based COLI programs to protect themselves against the death of employees who are especially difficult or costly to replace.
Employers use broad-based COLI to generate cash to fund benefit programs such as disability insurance plans, pension plans and retiree medical plans, Schiff says.
“The idea that companies are insuring individuals to benefit the company as a windfall when a person dies is just not the case,” Schiff says.
In the past, some companies set up COLI programs without the consent or even the knowledge of the employees.
“At the time they were done, they were all in compliance with the law,” Schiff says, noting that, years ago, many states did not require employers to notify the insureds or get their consent.
But the AALU explains in a notice to its members that 42 states now have laws requiring some form of notification or consent from an insured before a COLI policy can be issued. The notice also states that when there is any legal uncertainty, the insurance carrier will usually require the consent of the insured before it will agree to issue the policy.
Concern about COLI policies without employee notification is “old hat,” Schiff says. “It’s not an ongoing problem because you can’t do this anymore.”