There has been a great deal of discussion concerning Corporate-Owned Life Insurance (COLI) in the last year by everyone–from the industry to Congress and the mass media. The two latter audiences primarily have focused debate on notification and consent by insured employees; identification of which employees should be insured; continuation of coverage on former employees; and taxation of COLI.
As is the case with most topics (and lets face it, especially if they relate to the insurance industry), when a topic is misunderstood, a negative view prevails. Many of the concerns with COLI have either been addressed already or are being addressed today. The National Association of Insurance Commissioners is working toward a uniform approach by the states, especially regarding employee notification and consent. Industry groups such as the Association for Advanced Life Underwriting, the National Association of Insurance and Financial Advisors, and the American Council of Life Insurers support this effort.
Undoubtedly, there have been situations where COLI was used in a questionable manner. These are certainly the cases that get the publicity. There are, however, far more situations that go unnoticed where COLI was sold in an appropriate manner to help companies meet legitimate business needs. There is an opportunity for us as an industry to educate our customers, teaching them about using COLI as a business planning benefit.
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When COLI is used to finance benefits, typically it is being used to finance the cost of expanded employee benefits, including supplemental retirement benefits, survivor, disability, and broad-based health benefits. Due to changes adopted by the Financial Accounting Standards Board (FASB) in 1992, retiree benefits must be accrued for as they are earned over the working life of the employee. Companies use life insurance to build an asset to offset this liability. This is a responsible step, and the life insurance provides a stable tool consistent with long-term benefit planning.
It is important for employers to be able to maintain insurance even after an employee leaves the business. An employer doesnt know how long employees will stay or when they will die. As a result, employers must continue the coverage to match up with the long-term objectives associated with the benefits provided. Forcing companies to terminate coverage by triggering adverse tax consequences for holding the insurance until death (even after the employee leaves the business) will result in increased expense and ultimately reduced benefits for the employees and retirees.
COLI is used by businesses across America to:
Finance the cost of employee benefits;
Fund buy-sell arrangements;