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.
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;
Cover loss of key employees; and,
Secure debt and bonding obligations.
COLI is essential to providing financial security to businesses and employees. If youre not that familiar with the concept, here are some hypothetical examples to help you identify opportunities for your clients where COLI can suit their business needs:
–Construction Company. For more than 65 years, this family business has specialized in road and heavy construction. The majority owner and heir apparent is 15 years senior in age to the minority owner and is slowing down his involvement in the business. The minority owner manages the day-to-day operations of the business, including the companys 250 employees, and is the future leader of the company. COLI provides needed cash to buyout the heir apparent and transition leadership to the minority owner. Without COLI, there would be family conflict and bonding company concerns.
–Printing Company. A printing company owner was concerned about the effect his untimely death would have, as it would likely result in the company closing its doors. How could he help to ensure the future financial security of his family, his 320 employees and his small community? The owner can use COLI to insure himself and other key employees to guarantee the business will continue without him.
–Leasing Company. In this example, a small company can use COLI to ensure the business continues to grow and prosper. The leasing company is a subsidiary of a second generation-owned trucking firm. The company was developed to lease trucks to the operators that pull the trucking firms trailers. By leasing the trucks to the drivers, they ultimately take better care of the trucks and gain a sense of ownership. Due to the cost of the new trucks, however, the leasing company often carries a debt load of $5 million to $7 million. The success and continuation of the business is due to the vision of the president. To protect the company and its 100+ employees, there is a large key person policy on the president.
–Property and Casualty Company. A property and casualty company can also benefit from the use of corporate-owned life insurance. The company can use a Selective Employee Retirement Plan (SERP) financed with insurance to recruit, reward and retain high-impact employees. With this plan in place, any deaths that occur will result in death benefits being paid to the company. These benefits will be used to finance retirement benefits for remaining plan participants.
Many of the attacks on COLI focus on abuses that already have been addressed by tax law changes and reform to state law. Adding more rules will hurt employees in the long run. It is our challenge, and opportunity, to educate our clients on how COLI can work for them.
, JD, CLU, is director of advanced markets, Principal Life Insurance Company, Des Moines, Iowa. He can be reached via e-mail at email@example.com.
Reproduced from National Underwriter Life & Health/Financial Services Edition, September 15, 2003. Copyright 2003 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.