NU Online News Service, Oct. 23, 2003, 6:10 p.m. EDT — Washington

Legislation that would severely restrict use of corporate-owned life insurance is based on myths that fail to reflect the current business environment, according to life insurance industry representatives.

Witnesses from agent and insurer groups testified today at a hearing of the Senate Finance Committee that COLI is a vital tool for funding employee benefits.

Stories of alleged abuses involve policies that are no longer sold, the witnesses said.

Bob Plybon, president of the Association for Advanced Life Underwriting, Falls Church, Va., said sensationalist news stories have presented a grossly distorted picture of COLI.

Speaking on behalf of AALU and the National Association of Insurance and Financial Advisors, Falls Church, Plybon cited stories about “janitor’s insurance” as one example.

The “janitor’s” policies were policies written before 1996 that covered rank-and-file workers, apparently without the workers’ consent, Plybon said.

However, Plybon said, the old janitor’s policies bear no resemblance to current COLI programs.

The tax benefits associated with the old programs were eliminated by Congress in 1996, Plybon said.

Moreover, Plybon said, COLI today generally covers only managerial employees, and almost all employers obtain the consent of the insured employees.

In addition, Plybon said, COLI does not represent a “corporate windfall.”

To the contrary, he said, COLI policies are used to fund the cost of new or expanded employee benefits.

Plybon noted that, under Financial Accounting Standards Board requirements, retiree health and other benefit liabilities must be accrued as they are earned over the working lifetime of the covered employee, rather than as they are paid after retirement.

Companies use COLI to build an asset to offset this balance sheet liability, Plybon said. This strategy provides assurances for employees and investors that the company can afford to keep its promises, Plybon added.

Frank Keating, president of the American Council of Life Insurers, Washington, told the senators that COLI is already heavily regulated in every state.

State laws govern insurable interests as well as employee notice and consent, Keating said.

Indeed, he said, almost every state has a specific law requiring that employees receive notice of a pending COLI policy.

This notice requirement also includes documentation of the reasons for the coverage and how the employees as a group will benefit from it, Keating said.

In addition, Keating said, COLI is also regulated by the Internal Revenue Service, which places substantial restrictions on COLI. For example, he said, COLI premiums are not deductible and, in most cases, no deduction is permitted for interest on policy loans.

The issue before the Senate Finance Committee is a provision approved last month that would tax the death benefits on COLI policies covering employees who die more than one year after leaving employment.

While this treatment would not apply to key employees, the provision would cap the number of key employees at 20.

In response to criticisms of the provision, which was approved without a formal hearing, the Finance Committee agreed to hold a hearing and to then have a separate vote on any COLI restrictions.

Written versions of COLI hearing testimony are on the Web at http://finance.senate.gov/sitepages/hearing102303.htm