Keeping Fingers Crossed On The COLI Agreement
The tentative Senate Finance Committee agreement on corporate-owned life insurance hopefully will put an end to an issue that probably should not have been raised in the first place.
The new language on COLI reinforces the marketing practices that emerged after legislation passed in 1996, such as notice to and consent of covered employees and no use of COLI for hourly rank-and-file employees.
Under the new language, proceeds from COLI policies will continue to be used primarily to protect business owners from the financial consequences of the death of a key employee and to provide valuable benefits to covered employees.
It is a major victory for the entire insurance industry–both agents and companies–which was faced with the difficult task of using cold, hard facts to counter a series of screaming newspaper headlines using emotion-laden terms like “janitors insurance.”
Even the most ardent critics of the life insurance industry and COLI now should be reassured that the types of policies at the heart of the newspaper headlines, which have not been written in 10 years, will not be written in the future.
Life insurance agents and companies should now be able to serve the COLI market without fear of Congress coming down hard on them again.
That, at least, is the hope. But it is always wise to remain wary and there is always the possibility that the COLI issue will rear its head again.
Indeed, while this is a major victory, assuming a majority of the Senate Finance Committee agrees to the compromise, it must be acknowledged that the life insurance industry did not escape from the debate totally unscathed.
There is still a nagging problem over how the industry documents its case on the uses of COLI.
The Finance Committee asked the United States General Accounting Office to conduct a study on the uses of COLI, but GAO was unable to complete it.
GAO told the committee that while the insurance industry was very cooperative, insurance companies either do not maintain information in their files on COLI usage or the information is not maintained in a form that is helpful to GAO.
Moreover, a Treasury Department official told the committee that while he believes COLI policies often are used to pay for employee benefits, the evidence is anecdotal.
This is plainly unacceptable in something as important to the business as COLI policies. The industry needs to start doing a much better job here.
Perhaps to remedy this information gap, the agreement requires employers that take out COLI policies to maintain records and file returns with Treasury on the number of employees covered and the amount of insurance in force.
In addition, employers must maintain records that will allow Treasury to determine whether their COLI policies are, in fact, being used to benefit employees.
It is unfortunate that because of the apparent lack of solid information on COLI, employers must face new administrative expenses.
It will be up to Treasury to promulgate regulations on the new record-keeping requirements. Depending on how burdensome the regulations are, the COLI issue could flare up once again.
Reproduced from National Underwriter Life & Health/Financial Services Edition, November 26, 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.