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COLI In State Taxation Crosshairs

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The issue of the viability of corporate-owned life insurance and its sister, bank-owned life insurance, is coming to the fore again as states focus on taxing it.

For cash-strapped states, the key issue is increasing revenues without relying on politically-sensitive general taxes. But for the industry, the key issue is protecting inside buildup and other benefits of life insurance from taxation, a policy that has been in force in the U.S. for decades.

At the same time, the life industry is quietly lobbying Congress to include a provision dealing with the product in pending legislation so it can have legal certainty and also insulate it from recent public attack by providing certain consumer protections.

For the industry, COLI and BOLI represent a substantial if declining component of overall revenues. A study by the General Accounting Office recently indicated that the peak for COLI sales was 2001, when it represented approximately $9 billion in premiums.

But hard numbers, as the GAO testified during a congressional hearing on the issue last February, are hard to come by.

Cynthia J. Crosson, an analyst who just issued a report on COLI-BOLI, for Fitch Ratings, titled her report, “Curbing Their Enthusiasm.” Amongst other findings, she said insurers are “deliberately curbing their appetite” for underwriting COLI-BOLI, for a number of reasons, including concerns about assaults by tax writers and fears of a negative impact from a concentration on one product.

One of the reasons that annual premiums peaked in 2001, she wrote in her study, released late in July, was the Sept. 11, 2001, terrorist attack. “It raised fears of a huge mortality risk,” she said in an interview.

At one point in the 1990s it was a “very popular product which was going gangbusters,” Crosson said. But by 2001, the regulatory scrutiny grew intense, especially over highly leveraged products that became the subject of litigation. “Constant proposals to tax them began to keep the market off-balance and the industry began to back off,” she said.

Crosson based her study on information provided by 6 large underwriters of COLI-BOLI. But she said she couldnt provide information on the 6 top issuers because information was provided only if the detailed statistics were kept confidential. The report indicates that, for 4 out of 6 large insurers participating in a survey, COLI/BOLI has not represented more than about 12% of their total aggregate individual life first-year direct premium over the past 6 years, and that was in 1999.

The latest development in the states was the industrys ability to beat back an initiative in the Illinois legislature that would have imposed a retroactive tax on the death benefits of COLI and BOLI.

The American Council of Life Insurers, the Association for Advanced Life Underwriting, the National Association of Insurance and Financial Advisors, the Illinois Association of Insurance and Financial Advisors, the Illinois Life Insurance Council and other groups lobbied on a unified basis against the proposal, according to officials of the groups.

The tax would have been applied to policies already in force as well as future policies, said officials of the trade groups. The tax was proposed in the initial budget sent to the state legislature by Gov. Rod Blagojevich.

The industry also is girding for similar initiatives in other states whose legislatures meet this year, with the greatest concern being that the state of Washington will consider it in some form.

Tom Korb, chief lobbyist for the AALU in Washington, said the groups persuaded the speaker of the Illinois House, Michael J. Madigan, to oppose the provision when it was brought up during talks aimed at hammering out a state budget.

Jim Edwards, a staff official of NAIFA, said that one of the arguments was that, “Taxing these policies would have a devastating effect on Illinois businesses and workers. Because of this and the impact of the proposed tax on the sales of COLI policies, this tax would have resulted in little if any new revenue for the state.”

On the legislative front, both the ACLI and the AALU confirmed that their lobbyists and some of their members are continuing to work during the August recess to persuade congressional staffers to insert the COLI-BOLI provisions passed by the Senate Finance Committee in early February in pending legislation. The greatest opportunity for inclusion lies in getting the provisions into the FSC/ETI measure now in conference. The provision is not contained in either the House or Senate versions of the bill, but, given that Congress has a lot of work to do this fall and little time to accomplish it, this legislation offers the best hope for inclusion. The bill focuses on international trade and steps to remove the current European Union sanctions on United States exports to Europe.

“That bill should be taken up in conference upon the return to session of the Congress in September and some think it could be one of only a couple of tax bills which could pass this year,” said Korb.

The provisions are revenue-neutral and require that employers provide notice to an insured employee and obtain the employees written consent to being insured; mandate insured employees be within a limited class of employees permitted to be insured; and impose new annual reporting and record-keeping requirements.

Despite the strong merits for the passage of both deferred compensation and corporate-owned life insurance in FSC/ETI legislation, it is difficult to assess legislative outcomes in an environment that is becoming increasingly politicized with each passing day, Korb said.

Reproduced from National Underwriter Edition, August 5, 2004. Copyright 2004 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.