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.