In a recent district court opinion, the court decided that a corporation had an insurable interest on the lives of over 2,400 of its employees on which it had purchased whole life insurance policies. However, the court also decided that a trial on the facts of the program would be needed to determine whether the company should have been allowed to deduct the interest it paid on policy loans.
Prior to the early 1980s, the predecessor to Xcel Energy Company (Xcel) established a group life insurance program for its employees, which provided employees a death benefit equal to three times the employee’s salary while at the company. The plan also provided retired employees a death benefit equal to 1.5 times the employee’s salary at the time of retirement, with this amount capped at $125,000.
The company later realized that its liability was greater than its ability to fund the plan. It was estimated that the potential liability as of 1985 for active employees was between $152 million and $278 million. The liability for retired employees was about $30 million. The state public utilities commission would not allow the company to pass on to its customers the retiree costs of the plan to the company’s ratepayers.
The company eventually purchased whole life policies on over 2,400 employees with the death benefit of each policy of $61,000. The policies’ death benefits were payable to the company. The company informed its employees of the purpose of the insurance and obtained written consent for the policies from each insured.
For any particular policy, the company was allowed to borrow up to the amount of the policy’s cash value while the insured employee was alive. The company could choose one of two interest rates on the amounts that were borrowed from the policies. The interest rate could be either a fixed rate based on Moody’s Corporate Bond Average in effect before the policies were issued (13.78% for about 750 policies and 12.66% for nearly 1,700 policies), or a variable rate based on the Moody’s rate in effect prior to the policy loan. The insurance company credited some of the loan interest back to the policy’s cash value; the more that was paid in loan interest, the more that was credited to the policy cash value. The company always chose the higher interest rate to pay.