BY ALLISON BELL

Most recently in response to criticism concerning COLI, the United States Senate has drafted legislation that provides for the taxation of death proceeds of corporate-owned life insurance under certain circumstances.

The Senate’s proposal addresses the abuses of “janitor insurance” and recognizes the legitimate business need for COLI to serve as a funding vehicle for employee benefit plans.

As a result, the Senate’s legislative proposal provides that death benefits under corporate-owned life insurance policies will not be taxable if the employee is a key employee as defined in the proposed legislation.

Chapter 491 of the Laws of 1996 added a new subsection (d) to Section 3205 to provide notice, consent and termination rights to employees, including rank-and-files employees, whose lives were insured under corporate-owned life insurance programs designed to fund employee benefit plans.

Since the notice, consent and termination rights only apply in the case of Section 3205(d) COLI and not key person COLI under Section 3205(a)(1)(B), it is imperative that insurers only insure key employees under Section 3205(a)(1)(B).

This will also ensure that rank and file employees and other non-key employees receive the notice, consent and termination rights prescribed by Section 3205(d) and to curb some of the reported abuses associated with COLI on rank-and-file employees.

The establishment of a key employee standard based on the proposed federal legislation will aid in curbing abuse in the corporate-owned life insurance market.

Howard Mills

Superintendent of Insurance

March 17, 2006

Regulatory Impact Statement for Part 48 of Title 11 NYCRR (Regulation No. 180)

8. Alternatives:

The Department considered but rejected the prospect of issuing a Circular Letter to establish the standard for key person. The Department was concerned that the Circular Letter proposal would not have the same force and effect of a regulation, and would therefore be an inadequate mechanism to apply and enforce the insurable interest requirements of Section 3205.

9. Federal standards:

The definition of key employee in this proposed regulation is based on the definition of key employee set forth in a draft COLI bill pending in the United States Senate which provides for the taxation of death proceeds of COLI under certain circumstances. The Senate bill, which was approved by the Senate Finance Committee in February, 2004, provides that a key employee may be

The proposed regulation establishes a standard for all key employee life insurance policies issued before and after the effective date of the Regulation.

The Life Insurance Finance Association says lawmakers should be careful when updating the laws that govern who can pay to insure an individual’s life.

Fine-tuning the concept of “insurable interest” is important, but lawmakers should use a fine brush and any changes should strengthen

Insurable interest is a concept that an organization of premium finance companies,

Any efforts to change state law should be targeted to strengthening insurable interest laws and should not use a broad brush approach to sweep in legitimate premium financing and life settlement transactions, according to Scott Cipinko, LIFA’s managing director.

“LIFA and its members strongly believe that life insurance policies should only be purchased based upon an insurable interest in the life of the insured,” according to a LIFA statement.

But, LIFA distinguishes between premium financing transactions used to buy insurance in which there is an insurable interest and other types of transactions currently under regulatory scrutiny including investor-initiated, investor-owned, stranger-owned, and charity-owned life insurance.

As an example of a way to address the issue, LIFA cites HB 1484 which it says attempts to more clearly define insurable interest.