Empire State regulators have adopted emergency regulations in an effort to tighten controls over sales of company-owned life insurance.

The new New York state regulations require life insurers and fraternal benefit insurers to make sure that individuals covered by “key person” life insurance policies really are key persons and not just ordinary rank-and-file employees.

Some companies buy COLI and use any death benefits to help pay for employee benefit programs.

Critics have accused some employers of insuring employees – and long-departed former employees – with COLI without getting those individuals’ permission or even telling them about the coverage.

The distinction between key persons and ordinary employees is important in New York, because a 1996 state law requires employers to get permission from employees before including them in COLI programs, officials with the New York State Insurance Department write in an explanation of the new regulations.

Companies can use COLI policies to insure key persons without getting those individuals’ permission.

Because ordinary employees have more COLI rights than key persons, tightening the definition of “key person” will “ensure that rank and file employees and other non-key employees receive the notice, consent and termination rights prescribed,” officials write.

New York officials have based their “key person” definition on a definition included in a bill that was approved by the U.S. Senate Finance Committee in 2004.

In New York, the term “key person” now can include any of the following:

- An employee who is 1 of the 5 highest paid officers of the employer.

- An employee who is a 5% owner of the employer.

- An employee who earned at least $90,000 in compensation from the employer during the preceding year.

- An employee who is among the highest paid 35% of all employees.

- An employee or other person who makes a significant economic contribution to the company.

The New York department considered creating the “key person” definition by issuing a circular letter.

“The department was concerned that the circular letter proposal would not have the same force and effect of a regulation,” officials write in their discussion of the new regulations.

A copy of the emergency regulations is on the Web at Document Link