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Corporate-owned life insurance (COLI)

Old 11-08-07, 11:21 PM
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Corporate-owned life insurance (COLI)

I was talking to my mom tonight and we got onto this subject while discussing life insurance policies. I am probably just woefully naïve but I have never heard of COLI before.

As I See It: Dead Peasants
by Victor Rozek

The concept of life insurance always struck me as being ironic. Essentially, you're laying bets on your own early demise, while someone happily pockets your monthly premiums and wagers that you'll live for a very long time. Of course, the reason why we bet against our own survival is that our families will benefit, should we die prematurely. So, in a cautious if twisted way, wagering on your early demise makes sense. But what if your employer was also betting on your premature death?

It's a morbid conflict of interests, but if you work for a large corporation, there's a good chance you're worth more to your company dead than alive. The sanitized name for it is Corporate-Owned Life Insurance, or COLI, although critics and industry insiders refer to it as "dead peasants" insurance. The word "peasants" refers to the position and wage level of the people being insured. These are not policies taken on corporate officers, but on janitors, clerks, store greeters, and other rank-and-file employees, including IT personnel.

Arguably, COLI is a logical extension of classifying people as "resources," like vehicles or computers that can be insured against loss; and an estimated one-fourth of the Fortune 500 corporations are quietly profiting from the death of their employees. Among them, Disney, AT&T, Nestle, Procter & Gamble, Dow Chemical, Pitney Bowes, Wal-Mart, and that other champion of ethical corporate behavior, Enron.

Here's how it works. A company takes out a life insurance policy on you, usually without your knowledge or consent. It writes off the premiums as a business expense, then collects the insurance as a tax-free death benefit after you pass on. The company can even borrow against these policies, should its employees inconveniently survive beyond their expected expiration date. Think of it as a lucrative, tax-exempt corporate investment that pays off upon your death, except that your family will never see a penny of it. Just ask the survivors of Felipe Tillman.

The Atlanta Journal and Constitution reported that when Mr. Tillman died, his employer, CM Holdings, pocketed a tidy $339,302, while his family received "a big, fat nothing." The entire amount was no doubt needed to console the grieving company in its time of loss.

Despite the fact that insurance companies, which collected an estimated $2.8 billion in premiums in 2001, lobby strongly in support of this barbaric practice, it isn't legal in all states. In Texas, for example, the issuance of an insurance policy is guided by the principle of "insurable interest," which requires some evidence that the person requesting the policy stands to suffer financial hardship or tangible deprivation as the result of a loss. So if your house burns down, or an income-producing spouse dies, that would clearly demonstrate both financial loss and tangible deprivation. Having a billion-dollar corporation insure the life of an $8.00-per-hour clerk, on the other hand, would not.

Texas law, however, did not stop Wal-Mart from taking out 350,000 policies on its Lone Star employees. To bypass those annoying Texas regulations, the retailer insured its employees with a company in Georgia. And no one would have known, except that a tax attorney who happened to be looking into Wal-Mart's affairs uncovered the scam and sent a letter to Linda Waller, whose late husband worked in Wal-Mart's automotive department. Waller was surprised to learn that her husband had been insured for $64,000, and she approached Wal-Mart's human resources department seeking an explanation. She was assured that no such policy existed and that she was being poorly used by ambulance chasers.

But further investigation proved otherwise, and Waller, along with the families of other employees, sued. The U.S. District Court agreed that Wal-Mart had no insurable interest and that the money should go to the estates of the deceased. Wal-Mart had argued that there was nothing untoward about this arrangement at all. Employees were offered a $5,000 "death benefit" and were free to refuse it. Wal-Mart, however, neglected to inform its employees that the policies were worth considerably more than the sum of the benefit, or that the company would be the major beneficiary. And, according to the attorney who uncovered Wal-Mart's insurance practices, if employees refused the special "benefit" they became ineligible for future health insurance.

All of which raises any number of troubling ethical questions. For instance, Wal-Mart hires a great many senior citizens, who either need to supplement their Social Security or simply want to fill the empty hours of retirement. Are these attractive hires because they pay off more quickly? Motivation is, of course, unknowable (unless someone finds the memos), but the practice of purchasing COLI does create some grotesque incentives.

Another company, Camelot Music, was part of the same lawsuit. It insured its low-wage employees for princely sums of between $273,000 and $368,000. The possibility of such extravagant death benefits must create a certain ambivalence in employee-management relationships. At the very least, it must be unnerving to have your management hoping you'll get hit by a bus on your way home. Imagine if Union Carbide had this kind of foresight 20 years ago and had bothered to insure the employees in its Bhopal plant. It would have been cheaper than fixing its antiquated facility and providing proper training. And why stop there? Why not insure the villagers in the surrounding area? Three thousand dead: what a payday! Warren Anderson, the CEO, probably would have received a bonus. If you think that's an exaggeration, think again. The Wall Street Journal reported, without notable outrage, that death benefits were used to fatten executive compensation.

The incentive for negligence is huge. Among the cases I researched was a company that owned convenience stores and chose to insure its employees rather than install safety measures in its stores. A competing company did not insure the lives of its employees but installed bullet-proof glass in its facilities. During a five-year stretch in the 1990s, the company with the safety measures reported one on-the-job death. The company that insured its employees reported nine. Not much incentive to make the workplace safe if you can save money by doing nothing and then profit from the coming disaster.

Hundreds of large companies are breathlessly waiting for millions of current and former workers to perform their final service to their corporation. As families mourn, their loved ones will live on (at least as notations in an annual report), forever memorialized as off-balance-sheet assets. What it lacks in sentimentality, it makes up for in avarice.

Now, as individual employees, most of us would want to know if someone was investing in our demise. We might, for example, chose not to work in a so-called clean room or around dangerous chemicals; we might refuse the stress of overtime, balk at the unreasonable schedule, and resist making the after-hours programming change. We might, in short, take better care of ourselves, if only to delay rewarding those who invest money in the hope that we will soon die. But chances are we will never know. When a bill was introduced in Congress that would have forced companies to notify employees covered under COLI policies, our purchasable politicians didn't even give it a hearing.

So what's a peasant to do? Why not band together and take out policies on top management and their board of directors? Most of them are older than we are and are under considerably more stress, so they're likely to pay off sooner than we will. In an era when companies are stripping and defrauding employees of their pensions, think of it as an unauthorized retirement benefit.

And when the CEOs begin to howl with moral indignation, we can reply, à la Michael Corleone, a man who knew a thing or two about profiting from the death of business associates: "Nothing personal; it's only business."
http://www.itjungle.com/tfh/tfh010305-story04.html

H.R. 4551 was introduced in the 107th Congress but I do not think that it went anywhere. Valued employee indeed.
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Old 11-09-07, 03:14 AM
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Never heard of it either. Wiki says there have been reforms that your article doesn't seem to touch on.

It doesn't make sense to me, however, that Insurance companies would be writing policies that seem to benefit the companies so much. Or perhaps the benefit in the article is being exaggerated (or the cost being glossed over)?

Either way, it is messed up that you can take an insurance policy out on someone without their knowledge (I don't consider parents doing this for their kids to be similar).
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Old 11-09-07, 03:31 AM
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OMG, I was just talking about big business profiting off Death the other day in the Politics forum!!!
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Old 11-09-07, 06:55 AM
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Originally Posted by Blade
Never heard of it either. Wiki says there have been reforms that your article doesn't seem to touch on.

It doesn't make sense to me, however, that Insurance companies would be writing policies that seem to benefit the companies so much. Or perhaps the benefit in the article is being exaggerated (or the cost being glossed over)?
Exactly. I long ago calculated that whole life was a suckee deal for me (as an investment) and excellent deal for insurance companies, which is why they sell it, but I didn't buy it.

Buy term life according to your needs and invest the difference; profit.

If the companies were making a killing, they'd be making it from the insurance companies. The insurance companies wouldn't go for that. The tax emphasis is a diversion as both sides of the transaction (premiums and payout) are outside the tax system. Considering the time value of money, is the premium and payout an attractive investment? The two sides may strike a bargain, which can be expressed as an internal rate of return (IRR) but one side wants it higher, the other lower. Given the pathetic return of whole life, I am surprised it is a "good use" of corporate funds vs other investment opportunities.
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Old 11-09-07, 07:27 AM
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Maybe I'm dense, but I simply don't see what's wrong with this. Employees <i>are</i> an asset to a company, and the accidental loss of an asset should be insured against.
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Old 11-09-07, 07:30 AM
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i heard about it years ago. Fortune 500 companies have been taking out policies against their execs for as long as anyone can remember
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Old 11-09-07, 10:58 AM
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My mom use to work for Bank of America and they had a policy for her, so that if she died they would collect, and would collect more than I would.
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Old 11-09-07, 11:29 AM
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Originally Posted by wendersfan
Maybe I'm dense, but I simply don't see what's wrong with this. Employees <i>are</i> an asset to a company, and the accidental loss of an asset should be insured against.

Most of the reforms have centered around key employees. A prominent founding CEO (Steve Jobs at Apple) is an asset for them not the new first day employee at Apple Store.

In Missouri, I had to sign a paperwork that showed that I had a vested interest my son when applying for life insurance.

I am to lazy to search but there was a big thread couple years back about Wal-Mart having these type of policies on entry level employees.
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Old 11-09-07, 11:43 AM
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I would think this is a problem with the insurance companies. They'd be stupid to insure a new hire at a convenient store for $1,000,000. The person just isn't worth that and that is asking for them to get offed.
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Old 11-09-07, 11:44 AM
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Originally Posted by Just Lurking
I am to lazy to search but there was a big thread couple years back about Wal-Mart having these type of policies on entry level employees.
So what? I guess I don't get why this is a bad thing.
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Old 11-09-07, 11:45 AM
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Originally Posted by movie diva
My mom use to work for Bank of America and they had a policy for her, so that if she died they would collect, and would collect more than I would.
They probably also pay higher premiums than your Mom does (though, yes, they can deduct their insurance premiums). If your Mom feels her death benefit is too small for her life insurance, she can increase it.

I don't see an issue here. It shouldn't matter whether the individual has personal life insurance, the company will do what makes the most sense, business-wise. As others have said, employees are assets and they are insuring their assets (just as they would insure assets in a warehouse).

Now if companies started taking large policies and encouraging their insured to engage in risky activities (sky diving, smoking, et cetera) then I could see a very large issue. As it stands, I have no problem with it.
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Old 11-09-07, 11:48 AM
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What you are really insuring against is a loss of revenue as a result, correct? How is this different from property insurance on rental property that pays for loss of income in the event of a claim? I mean, other than the fact that it is a person involved.

Would it be wrong for the company to have an insurance policy that paid out some amount in the event that an employee was unable to work for a year due to injury?
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Old 11-09-07, 11:59 AM
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I was trying to gather more info last night on this but it was late; the gist of what I got was that the COLI could still be intact even after the employee was no longer employeed. If you are no longer an employee why should the company have a vested interest in you as an asset, etc.?
These policies could remain in place even after the employee quits or retires. This practice of taking out life insurance policies on large numbers of rank-and-file employees, with or without their knowledge or consent, with the corporation making itself the beneficiary became known derisively as "janitor insurance" or "dead peasant insurance." Often the real purpose of the transaction was to obtain the benefits of the tax arbitrage and not to acquire insurance.
http://en.wikipedia.org/wiki/Corpora...life_insurance
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Old 11-09-07, 12:05 PM
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I won't disagree with you there.
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Old 11-09-07, 12:38 PM
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Originally Posted by Duran
So what? I guess I don't get why this is a bad thing.

What is there loss? Hiring or training expenses. I could see these has a benefit for employers if it covered expenses and not generated revenue.

It is illegal in many states. As I sated above in Missouri, I had to declare a relationship with my son to get insurance. It was a one time expense to get coverage in case of tragedy not make money.
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Old 11-09-07, 12:43 PM
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I can definately see where is seems unsavory, but if a business is will to give out insuance for this, and another is willing to pay for it, I'm not sure why it should be illegal. Why should it be illegal?
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Old 11-09-07, 12:56 PM
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Never heard of this before. Huh. I don't have any problem with it, as long as the company doesn't work the employee to death.
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Old 11-09-07, 01:26 PM
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After a bit of digging I located the following:
On August 17, President Bush signed the Pension Protection Act of 2006 (PPA 2006).

Treatment of Death Benefits from Corporate Owned Life Insurance (COLI)
Death proceeds from life insurance policies are usually tax-free to beneficiaries. In the new legislation, businesses will treat benefits from COLI as income unless the insured was an employee within 12 months of death and certain other requirements are met. Furthermore, benefits paid to a beneficiary must be used to buy back corporate equity or the insured must be a highly compensated employee for the benefits to retain the tax-free status. This rule affects only those life insurance policies issued after the bill is enacted.
http://www.st-luke.org/downloads/PPA...0806-32355.txt
COLI (PPA section 863). Death benefits exceeding premiums and other amounts paid for the COLI contract will be taxable income to the employer, unless the insured was notified of and consented to the coverage and (a) the insured was a director or “highly compensated employee” when the contract was purchased, (b) the insured was an employee within 12 months before death or (c) the benefits will be paid to the insured’s heirs or used to purchase an equity interest in the employer from the heirs. In general, the provision applies to COLI contracts issued or materially changed after August 17, 2006.
http://wrg.wmmercer.com/pub/ps/34336...icle/20066712/
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Old 11-09-07, 01:58 PM
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Originally Posted by mbs
(though, yes, they can deduct their insurance premiums)
WHile this is true, I just want to clarify that most, if not all, corporate expenses are deductible (including salaries, insurance, utilities, etc.), as corporations only pay tax on profits, not revenues.
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Old 11-09-07, 02:27 PM
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Originally Posted by kvrdave
I can definately see where is seems unsavory, but if a business is will to give out insuance for this, and another is willing to pay for it, I'm not sure why it should be illegal. Why should it be illegal?
There is something intrinsically wrong with someone financially benefiting from your death without your knowledge and consent.
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Old 11-09-07, 02:32 PM
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Watch out for the electronic version of COLI.

(wait for it...)
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Old 11-11-07, 09:24 PM
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Originally Posted by lotsofdvds
Watch out for the electronic version of COLI.

(wait for it...)
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Old 11-18-07, 02:27 AM
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Originally Posted by kvrdave
I can definately see where is seems unsavory, but if a business is will to give out insuance for this, and another is willing to pay for it, I'm not sure why it should be illegal. Why should it be illegal?
Agree with you...to me no big deal. Remember the company must pay for the premium.

The worker could have bought his own insurance and his family could have collected. To me it almost seems odd that the family would go after the money. I mean they did not pay for the policy why should they get the benefit?
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Old 11-18-07, 08:07 AM
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JANITOR INSURANCE
By Keith Milem
Finance 493 Analysis of Financial Topics Independent Readings

Janitor Insurance

Many of us may not know it, but we may be worth more to our employers dead than alive. The so-called dead peasant, or dead janitor insurance is insurance purchased by companies on low-level employees. This practice is generally done without the knowledge of the employee. When the employee dies, the family receives no benefit. Instead the face value of the policy goes to the company, tax-free[1]. This insurance is also known as corporate-owned Life Insurance or COLI[2].

Prior to the 1980s, insuring lower level employees by corporations was not allowed; [3] there was no “insurable interest”[4] in the employees’ survival. Companies could not argue there would be financial hardship if file clerks, janitors or nonessential managerial personnel perished. The rules for insurability[5] were designed to prevent life insurance from providing an incentive or avenue to profit from ones death. Insurance companies aggressively lobbied state insurance departments to modify the rules. The net effect allowed insurance companies to sell janitor insurance; without regulations or guidelines.

The rules in most states are unclear whether employers are obligated to inform workers if they are covered by COLI. Insurance codes in most states provide little help, if any, to an employee in discovering out whether a company has insured them, or the amount of the death benefit. Nor can family members ascertain if a current or past employer collected, or if they will collect. “ In Georgia, in fact, employers can even collect death benefit on the children and spouses of their employees. When asked about the law, the state’s insurance regulators said employers and insurers don’t report the details of COLI transactions to the state; (Schultz, Francis WSJ, April 24, 2002).”

Why do corporations buy janitor insurance? These policies yield tax-free income as their cash value increases. Corporations can borrow against these policies to raise cash. Money from these policies may be used for any purpose. Until 1996 the biggest advantage was the tax deduction received on the interest they were paying.[6] These loans were often at lower interest rates than money that could be borrowed from banks. Even without these deductions, corporations would benefit from tax-free gains and the death benefit collected.[7]

The IRS has the ability to find out about the COLI policies. The rules for disclosure are vague, thus making it hard to determine the amount of money spent on insurance. Corporations also use other types of COLI insurance to pay for executive benefits. The rules for disclosure don’t require companies to distinguish if the insurance is ‘COLI Executive’ or ‘Janitor COLI’; thereby, companies report their life insurance in aggregate. Accounting standards only require companies to report cash value as an aggregate number and only if the increase is significant.

If Congress asked their economists to determine the cost to tax payers, they would have a hard time determining a dollar value. Companies borrow against the cash value on the policies and do not report it as income; therefore, it is not taxable.

Even though tax breaks on the interest are being phased out, companies are still investing in COLI life insurance. They still enjoy the tax-free buildup of cash value in the policies, which add to net income. This income is often referred to under a generic heading like other ‘income” or “other assets”. The death benefit is tax-free to the company. Future death benefits are attractive off-balance sheet assets for corporations, who understand the significance of future downstream earning from the death benefit.

Corporations closely monitor the demise of current and former employees insured by the company. One way of confirming employees’ deaths is checking with the Social Security Administration database on deaths. The exhibit below shows some examples of the amount of money companies have collected on employees.
Death Benefits

How companies profited from the deaths of their employees

Felipe Tillman
Employment: Music-store worker
Died: Jan. 1992
Age: 29
Cause: AIDS
Death Benefit: $339,302
Paid to: Camelot Music/CM Holdings

William Smith
Employment: Convenience-store clerk
Died: Dec. 1991
Age: 20
Cause: Murdered at work
Death Benefit: $250,000
Paid to: National Convenience Stores

Doug Sims
Employment: Distribution-center worker
Died: Dec. 1998
Age: 47
Cause: Heart attack
Death Benefit: $64,504
Paid to: Wal-Mart Stores

Peggy Stillwagoner
Employment: Home-health nurse
Died: Oct. 1994
Age: 51
Cause: Car accident
Death Benefit: $200,000
Paid to: Advantage Medical Services
Source: WSJ research

Not only do non-financial corporations engage in this practice, so do some of America’s biggest banks. Bank One, Morgan Chase & Co, and Bank of America Corp own billions of dollars in life insurance face value. This insurance is called Bank-Owned Life Insurance or BOLI. In 1996, the IRS disallowed interest write-offs companies and banks were taking against loans on life insurance policies. In 1997, thanks to effective lobbying by the banking industry, regulators changed the rules. Banks often borrow money from the government at reduced rates. The ability to borrow at such low interest rate helps to boost bank profits. Using life insurance to borrow against the cash value is no exception. Because gains are tax-free this will contribute to the banks’ and companies’ bottom line. One bank reported that 12.4% of net profits came from policies (Francis and Schultz, WSJ, April 26, 2002).

Corporations and banks benefit from these insurance policies in many ways:

1) The money collected from death benefits is tax-free.
2) They are not required to tell how the money is used once the death benefit is collected.
3) Polices yield a tax-free investment as the value rises.
4) Before 1996, companies could barrow against these policies and the interest was tax deductible.
5) The future death benefit is an attractive off-balance sheet asset.

Is it ethical for corporations to have COLI or BOLI on their employees? The ethics in this issue are very clear. Only companies possessing these policies benefit from this practice. Companies are not required to disclose any information about this type of insurance. COLI and BOLI insurance has been in a shroud of secrecy until recent articles appeared on this practice. A recent non-scientific survey in the Wall Street Journal asked if employers should be allowed to buy insurance with out the employee’s knowledge? Answer 202-Yes, 600-No. This clearly shows that the differences in opinions will remain until new federal and state guidelines are adopted.

[1] Life insurance proceeds are almost always tax-free to the beneficiary. In this paper company is the beneficiary.
[2] Company owned life insurance is not the same as employer paid life insurance where the employee designates the beneficiary.
[3] Companies take out insurance policies are taken out on key employees or group of employees. These policies referred to as “Key Man Policies” help protect the company from financial loss.
[4] Insurable interest, which holds that an insured must demonstrate a personal loss or else be unable to collect amounts due when a loss caused by an injured person occurs, (Trieschmann, J. S., Gustavson, S. G., & Hoyt, R, E., (2001). Risk Management Insurance, (11th ed.) South-Western College Publishing.
[5] Rules for insurability, are the standards, guidelines and regulations by which the insurance industry operates in.
[6] In 1996 the IRS began disallowing deductions companies were taking on interest on loans against life-insurance policies.
[7] Tax-free gains are the increase in cash value of the policies. This profit falls to the bottom line.
http://cobacourses.creighton.edu/fin...rinsurance.htm
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Old 11-18-07, 08:17 AM
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Originally Posted by Sdallnct
Agree with you...to me no big deal. Remember the company must pay for the premium.

The worker could have bought his own insurance and his family could have collected. To me it almost seems odd that the family would go after the money. I mean they did not pay for the policy why should they get the benefit?
Felipe Tillman was no longer an employee of Camelot Music at the time of his death.
SENATE FINANCE RECONSIDERS CORPORATE-OWNED LIFE INSURANCE TAX.
Publication: Liability & Insurance Week
Date: Monday, October 27 2003

The Senate Finance Committee held a special hearing Oct. 23 to re-examine whether companies should be required to pay tax on corporate-owned life insurance benefits.

The hearing was scheduled under pressure from the life insurance industry after the committee voted Sept. 17 in favor of an amendment proposed by Sen. Jeff Bingaman (D-NM) to tax the COLI benefits employers receive from the deaths of employees who had not been with the company for over one year prior to their deaths.

Since then, Sen. Kent Conrad (D-ND) has proposed delaying the effective date of the imposition of the tax from Sept. 17 to the date pension legislation is enacted, rather than the date the legislation was marked up by the committee, and a ban on the purchase of COLI for employees earning less than $90,000 a year.

Frank Keating, president and CEO of the American Council of Life Insurers, told the committee his organization supported the Conrad proposal.

He also praised a study released at the hearing by the General Accounting Office, Business-Owned Life Insurance: Preliminary Observations on Uses, Prevalence and Regulatory Oversight.

GAO found no comprehensive COLI data available and said state laws governing COLI differed, but "regulators and the National Association of Insurance Commissioners reported no problems with them."

Robert Plybon, president of the Association for Advanced Life Underwriting, who also spoke on behalf of the National Association of Insurance and Financial Advisors, said AALU and NAIFA "strongly oppose" Bingaman's amendment because it would "eliminate a means by which many businesses maintain and expand important employee benefit programs."

Andrew Pike, associate dean for academic affairs and professor of law at American University, said "COLI arrangements produce inappropriate tax benefits."

He said he did not think Conrad's modified amendment would provide sufficient safeguards to prevent corporate taxpayers from enjoying tax arbitrage profits from their COLI arrangements.

Spencer Tillman, who identified himself as a businessman and analyst for CBS Sports, told the committee his brother Felipe died in 1992 and his former employer, Camelot Music, and its parent company, CM Holdings, cashed in a life insurance policy on his life, collecting $340,000, although his brother had not worked for the company for years prior to his death.

"My take on this, ladies and gentlemen, is this practice is nothing more than a sophisticated form of bounty hunting...At the very least, employees who have a price on their head, should at least know what the price is, have to agree to having it placed there, be allowed to have a portion go to their family should they die and last, should be able to have the insurance policy discontinued if their employment is discontinued."
http://www.allbusiness.com/finance-i.../724376-1.html
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