COLI BILL-LIFE-05-16-05

Legislation was introduced in the House late on May 11 that would codify into federal law marketing "best practices" for sale of corporate-owned life insurance.

The bill, the "COLI Best Practices Act of 2005," H.R. 2251, would limit sale of COLI to highly compensated employees and require the consent of those being insured.

The legislation is identical to a compromise drafted in the U.S. Senate Finance Committee in February 2004, but which failed to be enacted by the Congress, according to several industry trade groups.

The bill has strong support from these life industry trade groups, including the American Council of Life Insurers, Washington; and, the Association for Advanced Life Underwriting and the National Association of Insurance and Financial Advisors, both in Falls Church, Va. There is support because the bill codifies industry best practices established by underwriters and agents and because some members of Congress were moving to shut down same of the highly profitable product.

Sale of COLI has been under fire for several years because consumer groups and even members of Congress have voiced outrage that large companies took out blanket life insurance policies on their employees without notifying the employees or allowing them to participate in the proceeds.

The IRS also refused to allow companies to not pay taxes on the inside buildup of certain policies deemed to be based on an overly aggressive interpretation of tax laws. These policies were sold in the late 1980s and early 1990s. Sales of these policies were stopped in the early 1990s when the IRS started to question them. The IRS won several cases, including two in appellate federal courts, and undertook enforcement actions against more than 100 other companies based on sales of aggressive COLI prior to 2003. But it then proposed a generous amnesty plan accepted by most of the companies involved, although the agency never disclosed how many cases were settled.