Critics Challenge COLI Legislation

May 15, 2002 ( - While Washington seems to be ready to charge ahead with legislation that would bar employers from taking out Corporate Owned Life Insurance (COLI) on employees, critics say that the proposed legislation is zoning in on the wrong aspects of the programs.

They say COLI is not a program that benefits corporations at the expense of their rank-and-file workers. Instead, they say it helps out rank and filers by being an integral part of funding for benefits programs.

On Legislation

At issue is a new bill, introduced by Representative Gene Green (D-Texas), the Life Insurance Employee Notification Act (HR 4551). It would require employers to notify employees and former employees and their families of insurance coverage on their lives.

In addition, the legislation would require that corporations notify employees and their families of how much insurance is taken out for them within thirty days of taking out the policy.

Also, Senator Jeff Bingaman (D-New Mexico) plans new legislation that will prevent companies from taking out life insurance on rank-and-file workers to reap tax-free income.


Howard Winklevoss, president of Greenwich-based Winklevoss Consulting, said the legislation is unnecessary. “Most COLI transactions are made on higher paid employees, executives and professionals who are already aware that the insurance is being taken out for them,” he said.

He continued that another problem with the proposed legislation is that it would conflict with state law since state laws govern insurance and have since the 1940’s. Still, Winklevoss said that disclosure is a real issue and some states require disclosure of COLI while others do not.
Meanwhile, Albert Schiff, president of the Association for Advanced Life Underwriting (AALU) released a statement to set the record straight. He pointed out that some of the attention being paid to COLI focused on leveraged life insurance programs between 1986 and 1996. These programs covered rank-and-file workers who in some cases had not given their consent to be insured and who may have received little or no benefits from the insurance.

However, he added that leveraged life insurance programs were ended in 1996 by legislation that denied interest deductions for borrowings from the life insurance policies.


A few things in particular irk many observers about COLI, namely that the policies yield tax-free income for corporations and that corporations can borrow money against the policies to raise cash. Also, it bothers some that money placed into COLI policies grow tax-free and the proceeds corporations receive when insured workers die is tax-free as well. 

Mark Whitelaw, president of Valley View Consultants said the misperceptions about how COLI  benefits corporations are at the heart of the issue and the proposed legislation. 

“They [lawmakers] are trying to convey that big companies are profiting from the deaths of the rank-and-file employees and there are no benefits to the rank and file,” he said. “Employers are insuring their employees to be able to continue to afford benefits and better manage employee benefits.”

“Actually, many companies do provide families with a benefit at the death of an ex-employee.  Some provide a taxable death benefit only (DBO) benefit of $5,000 or $10,000 which is payable to the family upon reporting the death of the ex-employee,” he said.

Funding Tool

Winklevoss also said COLI makes sense and is actually an efficient funding tool for benefits programs, particularly non-qualified benefits programs. He explained that many highly compensated individuals participate in non-qualified benefits programs due to restrictions on the amounts that they can invest