Grassley Lays Groundwork For COLI Bill

January 15, 2004 ( - US Senate Finance Chairman Charles Grassley (R - Iowa) has released a corporate-owned life insurance (COLI) proposal to curb tax abuses.

Under the proposed legislation, companies would be required to meet certain requirements to get associated COLI tax benefits.   Among those requirements is that benefits from COLI policies will be allowed tax free only for certain key employees or people employed within the last year before they died, according to a Dow Jones report.

Additionally, taxes would not be levied on COLI policy proceeds if a company first obtained a worker’s written consent before the life insurance policy was written.   However, if an organization does not meet these requirements, the proceeds of the COLI policy would be taxed.

>Grassley’s 2004 proposal is similar to one launched last year by Senator Kent Conrad, (D-North Dakota), who had a hand in crafting this year’s version. Like the previous edition, Conrad collaborated with the insurance industry when determining the best course of action in limiting tax abuses of COLI policies, yet still allowing companies to utilize them to help defray the costs of other employee benefits.

>In their current state, COLI policies are purchased by companies naming the employer as the beneficiary.   By borrowing most or all of the cash value within the policies and deducting the interest on the loans, companies could generate cash flow with little capital outlay.

Currently, companies do not pay tax on proceeds from COLI disbursements collected after their workers or former workers die. This is the case even if the proceeds do not go to the worker covered by the policy and even if the worker no longer works for the company.