A recent report out by the Government Accounting Office (GAO) titled BUSINESS-OWNED LIFE INSURANCE - More Data Could Be Useful in Making Tax Policy Decisions looks into the subject of Business Owned Life Insurance.
Federal and state regulators, in pursuing their regulatory responsibilities, have collected limited data on the prevalence and use of business-owned life insurance. Federal bank regulators have collected more data than other regulators. The analysis of the data showed that at least one-third of banks and thrifts held business-owned life insurance with a total cash surrender value of more than $56 billion as of December 31, 2002, and that banks and thrifts earned at least $2 billion from such policies in 2002.
A business is generally allowed to insure an employee’s life when the business has an insurable interest in the employee. Insurable interest is defined by state law and, once established at the time of purchase, continues for the life of the insured. Thus, a business generally may maintain life insurance on employees even after their employment has ended. Business-owned life insurance can refer to corporate-owned life insurance (held by all types of corporations or only nonbank corporations), bank-owned life insurance, trust-owned life insurance (held by business established trusts), or all three.
The report found that, although the SEC does not specifically require reporting on business owned life insurance, nine of the largest life insurance companies reported to SEC in their Forms 10-K total premiums of more than $3 billion in 2002 from their sales of such insurance. In addition, surveys of life insurance companies estimated that premiums from new sales of business-owned life insurance totaled more than $9 billion in 2001.
Although the IRS has not collected comprehensive tax-related data on business-owned life insurance policies, the Joint Committee on Taxation and the Office of Management and Budget (OMB) have reported estimates of forgone tax revenues from these policies as $7.3 billion to $13 billion for the period 2004–2008, excluding forgone tax revenues on additional income from death benefit payments. State insurance regulators have collected extensive financial information from insurance companies, but the data have not addressed the prevalence of business-owned life insurance.
Some state insurable interest laws permit businesses to purchase business owned life insurance to provide for business continuation when a key employee dies or as a strategy to help defray the costs of providing a variety of benefits to current and retired employees. However, unless a business places its policies in a trust that restricts the use of the proceeds to specific purposes, the business may use the proceeds for any purpose.
Although federal and state regulators generally have not collected data that distinguish among the uses of business-owned life insurance, the GAO found examples of how businesses stated they intended to use such policies from our analysis of Forms 10-K and a consulting firm’s survey. Federal bank regulators, SEC, IRS, and four state insurance regulators that were contacted have issued guidelines or requirements that are applicable to business-owned life insurance and generally have not had significant regulatory concerns about such insurance. As part of their responsibility to “Banks and thrifts” or “institutions,” as referred to in this report, are the commercial bank and thrift institutions regulated by the Federal Reserve, FDIC, OCC, and OTS. However, the report does not cover bank and thrift holding companies and foreign banks with domestic branches.” oversee the safety and soundness of banks and thrifts, the federal bank regulators have issued guidelines for institutions that buy business-owned life insurance.
More comprehensive data on the prevalence and use of business-owned life insurance could be useful to Congress in assessing the potential effects of legislative proposals that address the tax-favored treatment of the insurance. Costs would be incurred in obtaining the data. Such data would be most useful if reported separately for business continuation and broad based policies because legislative proposals that would further limit the tax-favored treatment of these policies generally have treated these policies differently.
Data on both categories could help in understanding the proportion of the total business-owned life insurance market that might be affected by future legislative proposals. Useful data that are not available include the amount of tax-free death benefit income that businesses received from these two types of policies—data that could help Congress better understand the potential effect of changes to their tax treatment on tax revenues. Other data on business continuation and broad based
policies that might be helpful to Congress in evaluating the potential effects of legislative proposals on businesses, their employees, and insurance companies include the annual premiums paid on new policies, the number and types of businesses that hold such policies, and the number of covered employees.
Businesses that hold the policies or insurance companies that sold them could provide the data, but both types of entities would incur administrative costs in extracting the required information from their records and summarizing it.
The report did not cover the costs with businesses; however, they expect that they would maintain records from which the required data could be extracted. In addition, some businesses already aggregate this information for use in completing forms filed with IRS and SEC, which suggests that some businesses would not have difficulty providing the data. Businesses might differ in their willingness to voluntarily provide the data, depending at least in part on the cost and their perception of the benefits of doing so. While the report did not independently determine the costs that insurers would incur in collecting the data, officials from several insurance companies told the GAO that extensive effort would be required to identify the relevant policies.
Although businesses might be able to identify the policies and provide the data more easily, requiring insurance companies to provide the data would substantially limit the number of affected entities. Similar to the data providers, the organization collecting, analyzing, and reporting the data would incur costs. SEC, Treasury, and NAIC are candidates for this role because each already collects financial information from businesses, insurers, or both and could modify existing reporting forms or, alternatively, conduct a survey to obtain the data.
This report includes a matter that Congress may want to consider if it decides that it needs more comprehensive data on the prevalence and use of business-owned life insurance. Specifically, Congress could direct the SEC or the Treasury or encourage NAIC to obtain the needed data from either the holders of business-owned life insurance or life insurance companies.
The GAO received written comments on a draft of this report from Treasury, IRS, SEC, and NAIC that are reprinted in appendixes III–VI, respectively. Treasury commented that the report is well-researched and informative. In response to the matter for congressional consideration, SEC and Treasury expressed reservations about having a potential role in collecting data on business-owned life insurance, stating that assuming such a role would not be necessary to fulfill their regulatory missions. We recognized in the report that these agencies do not need the data to fulfill their regulatory missions. That is, the data would be used in making tax policy decisions rather than doing regulatory oversight. NAIC did not express reservations about collecting the data, but said that it would like to better understand and evaluate the need for and utility of the data and favored using a survey as an initial step in the data gathering process. The comments are discussed in detail in the report.