Corporate Owned Life Insurance - COLI

[Unit 5302]

Recently I've read a few articles on COLI in the Wall Street Journal, and it's gotten a lot of bad press. I work as a marketing assistant in a major COLI carrier, and those articles really ticked me off because of how skewed they were. The industry responded, albeit weakly.

The case that is currently in the court system, and that's causing all the controversy is the Wal Mart plan. Back about 10 years ago, Wal Mart was taking out COLI policies on all their employee's. Right down to the janitors. All employees were enrolled unless they specifically opted out. The plan was sold under the premis that the employee would receive a $5,000-$10,000 death benefit life insurance policy for free. They were not told the corporation would receive in some cases hundreds of thousands of dollars. The suit currently in place is only on those policies where the insured resides in Texas. The law firm smells a tremendous amount of money, and they are going after Wal Mart under the guise of their being no insurable interest on the employees in Texas. Texas case law is setup only recognizing company executives as having an insurable interest. Wal Mart went around that by setting up a trust in Georgia (which also allows for negative consent, meaning you don't have to obtain signatures of the insureds to put the policy in force). That way, the policies were owned, and assigned as Georgia policies due to favorable case law there. The insured would have limited rights to the information on the policy, or to make changes on it since the corporation was making all the payments to keep the policy in force. The Texas court system decided to look at the case in depth, dispite the policies not being owned or assigned in Texas. In effect, they decided to apply Texas rules to a Georgia case, which I think may have exceeded their authority. Regardless, the law firm are attempting to win the suit based on no insurable interest in Texas, and then make all the death claims paid out payable to the estate of the deceased. Since the corporation received the payout, they would be the ones liable for the payments. Wal Mart is the corporation in this case. Anybody else smell deep pockets? Wal Mart quit the practice in the mid 90's when laws made their previously deductable payments non-deductable. They have since surrendered all policies with insureds in Texas to avoid future liability in this case as well.

Personally, I have a hard time faulting Wal Mart, or the industry for the practice. The employees did received a small death benefit, and they got it for free. Wal Mart benefitted greatly from the policies, but they also paid for them. Regardless, this is not how most COLI policies work.

Typically COLI polices are used to fund non-qualified executive benefits for major executives. In my company consent is required, unless their is an exception (somewhat rare). We have very few of the so-called "janitors insurance" cases in force, and there are underwriting guidelines in force which make it impossible for an average Joe like myself to be insured for 100's of thousands of dollars because of the need for insurance rules. In many cases the COLI policy is used to retain key executives in a competitive marketplace. They implement a term known as "golden handcuffs" which in many cases offers an incredible retirement package to the employee if he stays with the company. Executives are not stupid so they ask how the company is going to fund this retirement. Using COLI as a shuttle, the money can be invested in a varible life insurance contract saving a great deal of money on taxes. As of right now, a company cannot earmark money in a general fund for retirement benefits without having it taxed. Also, the company may fall onto hard times and that general fund could be depleted. The COLI policy is also less volatile than a general fund, and easier to keep in force. Once the executive leaves, the corporation can either choose to surrender the policy by removing the cash value to pay the benefit, or retain the policy and balance the books when the executive passes away. Either way, they won't get out of paying taxes in the long run, and they've protected the companies best interest, and done so with a valuable market product.

Thanks for letting me vent a little, lol.

Heh, this of course is aimed at anybody who cares. I'm sure Mr 5 0 has read the articles or heard about the deal.

[Rev]

Unit, from what I've read, the Texas law allows life insurance on employees only when the company has "insurable interest" in the life of the employee (executives whose demise would hurt the company profits, i.e. a loss).

The "dead janitor insurance " is really only a tax dodge for the company as insurance payments are generally not taxable (they are considered compenstion for a loss). If they were taxable to the company at corporate tax rates, it would not be profitable to do it at all.

Since the employees in that case you refer to do live in Texas and the company does do business in Texas where the 'dead janitor' was employed, there might be some basis for Texas court jurisdiction.

BTW, almost everything you said in your post is correct from what I've read.

Rev

[Mr 5 0]

Unit:

Yes, Unit, I'm familiar with the COLI case in Texas and as a former insurance company empolyee myself (inside sales rep for The Hartford) I can agree with your analysis of the situation.

I don't have a problem with the way COLI is used as a funding vehicle for executive retirement contracts and, as you point out, taxes are eventually paid, anyway.

Using COLI to insure hourly-wage employees, with no real insurable interest and no consent, as Wal-Mart once did, was risky, even if they did base the trust in no-consent, COLI-friendly Georgia.

I agree that Texas is grossly exceeding it's jurisdiction in this case and the tort lawyers are simply looking for a payday. I think they'll fail, as Wal-Mart has a seriously strong legal staff and plenty of cash to buy more, if necessary. The Georgia base for the trust should protect them, but you never know.

Still, Wal-Mart took some chances with using COLI to insure non-exempt employees. They'll probably survive this challenge but it's a reminder that the legal sharks are always out there, swimming around, looking for those deep pockets.

Most people hate big business (but love jobs - go figure) and almost no one really understands how insurance works, even in it's basic form ('spread the risk'), much less the more arcane elements of the insurance business, like COLI.

I appreciate your vent but I suspect we're very likely to find ourselves pretty much alone in our interest in this issue so don't be surprised if you don't see many more replies.

Nothing personal, just that business and insurance issues bore most folks to death. Then again, sports don't do a whole lot for me, so it all balances out.

[Rev]

Oh, I'd hate to see Walmart spend a ton of cash to defend that case (or lose it to hungry lawyers).

Hasn't Walmart stock dropped enough lately already?

Rev

[Unit 5302]

Rev: Actually, law has mostly prevented using COLI premium payments as a tax deduction since the mid-1990's. Wal Mart ended the practice of insuring all employees at that time because of that change in the system. In my long winded original post, I did mention that Texas has no case law identifying insurable interest on any employees lower than executive level. This is the reason the lawsuit is being gone about in Texas, and not Georgia.

Industry analysts are watching the suit with great interest. Texas has already pushed the limits of their jurisdiction (probably way over), but they don't seem to mind that fact. There is a concern that the Texas courts could ignore the fact the polices are owned and assigned out of Georgia, which would mean an appeal as I'm sure Wal Mart isn't about to pay out millions. Here's why the insurance industry cares so much. If Wal Mart were to lose, the money they received for the death benefit would then be marked as payable to the estate of the insured. Wal Mart could then choose to go back to the insurance company saying Wal Mart entered into a contract with the insurance company under the concept the death benefit would be paid to the owner, and not the insured. Potentially, the insurance company could deal with it in the end.

I actually found it extremely interesting that they mentioned Hartford Life at all in the Walll Street Journal, Jim. It really showed their lack of research because Hartford is not a major player in the COLI industry. I don't even think they have a dedicated COLI division?

[Mr 5 0]

Unit:

Hartford Life doesn't have a dedicated COLI division although they are involved in SERP and various other funding plans.

As you mentioned, the analysts and insurance companies are watching the case (along with the tort lawyers) closely due to the implications of a possibile future liability (in the multi-millions) for the companies involved, should the Texas case be adjudicated in the plaintiff's favor.

WSJ probably has contacts at Hartford Life and since they are part of the industry, they responded in some way and were mentioned in the story.

[Rev]

I realize the concerns of both Unit and Mr 5 0. However, companies that do business and hire people in Texas must abide byTexas law or else do their business elsewhere.

Rev

[Unit 5302]

Rev, no offense to Texas, but they need to pull out of this one. They do not have any authority over Georgia law. Regardless of where the insured's live, it's not the insured's policy. The owner and assignee are both addressed in Georgia. The policies are in no way, shape, or form owned or controlled by the insured's. Neither do the insured's pay for the policies, nor do they have a right to the death benefit directly from the policy.

Basically what I'm saying here is this isn't a Texas case, regardless of where the workers live.

[Rev]

Unit there's certainly no offense taken here by Texans and none meant towards anyone.

A company cannot just do whatever they want and hide behind a Georgia ownership trust. I wholeheatedly agree that the insurance underwriter should in no way be responsible for any losses.

It'll be interesting to see how this all pans out in the courts (federal probably).

Rev

[Unit 5302]

That's Georgia's call, not Texas'. Wal Mart didn't do whatever it wanted. Anybody from the company could have chosen to opt out of the policy at hiring. Had they done so, they wouldn't have been eligable for a free life insurance policy to them. Problem is, they find out a big company makes a lot of money while they don't and the little turds get greedy. What right does big business have to make money, or shelter themselves from unreasonable tax burdens? Screw big business. LOL. Yeah, and without them most of us wouldn't have jobs.

[Mr 5 0]

If taxes on business weren't so high successful companies like Wal-Mart wouldn't be seeking ways to lower corporate taxes by engaging in these schemes.

The class-envy position liberal politicians take (and many voters eagerly buy into) that assumes any big corporation is screwing everyone and should be taxed into bankruptcy is totally absurd and what lies behind corporations seeking whatever tax avoidance scheme they can find.

Typical absence of rationality from liberal types that want business taxed unmercifully while complaining about higher prices (duh) and unemployment rates. Idiots.

[Unit 5302]

Something I do want to note is that I disagree with the negative consent Wal Mart had. Negative consent means they could enroll a person without them opting for the policy. If they selected not to participate, they would not be enrolled, but if they didn't select anything, they would be enrolled. I do not think first time enrollment should ever be negative consent. I do think 1035 exchanges are a little more iffy on the subject.

Minnesota is terrible to big business, and I've been watching major Fortune 500 companies leave this state like wildfire.

[Mr 5 0]

Unit:

If you think Minnesota is bad (and I'm sure it is) you should live in Connecticut and really suffer.

Although we have a Republican Governor, he's a Republican In Name Only (RINO). The legislature is mostly Democrat and liberal, big-spending, high-taxing Democrat at that.

We have a 'Corporate Responsibility' activist group that wants to mandate a bunch of looney restrictions on CT business that would ruin them, if ever implemented. Unfortunately, many legislators are looking at these ideas as viable.

The looney left always prattle about jobs; one of the howlers in this groups mission statement is that they demand, demand that businesses provide more 'good-paying jobs' for Connecticut citizens. How asinine is that? As if jobs are a commodity that can be made out of thin air.

What they really want is a socialist, no, a communist government where everyone has a 'job', no one is well paid and everyone suffers equally, except the ruling elite, which would be these idiots, of course.

Don't get me started on politics and the adverse effect liberal/socialist schemes have on business and the economy.

It's a nice day and I don't want to ruin it or hijack your thread, but this subject gets me annoyed to no end by the sheer stupidity of politicians and too much of the citizenry, especially here in Connecticut, once a stable, Republican, business-friendly state. No more. The liberal Democarts took over a long time ago and it's been all downhill since then. If anyone doubts it, look at our U.S. Senators. 'Cryin' Joe' Lieberman and Chris Dodd, who never met a South american communist dictator he didn't embrace. Lieberman always wrestles with his conscience over moral decisions and to date, his conscience has never won.

Be thankful you only have to deal with Jesse Ventura. At least he's entertaining.

[polara7777]

I've never been big on politics but this has actually been a very interesting and enlightning read. Thanks to all that contributed.

[Unit 5302]

While I find Ventura to be refreshing in some ways, he can certainly be annoying in others. He had a record number of spending veto's overturned by our crazy liberal legislature. After that, he pretty much came out and said there wasn't much he could do to stop the clowns. Right now our legislature is running out of time to approve a budget. If they miss next Tuesday's deadline, Ventura gets ultimate veto power. That means he can ax whatever he wants to, hehe. I would love to see him get a hold of the ridiculous spending policies going on right now. As for being unfavorable to big business, Minnesota is the 3rd highest taxed state in the United States, following California, and New York. It certainly doesn't seem to me we should be in that league. The cost of living is increasing in double digits per year here thanks to a non-elected "Met Council" which is a power hungry organization, hell bent on controlling the growth of the twin cities. They are fiendish with their use of terms like "Urban Sprawl" which doesn't really exist here. There are simply no businesses moving out from the cities because of land value for commercial property, and tax rates. Furthermore, the Met Council is controlling new homes, and restricting cities near the metro area to a certain level of required low income housing. Apartments haven't been built to control extremely low vacancy (for the past 3 years between 0.5-1.5%) because the apartments would have to be "low income." For apartment owners, that means there is no reason to build. They cannot make any kind of a profit on low income rent. Instead, builders and owners have found a loophole. Retirement homes and assisted living apartments, which are springing up by leaps and bounds now. The Met Council's philosophy is the ridiculous idea that "everybody uses downtown Minneapolis." It's the biggest bunch of crap I've ever heard in my life, and it's been twisted to regulate almost everything. The council has decided to pick the "Portland, OR" model as to how they want to proceed. Unfortunately, Portland is bordered on 3 sides by natural barriers. Stupid. Regardless, to give you an idea on how bad rent and home prices are increasing, metro rent has increased 15-20% per year for the last three years. A home worth $80,000 4 years ago would now sell for $170,000. A nice single bedroom apartment within 35-40mi of downtown Minneapolis would have cost $400/mo 3 or 4 years ago. Now, it's $800/mo or more. If you don't meet restricted income guidelines, you really get hosed. Also, it's now basically impossible for first time home buyers here. There is no hope saving for a down payment. Inflation in the real estate market eclipses peoples ability to save, and in many cases if they can squeeze into a new home this year, there is no chance they'll be able to do it next year. All this is actually causing the urban sprawl the council so diligently works to stop. They must have an IQ of 10. People are moving farther and farther out, hoping to catch the front of skyrocketing land values and watch their equity increase. Driving distances of 60mi with alarming regularity. I seriously fear that it's too late for some. Should the met council be ousted (which I really, really think they should) property values will actually plummet in my opinion, and that will be catastrophic for buyers who purchased their homes at the peak of craziness.

As far as liberal agenda goes. I'm sure you're aware Minnesotan's elected Paul Wellstone. Some of them actually want him to run for president. That guy is the biggest spendmeister ever.

[Mr 5 0]

Unit:

Interesting info regarding your state, which I know has gone liberal for some time, much like CT. Paul Wellstone is a fair match for 'Cryin' Joe' Lieberman and Chris ('Castro-lover') Dodd.

I understand that Wellstone is doing poorly in the polls and his vow of limiting his terms to two went out the window, losing him a lot of credibility. Good. I wish Norm Coleman, well. Jesse Ventura, too, for that matter.

We have the same insanity in the housing market but it's skewed by the serious wealth present on Connecticut's 'gold coast'; the southern portion of the state that borders New York; Westport, Darian, Weston, Greenwich, etc. where stately homes go for millions and millions of dollars.

I live near Roxbury where a ton of celebrities reside, at least part-time. Lots of writers and actors (including Arthur Miller, Meryl Streep, Tom Brokaw and on and on).

My town, 12 miles away, is very middle class with a suburban/rural mix to it. A few expensive homes here and there but mostly middle-class homes, a good school system (which is why I moved here) and a referendum mechanism which gives residents control over the town budgets (it's a fight every year).

As a small state with cities that are all around 100,000 (as opposed to the almost 400,000 Minneapolis population) we have slighty different problems.

One of our problems is that our cities have totally died. They are populated by mostly monority welfare types and the tax base is about gone, in many cases, with the exception of Hartford, which had to beg a lot of the big national insurance companies to keep home offices in the city. Most are doing the bulk of their business in huge office complexes in the Hartford suburbs (where I used to work for The Hartford) leaving the 'home office' mostly an expensive, heavily-taxed shell and a symbol. Nothing more.

State aid to the cities is often half their budget, meaning that our state taxes (we have a state income tax as well as a sales tax) is going to support these desolated cities, filled with welfare clients, drug-and-gang-riddled and practically hopeless.

Bridgeport is the worst, and the mayor and most of his staff have been indicted for various forms of theft, as has the Waterbury mayor, who had child molestation charges thrown in so he's still in prison awaiting trial. It's a mess, yet our idiot Democrat legislature wants to keep pouring millions into these cities and tax the suburbs for it. This is not going down well, even with a huge liberal, soccer-mom, SUV-driving suburban population.

The liberal Democrat politicians propose huge, multi-million dollar 'projects' (sports stadiums, convention centers, etc) that bring some people into the city - for a few hours - then they drive right back out to suburbia and all this does little to nothing for the residents of the cities.

What they need is a decent, school system, safe streets and, as you noted in your post on MN, affordable housing so that middle-class folks can live there. No chance that will happen.

It's a mess and our taxes just go higher as people and businesses leave the state.

I checked the '99 U.S. census data
http://www.census.gov/govs/statetax/...nk_501.htmland

I found MN was 12th, CT 18th in total tax burden. Lucky you, you win the tax-burden contest! Pay at the door.

It's been interesting trading state misery and incompetence information with you, Kell. I actually feel a bit better knowing I'm not the only one who has to contend with total idiots for politicians that can't understand Economics 101 (high taxes and insane environmental policies discourage businesses from investing in your state) and just want to tax and spend our productive citizens into poverty in order to make everyone equally poor. Socialism is alive and well in America and gaining fast.

I wish you well.

[Rev]

There was an article in THE HOUSTON CHRONICLE about this case just yesterday. According to that article, there was not any consent at some of time when Walmart was involved in COLI's (the case in point).

At later times, there was consent from the employees, but it was required as a condition of employment. This, of course, means that the consent was coerced, and therefore not legal.

All of this is mostly of historical value, since Walmart doesn't do COLI's here anymore.

Rev

[Unit 5302]

I work in COLI, and I happen to know one of the people who worked on the Wal Mart case before leaving that company.

There was negative consent, which means no consent was needed, but a selection of no would allow the people not to have it. In all realism, who's going to turn down 5-10k of free insurance? There is no reason to turn it down. Almost nobody ever selected not to have it. Since my collegue has seen cases in which a no was selected, I can only assume that she wasn't there in the later years (which I think she was there only in the later years) or your paper is hopping onto the bandwagon and skewing the facts. Of that, I have no doubt. Papers and newsmedia are frothing at the mouth for this kind of junk.

12th now, huh? Hehe, Ventura must be doing well for us. I hadn't checked the data in a couple of years, and it looks like we're slacking.

We do have our wealthy land/home owner situation too. Minnesota's northern area's offer excellent fishing, gaming, and recreational activities. Along with excellent scenery and privacy. Small northern Minnesota towns have thus come under a fire of weathly elites moving into the area and sending property values skyrocketing. It has forced many out of the houses and land they have owned for generations. Minneapolis and St. Paul combine for about 700,000 people, and after that, most of Minnesota is under 100,000 people by far. Our total population is about 5,000,000.

To give you an idea of how asinine the Met Council is, they require all suburbs of the twin cities to have bus service. One of them, Prior Lake, has only 2 people that ride the bus. It costs over a million dollars a year to offer it. If they don't comply, they will not receive any taxes back from the state. It's total blackmail.