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.