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Report to Congressional Requesters: 

May 2004: 

BUSINESS-OWNED LIFE INSURANCE: 

More Data Could Be Useful in Making Tax Policy Decisions: 

GAO-04-303: 

GAO Highlights: 

Highlights of GAO-04-303, a report to congressional requesters 

Why GAO Did This Study: 

Business-owned life insurance is permanent insurance held by employers 
on the lives of their employees, and the employer is the beneficiary of 
these policies. Its attractive features, common to all permanent life 
insurance, generally include both tax-deferred accumulation of earnings 
on the policiesí cash value and tax-free receipt of the death benefit. 
Legislators have expressed concerns about the ability of employers to 
receive tax-favored treatment from insuring their employeesí lives.

GAO was asked to discuss (1) the prevalence and use of business-owned 
life insurance, (2) federal and state regulation and oversight of these 
policies, and (3) the potential usefulness of and costs associated with 
obtaining more comprehensive data on business-owned life insurance.

What GAO Found: 

Limited data are available on the prevalence and use of business-owned 
life insurance. Federal bank regulators have financial reporting 
requirements, but not all institutions holding policies meet reporting 
thresholds. The Securities and Exchange Commission (SEC), the Internal 
Revenue Service (IRS), and state insurance regulators told GAO that 
they generally have not collected comprehensive policy data because 
they have not had a need for such data in fulfilling their regulatory 
missions. GAO found, however, that some insurers have disclosed 
information about policy sales. Also, the Joint Committee on Taxation 
and the Office of Management and Budget have reported estimates of 
forgone tax revenues from these policies as $7.3 billion to $13 billion 
for the period 2004Ė2008, excluding forgone tax revenues on additional 
income from death benefit payments. Regulators said that they do not 
generally collect data on the intended use of policies, but that 
businesses can, for example, use business continuation policies to 
insure against the loss of a key employee or broad-based policies to 
fund employee benefits.

The federal bank regulators told GAO that they have reviewed the 
holdings of institutions with significant amounts of business-owned 
life insurance against their guidelines and concluded that no major 
supervisory concerns exist. SEC officials said that the agency has 
relied on its broadly applicable requirement that public companies 
disclose information material to investors in their financial 
statements, which would include any material information related to 
business-owned life insurance; SEC did not have investor protection 
concerns about public firmsí ownership of the insurance. IRS had some 
requirements related to the tax treatment of the insurance and is 
reviewing compliance with these requirements. State laws governing the 
insurance differed; the four statesí regulators that GAO contacted 
described limited oversight of the policies, and these regulators and 
the National Association of Insurance Commissioners (NAIC) generally 
reported no problems with the policies.

More comprehensive data could be useful to Congress in assessing the 
potential effects of legislative proposals that address the tax-favored 
treatment of business-owned life 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 have generally treated these policies 
differently. Data on the amount of tax-free income that businesses 
received from death benefits could help explain the potential effect of 
changes to the tax treatment of policies on tax revenues. Businesses 
holding the policies or insurance companies that sold them could 
provide this and other data. SEC, Department of the Treasury 
(Treasury), and NAIC already collect financial information from 
businesses and insurers and could be required or asked to collect the 
data. Should Congress decide that the data would be useful, decisions 
would be required on, among other things, whether the benefits of 
collecting the data outweigh the costs of doing so.

What GAO Recommends: 

If Congress decides that it needs more data on business-owned life 
insurance, it may wish to consider having SEC, Treasury, or NAIC 
collect the data from businesses or insurance companies. SEC and 
Treasury expressed reservations about collecting the data, noting that 
the data is not needed to fulfill their regulatory missions. GAO 
recognized 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.

www.gao.gov/cgi-bin/getrpt?GAO-04-303.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Davi M. D'Agostino at 
(202) 512-8678 or dagostinod@gao.gov.

[End of section]

Contents: 

Letter: 

Results in Brief: 

Background: 

Available Information on the Prevalence and Use of Business-Owned Life 
Insurance Is Limited: 

Regulators Have Applied Their Guidelines or Requirements and Have 
Generally Not Had Significant Regulatory Concerns about Business-Owned 
Life Insurance: 

More Comprehensive Data Could Be Useful to Congress; Costs Would Be 
Incurred in Obtaining the Data: 

Conclusions: 

Matter for Congressional Consideration: 

Agency Comments and Our Evaluation: 

Appendixes: 

Appendix I: Scope and Methodology: 

Appendix II: State Insurable Interest and Consent Provisions: 

Appendix III: Comments from the Department of the Treasury: 

GAO Comments: 

Appendix IV: Comments from the Internal Revenue Service: 

Appendix V: Comments from the Securities and Exchange Commission: 

GAO Comments: 

Appendix VI: Comments from the National Association of Insurance 
Commissioners: 

GAO Comments: 

Appendix VII: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Staff Acknowledgments: 

Tables: 

Table 1: Banks and Thrifts with the Largest Concentrations of Business-
Owned Life Insurance as of December 31, 2002, and Issues Cited in 
Regulators' Most Recent Examinations: 

Table 2: State Insurable Interest and Consent Laws Applicable to 
Business-Owned Life Insurance in Selected States as of December 31, 
2003: 

Table 3: State Insurable Interest and Consent Laws Applicable to 
Business-Owned Life Insurance as of December 31, 2003: 

Figures: 

Figure 1: Cash Surrender Value of Business-Owned Life Insurance Reported 
by Some Banks and Thrifts as of December 31, 2002: 

Figure 2: NAIC Model Guidelines on Business-Owned Life Insurance, 
December 2002 Revision: 

Abbreviations: 

FDIC: Federal Deposit Insurance Corporation: 

IRS: Internal Revenue Service: 

NAIC: National Association of Insurance Commissioners: 

OCC: Office of the Comptroller of the Currency: 

OMB: Office of Management and Budget: 

OTS: Office of Thrift Supervision: 

SEC: Securities and Exchange Commission: 

Letter May 13, 2004: 

The Honorable Daniel K. Akaka: 
The Honorable Jeff Bingaman: 
United States Senate: 

Congress has debated the appropriate income tax treatment of business-
owned life insurance since at least the mid-1980s and is likely to 
continue doing so. Most recently, some members of Congress have 
expressed concern that more complete data are not available describing 
the prevalence and use of the insurance, information that could be used 
in assessing its income tax treatment and related policy issues. 
Business-owned life insurance--including corporate-owned, bank-owned, 
and trust-owned life insurance--is permanent insurance[Footnote 1] that 
an employer purchases on the lives of its employees, with the business 
as the policy beneficiary.[Footnote 2] Attractive features of business-
owned life insurance, which are features common to all permanent life 
insurance, generally include both tax-deferred earnings on the 
policies' cash value and, if the policy is held until the death of the 
insured, tax-free income from the death benefit itself. Some business-
owned life insurance protects against the death of owners or key 
employees (business continuation insurance), while some of it covers 
larger groups of employees (broad-based insurance). Generally, 
businesses can retain ownership of these policies after the employment 
relationship has ended.

Before 1986, businesses could take loans against the cash value of 
their business-owned life insurance policies and deduct the interest 
expense from their taxable income without limitation. To address 
concerns that businesses were abusing their ability to deduct these 
interest expenses, Congress passed legislation in 1986 and 1996 to 
limit this practice. The Internal Revenue Service (IRS) and Department 
of Justice also pursued litigation against some businesses. 
Nonetheless, public policy issues have remained regarding the extent to 
which businesses should be allowed to benefit from insuring their 
employees' lives, with or without their consent, and the extent to 
which they should be allowed to receive tax advantages from holding 
these policies. Proponents of continuing the tax advantages of broad-
based business-owned life insurance assert that these advantages are 
important to financing employee benefits because rules relating to 
other tax-favored financing mechanisms for employee benefits are too 
restrictive.[Footnote 3] Some proponents also assert that changing the 
tax treatment of business-owned life insurance would affect businesses' 
ability to provide employee benefits. Opponents of continuing the tax 
advantages of broad-based business-owned life insurance, while not 
directly addressing the potential effect of a change in tax treatment 
on the provision of employee benefits, state that Congress has already 
provided specific tax-favored financing mechanisms for these benefits 
and has determined the appropriate scope of such financing. Some 
opponents are also concerned that policy proceeds can be used for any 
purpose, even when the purchase was justified based on projected 
employee benefit liabilities, and that the tax-favored treatment of the 
policies gives them a competitive advantage over other investments.

This report provides information for use in discussing the public 
policy issues related to permanent business-owned life insurance and 
expands on the preliminary observations we presented in October 2003 
testimony before the Senate Finance Committee.[Footnote 4] As agreed 
with your staff, the report discusses (1) the prevalence and use of 
business-owned life insurance, (2) federal and state regulatory 
requirements for and oversight of business-owned life insurance, and 
(3) the potential usefulness of and costs associated with obtaining 
more comprehensive data on business-owned life insurance.

To obtain information on the prevalence and use of business-owned life 
insurance, we met with officials from federal agencies that require 
financial reporting from businesses, including: the federal bank 
regulators--meaning for this report, the Board of Governors of the 
Federal Reserve System (the Federal Reserve), Federal Deposit Insurance 
Corporation (FDIC), Office of the Comptroller of the Currency (OCC), 
and Office of Thrift Supervision (OTS);[Footnote 5] the Securities and 
Exchange Commission (SEC); and IRS. We analyzed quarterly financial 
reports that banks and thrifts filed with federal bank regulators and 
annual financial reports (Forms 10-K) that publicly traded companies 
filed with SEC. In addition, we obtained some information on the 
prevalence and use of such insurance from the National Association of 
Insurance Commissioners (NAIC) and two life insurance trade 
associations.[Footnote 6] We considered conducting a survey of life 
insurance companies to gather additional data but did not do so after a 
survey pretest in which insurance companies' representatives told us 
that their companies did not routinely maintain the data we sought. We 
did not verify the accuracy of their statements. To describe federal 
and state regulatory requirements for and oversight of business-owned 
life insurance, we obtained information from officials of the federal 
bank regulators, SEC, IRS, NAIC, and the insurance departments of four 
states with differing business-owned life insurance provisions. To 
address the potential usefulness of and costs associated with obtaining 
more comprehensive data on business-owned life insurance, we reviewed 
legislative proposals to determine the types of data that could be 
useful and IRS, SEC, and NAIC's reporting forms and instructions to 
understand what role these organizations or the Department of the 
Treasury (Treasury) might play in collecting more comprehensive data. 
We also discussed the challenges insurers might face in providing data 
and organizations might face in collecting it with insurance companies, 
Treasury (including IRS), SEC, and NAIC representatives, as applicable. 
Appendix I provides detailed information on our scope and methodology. 
We conducted our work between February 2003 and December 2003, in 
accordance with generally accepted government auditing standards.

Results in Brief: 

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. Our 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.[Footnote 7] We also found 
that, although 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. Also, surveys of 
life insurance companies estimated that premiums from new sales of 
business-owned life insurance totaled more than $9 billion in 2001. 
Further, although 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, we 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 we 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 oversee the safety and soundness of banks and 
thrifts, the federal bank regulators have issued guidelines for 
institutions that buy business-owned life insurance. These regulators 
told us that they have applied the guidelines in their risk-based 
examinations of institutions with significant amounts of business-owned 
life insurance and generally have concluded that no major supervisory 
concerns exist. SEC officials said that the agency had not issued 
specific requirements for holders of business-owned life insurance, 
relying instead on its broadly applicable requirement that public 
companies disclose information material to investors in their financial 
statements. These officials also said that, in the absence of any past 
problems, SEC did not have investor-protection concerns about public 
firms' ownership of business-owned life insurance. The Internal Revenue 
Code includes statutory requirements and IRS has issued regulatory 
requirements related to the tax treatment of the insurance. IRS 
officials said that the agency has been studying potential concerns 
related to the use of the policies. State laws governing business-owned 
life insurance differed; the four states' regulators that we contacted 
described limited oversight of the policies, primarily involving the 
regulators' review of proposed policy forms that insurers must submit 
for approval before using the forms to sell policies in their states. 
The state officials said that their departments had not routinely 
verified that employees covered by the policies had consented to being 
insured. However, these regulators and NAIC generally reported no 
problems with the policies.

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. We did not 
discuss these costs with businesses, however, we expect that they would 
maintain records from which the required data could be extracted. Also, 
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. Nonetheless, 
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 we did not independently determine the 
costs that insurers would incur in collecting the data, officials from 
several insurance companies told us 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 
SEC or Treasury or encourage NAIC to obtain the needed data from either 
the holders of business-owned life insurance or life insurance 
companies.

We 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 
greater detail at the end of this letter.

Background: 

A business is generally allowed to insure an employee's life when the 
business has an insurable interest in the employee.[Footnote 8] 
Insurable interest is defined by state law and, once established at the 
time of purchase, continues for the life of the insured.[Footnote 9] 
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.[Footnote 10]

Business-owned life insurance is permanent life insurance, which has an 
insurance component and a savings component. The premium for a newly 
issued permanent life insurance policy pays for the insurance 
component, but the premium initially exceeds the cost of providing life 
insurance protection for the insured person. The excess amount is added 
to the policy's cash value, which earns interest or other investment 
income--called inside buildup. The inside buildup is accrued income 
because the policyholder does not receive cash payment as the policy 
earns income.

The Internal Revenue Code allows for the deferral of income tax on the 
accumulated inside buildup on life insurance policies and some other 
investments that appreciate in value, such as stocks, some bonds, and 
real estate.[Footnote 11] However, the Internal Revenue Code provides 
for income tax-free death benefit payments on life insurance, so that 
unlike other investments, the accrued income is not taxed if the policy 
is held until the insured party's death. However, if a policy owner 
surrenders a policy before the death of the insured, the owner may 
incur a tax liability to the extent that the policy's cash surrender 
value exceeds its cost base and may incur a tax penalty. The cost base 
is equal to the total premiums paid less dividends and withdrawals 
received from the policy. Also, if a business owns life insurance 
policies, the annual earnings and death benefit proceeds are among the 
factors that could make the business subject to the alternative minimum 
tax.[Footnote 12]

To qualify as life insurance for tax purposes, a contract must qualify 
as a life insurance contract under applicable state law and meet one of 
two tests defined in Internal Revenue Code section 7702 to ensure that 
the contract is not overly investment oriented.[Footnote 13] In 
addition, while policy owners may access the cash value of their 
policies by borrowing against them, policy owners' ability to deduct 
the interest on such loans in connection with policies covering 
employees, officers, and individuals financially interested in the 
business was limited to loans up to $50,000 per policy by the Tax 
Reform Act of 1986.[Footnote 14] The Health Insurance Portability and 
Accountability Act of 1996 eliminated the interest deductibility for 
these individuals, except for policies on a limited number of key 
persons.[Footnote 15] Before the limitations adopted in 1986 and 1996, 
some businesses purchased "leveraged business-owned life insurance," in 
which they leveraged their life insurance ownership by borrowing 
against the policies to pay a substantial portion of the insurance 
premiums and in doing so incurred a tax-deductible interest expense 
while realizing tax-free investment returns.[Footnote 16]

State and federal legislatures considered numerous proposals in 2003 
and early 2004 that would change the conditions under which businesses 
may purchase business-owned life insurance, the consent requirements 
for such purchases, or the tax treatment of the insurance. For example, 
California considered and passed a law to prohibit businesses from 
purchasing life insurance policies on employees that are not exempt 
from the state's overtime compensation requirements. Texas considered, 
but did not adopt, a proposal to prohibit business-owned life insurance 
except in certain cases, such as when an employee is eligible to 
participate in an employee benefit plan and consents to being insured. 
Also, several members of Congress introduced legislation in 2003 that 
would have required employee consent or limited the tax-favored 
treatment of business-owned life insurance on policies taken out on 
employees that were not key persons, although none had been enacted by 
the end of the first session of the 108th Congress. The legislation 
would have affected the tax-favored treatment of such policies in 
various ways, such as taxing policy earnings and income from death 
benefits except on key person policies, taxing the death benefit 
payments on policies where the employee died more than 1 year after 
leaving employment, and limiting allowed deductions for a business's 
general interest expenses based on its business-owned life insurance 
holdings. In addition, pension legislation that the Senate Finance 
Committee passed in February 2004 included provisions that would 
generally limit the tax-favored treatment of business-owned life 
insurance, except for policies on those individuals the legislation 
defined as key persons; require employees' written consent for a 
business to hold insurance on their lives; and require businesses to 
report policy information to IRS.

Available Information on the Prevalence and Use of Business-Owned Life 
Insurance Is Limited: 

In pursuing their regulatory missions, federal and state regulators 
have collected limited information on the prevalence and use of 
business-owned life insurance. Federal bank regulators have collected 
more data than other regulators on the prevalence of business-owned 
life insurance; however, the data are limited because the regulators 
did not require all banks and thrifts to report it. While SEC has not 
specifically required reporting on business-owned life insurance, we 
found that some life insurance companies had reported information on 
policy sales in their Forms 10-K and in a life insurance industry 
survey. Federal revenue estimators have estimated the annual forgone 
tax revenue attributable to earnings on the insurance, although IRS has 
not required businesses to report on the prevalence of business-owned 
life insurance. Information at the state level is limited, however, 
because state insurance regulators have not collected information on 
the prevalence of the policies through their financial reporting forms. 
Some state laws permit businesses to purchase business-owned life 
insurance for business continuation purposes or in connection with 
employee benefit plans, but businesses generally are not obligated to 
use the death benefit proceeds for a particular purpose. Although 
federal and state regulators generally have not collected data on the 
uses of business-owned life insurance, we found some examples of how 
businesses said they intended to use such policies.

Federal Bank Regulators Have Collected the Most Data on the Prevalence 
of the Policies, but Not All Banks and Thrifts Provided Information: 

In monitoring the safety and soundness of individual institutions, 
federal bank regulators have collected more financial information than 
other federal and state regulators on business-owned life insurance 
policies. For supervisory purposes, federal bank regulators have 
required that regulated institutions disclose in quarterly financial 
reports earnings from and the cash surrender value of business-owned 
life insurance if the amounts exceed a certain threshold. As discussed 
below, the regulators have used the amounts reported to determine the 
need for further review of institutions' risk exposure. Business-owned 
life insurance is an asset reported at cash surrender value--that is, 
the sum of accumulated premium payments and inside buildup, less 
accumulated insurance costs, fees, and charges that the policyholder 
would be required to pay for surrendering the policy. It does not take 
into account income tax liabilities that might result from the 
surrender. The Federal Reserve, FDIC, and OCC require the institutions 
they regulate to disclose the cash surrender value of policies worth 
more than $25,000 in aggregate and exceeding 25 percent of "other 
assets," which include such items as repossessed personal property and 
prepaid expenses. Through the end of 2003, OTS required the thrifts it 
supervises to report the cash surrender value of policies if the value 
was one of the three largest components of "other assets;" in 2004, OTS 
began requiring all the thrifts it supervises to report the cash 
surrender value of their policies.

We found that about one-third of banks and thrifts--3,209 of 9,439, 
including many of the largest institutions--had disclosed the cash 
surrender value of their business-owned life insurance holdings as of 
December 31, 2002.[Footnote 17] The remaining two-thirds either did not 
hold business-owned life insurance or held such insurance but did not 
meet the reporting threshold. The total cash surrender value of 
reporting institutions' policies was $56.3 billion. A total of 259 
banks and thrifts with assets of $1 billion or more owned 88 percent 
($49.4 billion) of the total reported cash surrender value (fig. 1). 
These 259 institutions included 23 banks and thrifts that were among 
the top 50 largest institutions and that owned 66 percent ($36.9 
billion) of the total reported cash surrender value. Because not all 
institutions that owned policies met the reporting threshold, these 
data indicate the minimum number of institutions that held business-
owned life insurance and the aggregate cash surrender value of their 
policies; with this data we could not estimate the prevalence of 
business-owned life insurance or its value among institutions that did 
not report on their holdings.

Figure 1: Cash Surrender Value of Business-Owned Life Insurance 
Reported by Some Banks and Thrifts as of December 31, 2002: 

[See PDF for image] 

[End of figure] 

The federal bank regulators' thresholds for reporting business-owned 
life insurance earnings differed from the ones for reporting cash 
surrender value, so not all of the same institutions reported earnings 
as reported cash surrender value.[Footnote 18] We found that nearly 
one-fifth of banks and thrifts reported their 2002 annual earnings on 
the cash surrender value of business-owned life insurance. As of 
December 31, 2002, some 1,563 institutions reported $2.2 billion in 
such earnings.

SEC Has Not Specifically Required Reporting on the Policies, but Some 
Insurers Have Reported Sales: 

SEC officials told us that the agency has not specifically required 
businesses to report on their purchases or sales of business-owned life 
insurance because such data generally are not material to public 
companies. According to SEC officials, agency regulations do not 
specifically require public companies to disclose the value of their 
business-owned life insurance in the financial statements submitted to 
the agency. Similarly, SEC does not specifically require public 
companies that sell business-owned life insurance to report on those 
sales. Rather, in administering federal securities laws, SEC requires 
public companies to prepare their financial statements in accordance 
with generally accepted accounting principles, which would require them 
to disclose information about business-owned life insurance policies 
that is material--that is, according to SEC, information that an 
investor would consider important in deciding whether to buy or sell a 
security or in making a voting decision related to a security that the 
investor owns.[Footnote 19] According to SEC officials, however, 
following generally accepted accounting principles would rarely require 
holdings of and earnings from business-owned life insurance to be shown 
as separate line items because they are unlikely to be financially 
material to a company.

Although SEC does not explicitly require insurance companies to report 
information on the business-owned life insurance policies they have 
sold, some insurance companies have disclosed such information on their 
Forms 10-K. By reporting their revenue from business-owned life 
insurance premiums, life insurance companies show how significant sales 
of such policies are compared with total sales; they also provide an 
indication of the level of demand for business-owned life insurance. We 
reviewed the Forms 10-K of 32 life insurance companies that were among 
the 50 largest such companies ranked by assets. We found that nine 
insurers reported receiving, in aggregate, over $3 billion in total 
business-owned life insurance premiums in 2002 from new and, in some 
cases, previous sales. The amount of business-owned life insurance 
premiums received in 2002 ranged from 11 to 53 percent of each 
company's 2002 total life insurance premiums for the four companies 
that reported this information. In addition, three insurance companies 
reported the accumulated cash surrender value of business-owned life 
insurance policies they had previously sold as totaling about $28 
billion as of December 31, 2002.

Separate from reporting to SEC, some insurance companies have also 
reported business-owned life insurance sales in response to industry 
surveys. CAST Management Consultants, Inc., conducts research on 
business-owned life insurance and has reported on premiums paid on new 
policies. A life insurance industry association and life insurance 
companies cited CAST's surveys as the only currently available 
information on aggregate business-owned life insurance premiums. CAST 
estimated that in 2001, premiums from new sales of business-owned life 
insurance totaled $9.3 billion: $5.2 billion in bank-owned life 
insurance premiums and $4.1 billion in corporate-owned (excluding bank-
owned) life insurance premiums. CAST also estimated that in 2002, 
premiums from new sales of corporate-owned (excluding bank-owned) life 
insurance totaled $3.2 billion. CAST did not estimate bank-owned life 
insurance premiums for 2002. CAST's estimates were based on responses 
to a 2003 survey concerning corporate-owned life insurance premiums and 
a 2002 survey concerning bank-owned life insurance, increased by CAST 
adjustments. Each survey received responses from 20 life insurance 
companies, although not all of the same companies responded to both 
surveys.[Footnote 20] In addition, a representative of the A.M. Best 
insurer rating company said that the company collects information on 
business-owned life insurance, but does not currently report the data. 
A.M. Best reported aggregate premiums from business-owned life 
insurance for 1998 (the last year for which it reported data) as more 
than $10 billion for 20 large insurers.[Footnote 21] Because these 
surveys did not use statistical samples of insurers, the resulting 
estimates made from the limited number of respondents do not represent 
statistically valid estimates of all business-owned life insurance 
sales and, therefore, our interpretation of the resulting data is 
limited. The statistics from these surveys are meant to indicate only 
that some large insurance companies have had active sales in recent 
years and that the premiums in the aggregate are significant.

IRS Has Not Collected Information on the Policies, but Federal Revenue 
Estimators Have Estimated the Forgone Tax Revenues: 

IRS officials told us that the agency has not generally required 
businesses to report on the value of, earnings on, or death benefit 
income from business-owned life insurance policies. The officials noted 
that these amounts are not typically included in taxable income and 
that, therefore, the information is generally not needed. Businesses 
that are subject to the alternative minimum tax include income from 
death benefits and earnings from insurance when calculating the tax, 
but they are not required to list the insurance-related values on the 
alternative minimum tax form. Also, businesses that are required to 
complete Schedule M-1, Reconciliation of Income (Loss) per Books with 
Income per Return, as part of their Form 1120, U.S. Corporation Income 
Tax Return, would report earnings on business-owned life insurance as 
part of the income recorded on their books but not on the tax return. 
However, according to IRS officials, these earnings might not be 
identified as earnings from business-owned life insurance, as they are 
often lumped together with other adjustments.[Footnote 22]

Federal revenue estimators have estimated that the current tax 
treatment of earnings on the cash value of business-owned life 
insurance results in over a billion dollars in forgone tax revenues 
annually. In its "Estimates of Federal Tax Expenditures for Fiscal 
Years 2004-2008," prepared for congressional use in analyzing the 
federal budget, the Joint Committee on Taxation estimated that the 
forgone tax revenues resulting from the tax treatment of investment 
income on life insurance for corporations would total $7.3 billion for 
2004 through 2008. Similarly, OMB, in its fiscal year 2005 budget 
"Analytical Perspectives," reported Treasury's estimate of forgone tax 
revenues resulting from the tax treatment of life insurance as $13 
billion for 2004 through 2008. These estimates assumed policies would 
be held until the insureds' deaths, making the current tax-deferred 
earnings tax-free. The estimates did not reflect the forgone tax 
revenues on the additional income from death benefit payments in excess 
of the premiums paid and the accumulated tax-deferred earnings. 
Officials involved in preparing these estimates said that, lacking 
comprehensive data on the earnings on business-owned life insurance, 
they developed their estimates using available data on life insurance 
companies' investment income and assumptions about business-owned life 
insurance's share of the total life insurance market.

State Insurance Regulators Have Not Collected Data on the Prevalence of 
the Policies: 

State insurance regulators, concerned with state requirements, rates, 
and solvency issues, have collected extensive financial information 
from insurers through NAIC's standardized financial reporting forms, 
but not at the level of detail that would describe the prevalence of 
business-owned life insurance policies. State insurance regulators use 
insurers' financial statements to monitor individual companies' 
solvency. According to the four state regulators we contacted and NAIC, 
information on business-owned life insurance is not required or 
necessary for regulating solvency.[Footnote 23] Insurers' financial 
statements list the number of policies and premiums collected during 
the reporting period, but the amounts are broken out only by individual 
and group policies, not by whether businesses or individuals owned the 
policies.

Businesses May Purchase Business-Owned Life Insurance for Various 
Purposes but Generally Are Not Required to Use Policy Proceeds for 
Those Purposes: 

Under state laws that define insurable interest, businesses may 
purchase life insurance for various purposes, including for business 
continuation--that is, to ensure that a business can continue to 
operate when a key employee or owner dies. Historically, insurable 
interest reflected a family or business's dependency on an individual 
and the risk of financial loss in the event of that individual's death. 
Accordingly, a traditional use of business-owned life insurance is as 
key-person insurance, which is intended to ensure recovery of losses--
such as a loss of earnings or added hiring costs--in the event of the 
death of key employees. In addition, businesses may use business-owned 
life insurance as part of "buy-sell arrangements" that allow the 
surviving owners to use the death benefits to purchase a deceased 
owner's share of the business from the estate or heirs.

In the 1980s and 1990s, several states expanded their definitions of 
employers' insurable interest to permit purchases of broad-based 
business-owned life insurance in connection with employee compensation 
and benefit programs. Several of these states limit the aggregate 
amount of insurance coverage on nonmanagement employees to an amount 
commensurate with the business's employee benefit plan liabilities or 
require that insured employees be eligible to receive employee 
benefits. Information we obtained from officials of large banks and 
from our analysis of a sample of public companies' Forms 10-K indicates 
that firms have related their purchases of broad-based business-owned 
life insurance to various types of employee benefit costs, including 
health care for current or retired employees, life and disability 
insurance for current or retired employees, workers' compensation, 
qualified retirement plans--including defined benefit and defined 
contribution plans, such as 401(k) plans--and nonqualified retirement 
plans, such as supplemental executive retirement plans.[Footnote 24] 
Consistent with this expanded use of business-owned life insurance, 
NAIC has observed that many products sold by life insurers have evolved 
to become primarily investment products. Also, consulting firms that 
specialize in business-owned life insurance transactions, life 
insurance brokers, and industry experts have emphasized the potential 
use of broad-based business-owned life insurance as a profitable long-
term investment strategy to finance employee benefit costs and not 
merely as protection against financial losses that a business would 
incur in the event of the death of key persons.

According to bank regulators and life insurance industry 
representatives, when purchasing life insurance, businesses generally 
relate the amount of coverage they purchase on a group of employees to 
the value of their projected employee benefit costs. For example, a 
business might insure the lives of a group of employees such that the 
present value of expected cash flows to be received from the policies 
over time, net of premiums, would cover some portion or all of the 
present value of the business's employee benefit expenses over the same 
period of time.[Footnote 25] When calculating the expected future cash 
flows from the insurance, businesses would not generally assume 
policies will be surrendered if employees leave or retire because 
surrendering the policies would result in taxation and possibly 
surrender charges; rather, businesses would assume that they will hold 
the policies until the insured employees die.

Because businesses may hold business-owned life insurance policies for 
many years before receiving death benefit payments, businesses do not 
necessarily receive the cash flows from business-owned life insurance 
at the same time that they must pay their employee benefit expenses. 
According to insurance industry representatives, when businesses use 
the insurance in connection with health care benefits for retired 
employees, the death benefit proceeds are well timed for reimbursing 
the benefit costs, because retirees tend to incur their largest medical 
expenses in the last months of their lives. However, we found examples 
of businesses that said they used the insurance in connection with 
current employee benefit costs, such as active employee health care. In 
such cases, the timing of the death benefit payments would not 
necessarily correspond to the timing of employee benefit expenses 
because businesses must pay those expenses years before receiving death 
benefits on most insured employees.

Regardless of a business's reported purpose for purchasing business-
owned life insurance, the business generally does not have an 
obligation to restrict its use of the life insurance proceeds to these 
purposes. Although the expected income from broad-based business-owned 
life insurance policies over time might be commensurate with a 
business's expected employee benefit costs at the time of the insurance 
purchase, businesses are generally not required to use the proceeds 
from the policies to pay for employee benefits. Unless the policies 
were placed in a trust that restricted their use to employee benefit 
payments, the life insurance policies would be part of the unrestricted 
general assets of the business and, as such, could be used to pay any 
obligations of the business.[Footnote 26]

Limited Data Show That Some Businesses Use Life Insurance in a Variety 
of Ways: 

Of the federal and state regulators we contacted, only OTS has required 
the institutions it regulates to provide information that distinguishes 
among the uses of business-owned life insurance. Through the end of 
2003, OTS required the thrifts it supervises to report the value of 
their key-person policies and the value of business-owned life 
insurance policies purchased for other purposes as separate items, if 
the amounts met the reporting threshold. Of the $3.3 billion cash 
surrender value that 249 OTS-supervised thrifts reported owning as of 
December 31, 2002, about $400 million was for key-person insurance and 
$2.9 billion was for other business-owned life insurance. However, 
these amounts may not be representative of the proportions of key-
person and other business-owned life insurance that these thrifts held. 
OTS's disclosure threshold applied separately to each category, so that 
OTS-supervised thrifts could have been required to report on only one 
type of policy rather than the total value of their business-owned life 
insurance holdings. Beginning in 2004, OTS eliminated its reporting 
threshold so that all the thrifts it supervises are required to report 
the value of both their key-person and other business-owned life 
insurance policies. The new requirement will allow OTS to determine the 
cash surrender value of all key-person and other business-owned life 
insurance held by the institutions it supervises.

Although SEC did not specifically require them to do so, we found that 
some businesses included information on how they intended to use 
business-owned life insurance in the Forms 10-K they filed with SEC. We 
reviewed the Forms 10-K of 100 randomly selected Fortune 1000 public 
companies. Of these, 11 provided information on the intended use of 
their business-owned life insurance policies. All 11 businesses 
reported using these policies to provide deferred compensation or 
benefits for executives; 1 also reported using them to provide 
postretirement health care.[Footnote 27] For example, 1 of the 11 
businesses reported having a supplemental executive retirement plan 
financed by life insurance that had a cash surrender value of about $66 
million as of December 31, 2002. The amount of insurance coverage was 
designed to cover the full cost of the plan, which at that time was 
estimated to have a present value of about $69 million. Another 1 of 
the 11 businesses reported that it had purchased policies with a cash 
surrender value of about $161 million as of February 28, 2003, with the 
intention of using the policies' proceeds as a future financing source 
for postretirement medical benefits, deferred compensation, and 
supplemental retirement plan obligations aggregating $241.3 million. 
However, the business noted that the life insurance assets did not 
represent a committed financing source and that the business could 
redesignate them for another purpose at any time.

Some large businesses have also provided survey responses suggesting 
that some business-owned life insurance is used to finance executive 
benefit plans. Clark Consulting has conducted annual executive benefits 
surveys of Fortune 1000 corporations and reported on respondents' use 
of business-owned life insurance to informally fund nonqualified 
deferred compensation and supplemental executive retirement plans. 
Businesses informally fund such plans by planning to have assets 
available to pay for them, although the assets would not generally be 
protected in bankruptcy.[Footnote 28] From its 2003 survey, which had a 
22 percent response rate, Clark Consulting reported that 93 percent of 
the respondents offered nonqualified deferred compensation plans, 69 
percent of those with nonqualified deferred compensation plans 
informally funded them, and 55 percent of those that informally funded 
the plans used business-owned life insurance to do so.[Footnote 29] 
Similarly, 71 percent of the respondents offered supplemental executive 
retirement plans, 53 percent of those respondents informally funded the 
plans, and 61 percent of those that informally funded the plans used 
business-owned life insurance to do so. Because the survey did not use 
a statistical sample of businesses and may be subject to other sources 
of error such as nonresponse bias, respondents' answers cannot be 
projected to all Fortune 1000 companies or to all businesses in the 
United States.[Footnote 30] The statistics reported here are meant to 
indicate only that some large businesses are using life insurance in a 
variety of ways.

Regulators Have Applied Their Guidelines or Requirements and Have 
Generally Not Had Significant Regulatory Concerns about Business-Owned 
Life Insurance: 

Banks and thrifts are required to follow federal regulatory guidelines 
in purchasing business-owned life insurance. Officials from federal 
bank regulators that had examined some institutions' purchases told us 
that these purchases had not raised major supervisory concerns. SEC's 
general disclosure requirements apply to business-owned life insurance; 
the agency has not had specific investor-protection concerns about such 
policies. The Internal Revenue Code includes statutory requirements, 
and IRS has issued regulatory requirements related to the tax treatment 
of the insurance. IRS officials told us that the agency was studying 
potential concerns. States had differing laws concerning insurable 
interest and consent requirements for business-owned life insurance. 
The insurance regulators of the four states we contacted described 
limited oversight of business-owned life insurance sales, and the four 
state regulators and NAIC generally did not have concerns about the 
policies.

Federal Bank Regulators Examined Some Institutions' Purchases of 
Business-Owned Life Insurance and Have Not Had Major Supervisory 
Concerns: 

Federal bank regulators have issued guidelines for purchases of 
business-owned life insurance that they have used in overseeing banks 
and thrifts' holdings of such policies. The regulators' oversight, 
consistent with their missions, includes assessing the safety and 
soundness of supervised institutions, and regulatory officials said 
that the agencies generally have not had major supervisory concerns 
about banks and thrifts' business-owned life insurance holdings. They 
said that while business-owned life insurance carries some risk, 
policies that were purchased in accordance with their guidelines are 
generally not a major threat to an institution's safety and soundness. 
The regulators cited other types of activities--such as commercial real 
estate, specialized, and subprime lending--as generally raising more 
supervisory concerns than business-owned life insurance because of 
increased risk or volatility.

OCC and OTS guidelines describe the permissible uses of business-owned 
life insurance.[Footnote 31] According to Federal Reserve and FDIC 
officials, their agencies generally follow OCC's guidelines. The OCC 
and OTS guidelines state that banks and thrifts may purchase life 
insurance only for reasons incidental to banking, including insuring 
key persons and borrowers and purchasing insurance in connection with 
employee compensation and benefit plans. The guidelines require that, 
before purchasing policies, a bank or thrift's management conduct a 
prepurchase analysis that, among other things, determines the need for 
insurance and ensures that the amount of insurance purchased is not 
excessive in relation to the estimated obligation or risk. For example, 
the guidelines state that when purchasing life insurance on a group of 
employees, the institution may compare the aggregate obligation to the 
group (such as employee benefit costs) with the aggregate amount of 
insurance purchased.

The guidelines require that the prepurchase analysis determine the 
amount of insurance needed using "reasonable" financial and actuarial 
assumptions, such as those for the time period or the discount rate 
used to calculate the present value of expected employee benefit 
costs.[Footnote 32] However, the guidelines do not specify parameters 
for the assumptions, such as the discount rate or time period, to be 
used in the prepurchase analysis--parameters that affect the amount of 
insurance that can be purchased.[Footnote 33] OCC officials stated that 
specifying such parameters would have little or no effect because banks 
tend to purchase less insurance than they could justify based upon 
their expected employee benefit expenses, regardless of the assumptions 
used in prepurchase analyses. In addition to the requirements for 
determining the need for insurance, the guidelines state that banks and 
thrifts using business-owned life insurance for executive compensation 
should ensure that total compensation is not excessive--that is, 
unreasonable or disproportionate to the services performed, taking into 
account factors such as the financial condition of the institution and 
compensation practices at comparable institutions.

The OCC and OTS guidelines also require the bank or thrift's 
prepurchase analysis to consider the risks associated with business-
owned life insurance and to maintain effective senior management and 
board oversight of the purchases. In addition, the guidelines state 
that a bank or thrift should consider the size of its purchase of 
business-owned life insurance relative to the institution's capital and 
diversify risks associated with the policies. The OCC and OTS 
guidelines require banks and thrifts to document their decisions and 
continue to monitor, on an ongoing basis, the financial condition of 
the insurance companies that carry their policies. For example, the 
guidelines state that institutions should review an insurance company's 
ratings and conduct further independent financial analysis, with the 
depth and frequency of such analysis determined by the relative size 
and complexity of the transaction.

OCC officials explained that the agency's guidelines do not require 
institutions to continue to compare their projected employee benefit 
costs with the projected cash flows from the insurance after purchasing 
the policies. However, purchases of additional insurance would require 
a prepurchase analysis, so that institutions would be required to 
update their comparisons at such times. Officials at three large banks 
said that their banks had not compared the projected employee benefit 
costs and projected insurance cash flows after purchasing the 
insurance. Officials at a fourth large bank said their bank had updated 
the comparison annually in conjunction with additional insurance 
purchases in recent years.

Federal bank regulators told us that their risk-based examination 
programs are designed to target aspects of banks and thrifts' purchases 
of business-owned life insurance that would raise supervisory concerns 
about institutions' safety and soundness. They specifically identified 
the credit and liquidity risks associated with business-owned life 
insurance as concerns that could warrant attention during an 
examination. Credit risk arises from the potential failure of an 
insurance carrier that might then be unable to pay death benefits or 
return the cash surrender value of policies upon request. OCC and 
Federal Reserve officials said they were less concerned about credit 
risk when it was diversified--for example, when institutions held 
policies with several highly rated insurers. Liquidity risk arises from 
the long-term nature of life insurance and the cost to the bank or 
thrift of surrendering policies.

OCC officials emphasized that other risks associated with business-
owned life insurance could also raise supervisory concerns, 
particularly among institutions with relatively large holdings. 
Specifically, OCC officials said that the potential risk to 
institutions' reputations could be of concern as a result of negative 
perceptions of their holding the policies. For example, the officials 
noted that under California's new law, businesses must disclose to 
insured employees the existence and face amount of insurance policies 
purchased on their lives by the end of March 2004, which could 
negatively affect the businesses' reputations if employees were unaware 
that the policies existed. The officials also cited potential concerns 
about transaction risk, which arises from an institution not fully 
understanding or properly implementing a transaction. For example, if 
an institution did not comply with applicable insurable interest laws 
in purchasing a policy, it may not be able to collect the death 
benefits on the policy.[Footnote 34] Finally, OCC and Federal Reserve 
officials cited potential concerns about tax risk--the risk that 
Congress could change the tax treatment of business-owned life 
insurance. If any such changes were applied to previously purchased 
policies, banks might not receive the returns on the policies that they 
had expected, which could, in turn, raise supervisory concerns with 
respect to certain institutions.[Footnote 35]

The federal bank regulators explained that they determined whether to 
include business-owned life insurance in the scope of an examination 
based not only on their preliminary assessment of the level of risk 
associated with business-owned life insurance but also on the size of 
an institution's holdings relative to capital. The regulators' 
examination procedures, in general, direct examiners to identify 
concentrations of credit--instances where the institution's exposure to 
a creditor or, in some cases, a group of creditors (such as an 
insurance company or companies from which the institution has purchased 
policies) exceeds 25 percent of the regulator's measure of the 
institution's capital. All of the regulators said that, if the cash 
surrender value of a bank or thrift's policies exceeded this threshold, 
they would consider whether further supervisory review of these 
holdings was warranted. Such a review would help to ensure that the 
institution was not unduly exposed to credit or liquidity risk and that 
it was complying with the guidelines on business-owned life 
insurance.[Footnote 36] OCC officials also said that the difficulty of 
quantifying the reputation, transaction, and tax risks associated with 
the policies underscored the importance of examiners considering 
whether institutions had overly concentrated holdings of business-owned 
life insurance.

As of December 31, 2002, 467 banks and thrifts reported business-owned 
life insurance holdings in excess of 25 percent of their tier 1 
capital.[Footnote 37] We asked the bank regulators to explain their 
oversight of 58 institutions with the largest concentrations, all in 
excess of 40 percent of tier 1 capital. Bank regulatory officials said 
that their agencies were monitoring these institutions' levels of 
holdings through reviews of quarterly financial reports and had 
conducted reviews of the holdings as part of their examinations at many 
of the institutions. Officials from each regulator told us their 
agencies had concluded that major supervisory concerns did not exist 
about the amount of insurance the institutions owned, although the 
Federal Reserve and OCC had cited the need for some institutions to 
improve their oversight or internal controls related to the policies.

Specifically, Federal Reserve officials said that the agency had 
reviewed business-owned life insurance holdings as part of its 
examinations of the nine Federal Reserve-supervised banks that we 
identified (table 1). Federal Reserve officials said that the agency's 
examinations did not raise concerns about the nine banks' total 
holdings of business-owned life insurance. However, the officials said 
that the Federal Reserve had made recommendations to four of the banks, 
including that they conduct more diligent prepurchase analyses, 
communicate more information to board members, enhance internal 
controls, and conduct quarterly reviews of insurance carriers' 
financial condition. Based on a review of examination summary reports, 
FDIC officials said that FDIC had criticized the level of business-
owned life insurance at only 1 of the 32 FDIC-supervised institutions 
we identified; the officials said that the summaries might only note 
the results of a review of business-owned life insurance if examiners 
identified problems, so it was unclear how many of the other 
institutions' holdings had been reviewed. OCC officials told us that 
OCC did not have safety and soundness concerns about the amount of 
holdings at any of the 15 OCC-supervised banks we identified. The 
officials distinguished between community banks (4 of the 15 we 
identified) and large banks (11 of the 15 we identified), noting that 
OCC's primary supervisory concern has been with the effectiveness of 
community banks' ongoing oversight of their business-owned life 
insurance.[Footnote 38] They said that OCC had reviewed the holdings of 
at least three of the community banks we identified and had cited the 
need for one of these banks to improve ongoing risk management of the 
policies. In contrast, the OCC officials said that large banks 
generally have sophisticated risk management systems and manage their 
insurance investments well. Although the officials did not report how 
many of the large banks' business-owned life insurance holdings had 
been reviewed during examinations, they said that these banks sometimes 
approach OCC examiners before making new insurance purchases and that, 
in this respect, OCC monitors some banks' business-owned life insurance 
programs on an ongoing basis. OTS officials told us that OTS had 
examined both of the thrifts we identified and did not have supervisory 
concerns about their current holdings or policy oversight.

Table 1: Banks and Thrifts with the Largest Concentrations of Business-
Owned Life Insurance as of December 31, 2002, and Issues Cited in 
Regulators' Most Recent Examinations: 

Regulator: The Federal Reserve; 
Institutions with business-owned life insurance holdings greater 
than 40 percent of tier 1 capital: 9; 
Institutions whose most recent examination cited concerns or 
made recommendations related to business-owned life insurance[A]: 4.

Regulator: FDIC[B]; 
Institutions with business-owned life insurance holdings greater 
than 40 percent of tier 1 capital: 32; 
Institutions whose most recent examination cited concerns or 
made recommendations related to business-owned life insurance[A]: 1.

Regulator: OCC[B, C]; 
Institutions with business-owned life insurance holdings greater 
than 40 percent of tier 1 capital: 15; 
Institutions whose most recent examination cited concerns or 
made recommendations related to business-owned life insurance[A]: 1.

Regulator: OTS; 
Institutions with business-owned life insurance holdings greater 
than 40 percent of tier 1 capital: 2; 
Institutions whose most recent examination cited concerns or 
made recommendations related to business-owned life insurance[A]: 0.

Regulator: Total; 
Institutions with business-owned life insurance holdings greater 
than 40 percent of tier 1 capital: 58; 
Institutions whose most recent examination cited concerns or 
made recommendations related to business-owned life insurance[A]: 6. 

Sources: GAO analysis of FDIC and OTS data for the number of 
institutions with largest concentrations and all four federal bank 
regulators for the number of examinations that cited concerns.

[A] Examinations were conducted through September 2003, except that the 
Federal Reserve examinations were conducted through November 2003.

[B] FDIC and OCC officials did not report whether all examinations had 
included a review of business-owned life insurance holdings.

[C] Of the 15 OCC-supervised banks, 4 were community banks and 11 were 
large banks. OCC generally defines community banks as banks with less 
than $1 billion in total assets. OCC characterizes banks in its Large 
Bank Supervision program as the largest and most complex national 
(federally chartered) banks. One examination of a community bank cited 
a concern related to business-owned life insurance. The number of large 
bank examinations that cited concerns was not available.

[End of table]

SEC Has Applied Its Disclosure Requirements and Has Not Had Investor-
Protection Concerns about Business-Owned Life Insurance: 

SEC officials said that the agency's regulations for public companies 
do not specifically address business-owned life insurance; rather, SEC 
has relied on its broadly applicable disclosure requirements to 
identify any investor protection concerns. As discussed, SEC, whose 
mission is to protect investors and maintain the integrity of the 
securities markets, requires public companies to disclose material 
financial and other information so that investors can make informed 
decisions. SEC officials said that business-owned life insurance is 
unlikely to be a material item. However, they added that the agency 
would have an oversight concern if it became aware of a public 
company's failure to disclose material purchases of or earnings from 
business-owned life insurance or if problems developed in accounting 
for these policies. For example, a senior SEC official said that SEC 
might become aware of a failure to disclose material information if it 
was examining a poorly performing business and found that its 
management had not disclosed that the business was using business-owned 
life insurance to sustain itself. SEC officials said that, to date, no 
such problems have arisen, and the agency has not had investor-
protection concerns about public companies holding business-owned life 
insurance.

IRS Has Issued Requirements for the Tax Treatment of Policies and Is 
Studying Potential Concerns: 

IRS, whose mission includes administering the tax law, had some 
requirements related to the tax treatment of business-owned life 
insurance. The Internal Revenue Code defines life insurance for tax 
purposes, establishes its tax treatment, and limits the deductibility 
of interest on loans taken against policies. In addition, in September 
2003, IRS and Treasury issued final regulations on the tax treatment of 
split-dollar life insurance policies--policies in which the employer 
and employee generally share costs and benefits as part of an executive 
compensation arrangement.[Footnote 39] Because none of IRS's prior 
rulings regarding the taxation of split-dollar arrangements had 
directly addressed the types of arrangements that have been widely used 
in recent years, IRS and Treasury issued interim guidance in 2001 and 
2002 that culminated in the final regulations. Under the final 
regulations, corporations cannot provide tax-free compensation to 
executives using split-dollar policies, and a business's premium 
payments are treated as loans to an executive who owns the policy. If 
the employer owns the policy, the regulations treat the executive's 
interest in the policy's cash value and current life insurance 
protection as taxable economic benefits to the executive.

IRS officials said that the agency was studying some possible remaining 
issues related to business-owned life insurance that is held by highly 
leveraged financial institutions such as banks and thrifts. Various 
sources have reported that the limitation on the deductibility of 
policy loan interest adopted in 1996 curtailed new sales of leveraged 
business-owned life insurance policies. However, IRS officials 
expressed concern that this limitation had not eliminated the tax 
arbitrage opportunities available through business-owned life 
insurance and that, for this reason, highly leveraged financial 
institutions such as banks and thrifts might be borrowing to indirectly 
finance their policies. Borrowing to indirectly finance policies can 
occur when businesses pay the premiums on life insurance policies by 
increasing debt that is not directly linked to the policies and then 
deducting the interest they pay on that debt from their taxable 
income.[Footnote 40] Although the Internal Revenue Code limits the 
amount of deductible interest that is linked directly to business-owned 
life insurance, establishing such a link is difficult because 
businesses may incur debt for many purposes. Borrowing to indirectly 
finance policies presents a tax advantage to businesses because they 
receive tax-deferred inside buildup from life insurance policies 
indirectly financed with debt on which the interest expense is tax-
deductible.

In addition, IRS officials said that the agency is concerned that banks 
may be using separate account policies to maintain excessive control 
over investments, which is inconsistent with the Internal Revenue Code 
treatment of life insurance. Internal Revenue Code provisions were 
intended to ensure that the primary motivation in purchasing life 
insurance would be the traditional economic protection provided by such 
policies, while discouraging the use of tax-preferred life insurance as 
primarily an investment vehicle. In separate account life insurance, an 
asset account is maintained independently from the insurer's general 
account. Compared with a general account policy, which offers either a 
guaranteed rate of return or a rate that varies at the insurer's 
discretion, a separate account policy permits the policy owner latitude 
in the choice of investments, particularly equities.[Footnote 41] 
Businesses may also purchase private placement policies, or separate 
account policies that allow policyholders to negotiate key terms of the 
policies--such as who will act as investment adviser--with the 
insurance company. These policies also offer investment alternatives 
that traditional separate account policies do not, including privately 
traded investments in start-up businesses and private venture capital 
funds. Based on IRS revenue rulings, the agency decides on a case-by-
case basis whether the purchaser of a policy has excessive control over 
separate account assets. These revenue rulings have identified factors 
to consider, such as whether the purchaser directs the account to make 
a particular investment, sells or purchases assets in the account, or 
communicates with the investment adviser about the selection or quality 
of specific investments, and whether the account's investment 
strategies are broad enough to prevent the purchaser from making 
particular investment decisions by investing in a subaccount. IRS 
officials said that the agency was studying its concerns about 
indirectly financing policies through borrowing and about using 
separate account policies at five banks that IRS had identified through 
routine examinations. The officials said that IRS had not taken action 
against any of these banks.

State Laws Differ, and Four States with Limited Oversight of Business-
Owned Life Insurance Have Not Had Significant Concerns: 

Although NAIC has developed model legislative guidelines for business-
owned life insurance, the states are not required to follow them. NAIC 
initially developed model guidelines for business-owned life insurance 
in 1992 and revised them in 2002 (fig. 2). The 1992 guidelines 
suggested that states consider including in their laws provisions that 
recognize employers' insurable interest in employees, including 
nonmanagement employees who could expect to receive benefits. The 2002 
revision added a recommendation for states to consider requiring 
employee consent to be insured and prohibiting employers from 
retaliating against employees who refused to grant their consent. 
However, states have passed a variety of laws regulating insurable 
interest and consent requirements for business-owned life insurance 
(see app. II).

Figure 2: NAIC Model Guidelines on Business-Owned Life Insurance, 
December 2002 Revision: 

[See PDF for image]

[End of figure]

While some states have followed NAIC's guidelines, state consent 
requirements still differ. Since NAIC revised its guidelines in 2002, 
several states have passed legislation requiring employers to obtain 
employees' written consent before taking insurance on their lives 
(others already had such requirements). Also, while some states have 
consent provisions that specifically address business-owned life 
insurance, in some states consent provisions apply to life insurance 
policies in general. Compendiums of state laws prepared by NAIC and the 
American Council of Life Insurers and our review of selected state 
statutes indicated that, as of December 31, 2003, 35 states had laws 
requiring written consent (either for life insurance in general or 
specifically for business-owned life insurance), and another 4 states 
had consent requirements that were satisfied if an employee did not 
object to a notice of the employer's intent to purchase a policy. 
However, at least 18 of these states exempted group life insurance 
policies from consent requirements. Additionally, 1 state required 
employers to notify employees when purchasing business-owned life 
insurance, but did not require employee consent.

We spoke with insurance department officials from California, Illinois, 
New York, and Texas. The insurable interest and consent provisions of 
the four states differed, but all allowed some purchases of business-
owned life insurance and three required some form of consent; two 
required the amount of coverage to be related to employee benefit costs 
(table 2). The insurance department officials told us that they conduct 
limited oversight to test compliance with their states' insurable 
interest and consent laws. They said that their primary method of 
addressing this issue was through policy form reviews, or assessments 
of the proposed forms that insurers would provide to policyholders when 
selling policies in their states. For example, New York insurance 
department officials said that department officials review policy forms 
for compliance with the state's requirements and that, for policies on 
non-key employees, the form must describe insured employees' right to 
discontinue the coverage on their lives and must note the statutory 
limitations on the coverage amounts. Also, a submittal letter that 
insurers must provide to the department along with the policy form must 
explain how the insurer will verify that New York's insurable interest 
requirements are satisfied and, for non-key employees, whether the 
employer or the insurer will prepare the required employee consent 
notices. In Illinois, insurance department officials said that they 
review policy forms to ensure that the forms include the state's 
statutory requirements related to business-owned life insurance, but 
the forms need not detail procedures for obtaining consent or 
determining appropriate amounts of coverage.

Table 2: State Insurable Interest and Consent Laws Applicable to 
Business-Owned Life Insurance in Selected States as of December 31, 
2003: 

State: California; 
Employer and employer-sponsored trusts' insurable interest in current 
and former employees: 
* An employer may insure the lives of directors and officers or 
administrative, executive, or professional employees exempt from 
California overtime compensation requirements; 
* An employer-sponsored trust providing employee or retiree benefits 
may insure the lives of those for whom benefits are to be provided; 
Requirements for notifying or obtaining consent of insured employees: 
* Employee written consent is required; 
* Policies purchased on nonexempt employees prior to January 1, 2004, 
will be void no later than January 1, 2010, unless the employer meets 
certain exceptions, including disclosing in writing information about 
such policies to insured employees.

State: Illinois; 
Employer and employer-sponsored trusts' insurable interest in current 
and former employees: 
* An employer or employer- sponsored trust may insure the lives of 
directors and officers and management, nonmanagement, and retired 
employees; 
* Coverage of nonmanagement and retired employees is limited to an 
amount commensurate with the employer's projected unfunded employee 
benefit plan liabilities for nonmanagement and retired employees; 
Requirements for notifying or obtaining consent of insured employees: 
* The consent requirement is satisfied if an employee does not reject 
coverage within 30 days of receiving written notice of the coverage.

State: New York; 
Employer and employer-sponsored trusts' insurable interest in current 
and former employees: 
* Employers may insure the lives of employees in whom the employer has 
a lawful and substantial economic interest in having the life of the 
insured person continue; 
* Employers may insure the lives of employees or retirees who 
participate in or are eligible to participate in an employee benefit 
plan upon satisfaction of eligibility criteria. In such cases, the 
total amount of coverage cannot exceed employee benefit costs incurred 
since date of coverage plus projected future employee benefit costs; 
Requirements for notifying or obtaining consent of insured employees: 
For all employees: 
* Employee notification and written consent are required; 
For employees insured under the insurable interest provision related to 
participation in an employee benefit plan: 
* The notification must state that the insured can have coverage 
discontinued at any time; 
* When employment terminates, employees must receive notice that they 
can have coverage discontinued. Notification is not required if the 
employee has a right to receive benefits being financed by the 
insurance coverage.

State: Texas; 
Employer and employer-sponsored trusts' insurable interest in current 
and former employees: 
* Employers may purchase a group life policy to insure the lives of 
officers, directors, employees, and retired employees in an amount 
necessary to provide funds to offset liabilities related to fringe 
benefits; 
* An individual may consent in writing to the purchase of or 
application for an individual or group life insurance policy and 
designation of any entity as beneficiary of the policy or owner of the 
policy; 
Requirements for notifying or obtaining consent of insured employees: 
* Employee consent is not required for policies purchased to offset 
liabilities related to fringe benefits.[A]; 
* Any individual may consent to a business's purchase of and 
designation as beneficiary of a policy on the individual's life. 

Source: GAO analysis of state statutes.

[A] The Texas Department of Insurance noted that, notwithstanding the 
statute's language, based on its legislative history, the department 
has consistently maintained that employee consent is required.

[End of table]

NAIC staff said that state insurance regulators generally have the 
authority to review policies currently in force for compliance with any 
state requirements. But the officials from the four states we contacted 
said that their departments had not routinely verified that employees 
covered by the policies had consented to being insured or, where 
applicable, tested whether coverage amounts were appropriate.[Footnote 
42] An official from California's insurance department said that the 
department did not routinely review business-owned life insurance 
sales, but added that the department had recently received complaints 
about at least one insurer and multiple employers. The official noted 
that the department was investigating these complaints, including 
reviewing documentation for the policies in question, and that any 
policies that were found to violate state provisions could be voided. 
Officials in Illinois, New York, and Texas said that a pattern of 
consumer complaints about business-owned life insurance would cause 
their departments to investigate the insurance sales during market 
conduct examinations of insurers or refer the matter to their legal 
division for an enforcement action.[Footnote 43] However, the officials 
said that generally they had not received complaints about business-
owned life insurance. In addition, NAIC staff told us that the 
organization maintains a national database of consumer complaints made 
to state insurance regulators and that business-owned life insurance 
had not been a significant source of complaints. As a result, NAIC had 
not developed a separate category for tracking such complaints. 
However, relying on complaints may not be an effective means of 
identifying violations of state law related to business-owned life 
insurance, because employees who are not aware of their state's 
notification and consent requirements and whose employers have not 
provided the required notification or obtained the required consent, 
would not know that they have a basis for complaining to their state 
insurance regulators.

More Comprehensive Data Could Be Useful to Congress; Costs Would Be 
Incurred in Obtaining the Data: 

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 this insurance. 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 
business-owned life insurance generally have treated the policies 
differently--they have applied primarily to broad-based policies. Data 
on business continuation versus broad-based insurance would be useful 
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 income received from the death benefit payments on business 
continuation and broad-based policies--data that could help Congress 
better understand the potential effect of changes to the tax treatment 
of these policies on tax revenues.[Footnote 44]

Other data on the prevalence and use of business-owned life insurance, 
further broken down or identified by business continuation and broad-
based policies, might also be helpful to Congress in evaluating the 
potential effects of legislative proposals on businesses, their 
employees, and insurance companies. The cash surrender value of 
business-owned life insurance policies could help assess whether the 
value of assets invested in such policies is consistent with the 
behavior that Congress wishes to encourage through tax preferences. The 
annual premiums paid on new policies could be used to determine the 
demand for business-owned life insurance and the potential effect of 
proposed legislative changes on the market for business-owned life 
insurance. The number of businesses that hold business-owned life 
insurance policies could provide information on how many businesses 
might be affected by proposed legislative changes. Additional 
information on the size, type, and geographic location of businesses 
holding the insurance could be used to characterize the businesses that 
might be affected. Finally, although obtaining an unduplicated count of 
the total number of people covered by business-owned life insurance 
might be impractical, data on the number of each business's employees 
insured under such policies could be used, for example, to determine 
the average number or percentage of employees covered by businesses 
that reported owning policies.[Footnote 45] Although more costly to 
obtain, data collected over multiple periods could help identify trends 
that might provide additional insights into the effects of legislative 
proposals.

Businesses that hold business-owned life insurance or insurance 
companies that sold the policies could provide the data for Congress's 
use, but both types of entities would incur administrative costs in 
extracting the required information from their records and summarizing 
it. We did not discuss these costs with businesses, however, we expect 
that they would maintain financial records and insurance policy 
statements from which the required data could be extracted. Also, some 
businesses already aggregate this information for use in completing 
their income taxes or Forms 10-K filed with IRS and SEC, respectively, 
suggesting that some businesses would not have difficulty providing the 
data. Nonetheless, 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 we did not 
independently determine the costs that insurers would incur in 
collecting the data, officials from several insurance companies told us 
that extensive effort would be required to identify policies as 
business-owned life insurance, as opposed to policies in which a 
business is the owner but not the beneficiary, and extract the data 
that we identified as being useful for decision making. These officials 
also told us that it would be difficult for them to distinguish between 
business continuation and broad-based policies. Consistent with these 
concerns, three life insurance industry trade associations recently 
supported proposed legislation that would require businesses that hold 
business-owned life insurance to report some information on their 
policies to IRS. While businesses might be able to provide data on the 
policies they own more easily than insurance companies could provide 
information on the policies they have sold, requiring insurance 
companies to report would substantially limit the number of reporting 
entities. About 1,200 companies sell life insurance, according to NAIC, 
while many more businesses purchase it.

The organization collecting, analyzing, and reporting the data would 
also incur costs. SEC, Treasury, and NAIC are candidates for this role, 
because each already collects financial information from businesses 
that purchase business-owned life insurance, insurers, or both. One of 
the agencies or NAIC could collect the data by modifying existing 
reporting instruments, such as the SEC Form 10-K, applicable IRS tax 
forms, or insurance company annual reporting forms. Alternatively, the 
agencies or NAIC could collect the data through a survey. We did not 
determine the resources that would be required for the agencies or NAIC 
to modify their existing reporting instruments or conduct a survey. 
Beyond the costs, other factors could be considered in selecting one of 
these or another organization to lead the effort. Either SEC or 
Treasury might be able to combine data on business-owned life insurance 
with other data that businesses already report to them, such as 
business size, type, or location. SEC currently collects information 
only from publicly traded companies, whereas Treasury, through IRS, 
requires all businesses, including life insurance companies, to file 
tax returns. While taxpayer information is confidential and would not 
be publicly available except in the aggregate, Congress would likely 
need only aggregate information. Collecting business-owned life 
insurance data through NAIC, a membership organization of chief state 
insurance regulators, assumes the data would be collected from 
insurance companies and would involve the organization's voluntary 
cooperation.

Conclusions: 

The use of life insurance, which receives tax-favored treatment, has 
expanded from its traditional coverage of a family's principal wage 
earners and a business's key employees to broad-based coverage of a 
business's other employees. Although recent legislative proposals have 
sought to limit the tax-favored treatment of business-owned life 
insurance, comprehensive data on the prevalence and use of such 
insurance have not been available for use in assessing the impact of 
these proposed changes. Should Congress conclude that such data would 
facilitate its ongoing deliberations on the appropriate tax treatment 
of business-owned life insurance, decisions would be required on what 
data are needed, who should provide the data (insurance buyers or 
sellers), who should collect the data (SEC, Treasury, NAIC, or another 
organization), how to collect the data (additional reporting or a 
survey), what it would cost to collect the data, and whether the 
benefits of collecting additional data warrant the cost of doing so. 
Important data for understanding the tax and other implications of 
changes in the tax-favored treatment of business-owned life insurance 
would be the amount of tax-free income received from death benefit 
payments, reported separately for business continuation and broad-based 
policies. Additional data of value could include the cash surrender 
value of policies, the annual dollar amount of premiums paid on new 
policies, the number of businesses that hold business-owned life 
insurance, the characteristics of businesses that own the policies, and 
the number of employees insured under such policies.

Matter for Congressional Consideration: 

If Congress decides that it needs more comprehensive data on the 
prevalence and use of business-owned life insurance, such as the tax-
free income from death benefit payments and/or other select data 
reported separately for business continuation and broad-based policies, 
Congress could, among other alternatives, obtain the data by: 

* assigning responsibility to SEC or Treasury to (1) require purchasers 
of business-owned life insurance or insurers to report the data in 
their financial statements or federal tax returns, respectively, or (2) 
conduct a survey of the purchasers or insurers to obtain the data; or: 

* encouraging NAIC to (1) require insurers to report the data in the 
annual reports they file with NAIC or (2) conduct a survey of insurers 
to obtain the data.

Agency Comments and Our Evaluation: 

We 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, but together with SEC expressed reservations about the 
matter for congressional consideration. Both agencies were reluctant to 
have a potential role in collecting data on business-owned life 
insurance, stating that having such a role would not be necessary to 
fulfill their regulatory missions. NAIC did not express such 
reservations, but said that it would like to evaluate the need for and 
utility of the data and favored using a survey as an initial step in 
the data gathering process. In addition, we received technical comments 
from Treasury, the federal bank regulators, SEC, and NAIC that we 
incorporated into the report where appropriate.

In addressing their concern about collecting the data described in our 
matter for congressional consideration, SEC and Treasury commented that 
because they do not need the data to fulfill their regulatory missions, 
they do not believe it would be appropriate for them to collect the 
data. Specifically, SEC expressed concern about collecting data for 
purposes other than protecting investors. Similarly, Treasury expressed 
concern about collecting information not directly needed to calculate 
tax liabilities or enhance IRS's ability to audit tax returns. However, 
as discussed in our report, Treasury provides OMB the estimate of 
forgone tax revenues resulting from the tax treatment of life 
insurance, and OMB reports this estimate in its budget documents. As we 
also report, this estimate is not complete because it does not reflect 
the forgone tax revenues on the additional income from death benefit 
payments in excess of the premiums paid and the accumulated tax-
deferred earnings. Accordingly, Treasury might find that gathering 
additional data would allow the agency to provide OMB with a more 
complete and accurate estimate. NAIC reiterated that collecting the 
data described in our matter for congressional consideration would go 
beyond what is needed to support states' regulation of insurers' 
solvency. But NAIC did not explicitly express reservations about being 
charged with collecting the data should Congress request that it do so. 
We recognized in the report that none of the potential candidates that 
we identified for collecting additional data on business-owned life 
insurance needs the data to fulfill its missions and that the data 
would be used primarily for making tax policy decisions rather than for 
providing regulatory oversight. As discussed in the report, if Congress 
decides that it needs more comprehensive data on business-owned life 
insurance, among its alternatives would be to turn to SEC, Treasury, 
NAIC, or another entity to collect the data.

Addressing the issue of how to collect the data, Treasury commented 
that it would be costly to design and distribute a survey, that 
response rates might be low without a penalty for noncompliance, and 
that Treasury would not be the best candidate to conduct a survey 
because it is not a "statistical gathering agency." Regarding the 
latter, Treasury said that a survey of insurance products could be 
better performed by other organizations or agencies. As discussed in 
the report, we agree that collecting the required data would involve an 
investment of resources, whether it is done through a survey or via 
existing reporting mechanisms. We also agree that obtaining an adequate 
survey response rate presents a challenge. However, according to 
professional literature, congressional action making the survey 
mandatory should significantly improve the response rate.[Footnote 46] 
Also, according to this literature, government surveys that have 
employed response improvement methods continue to achieve acceptable 
response rates. Additionally, the surveyed entities may be more likely 
to respond if they believed that doing so would be in their interest. 
For example, they might conclude that congressional action would be 
more favorable to them if it was based on more complete data. Further, 
although Treasury is not a statistical gathering agency, it has chosen 
to conduct surveys to provide required information to Congress, as well 
as for other purposes, such as to study the growth of investment in 
foreign securities. Treasury has also contracted out surveys, as have 
other federal agencies. NAIC also commented that collecting the data 
could entail significant costs. NAIC said that it would like to 
evaluate the need for and utility of collecting the data and suggested 
that an initial study sampling the data described in our matter for 
congressional consideration might be a cost-effective way to assess the 
need for broader data collection. We agree that such a strategy could 
be one way of approaching the data collection effort.

: 

We are sending copies of this report to the Chairmen of the Senate 
Committee on Finance, House Committee on Financial Services, Joint 
Committee on Taxation, and other interested congressional committees. 
We will send copies to the Chairman of the Board of Governors of the 
Federal Reserve, Secretary of the Treasury, Chairman of FDIC, 
Commissioner of Internal Revenue, Comptroller of the Currency, Director 
of OMB, Director of OTS, Chairman of SEC, Executive Vice President of 
NAIC, and other interested parties. We also will make copies available 
to others upon request. In addition, the report will be available at no 
charge on the GAO Web site at [Hyperlink, http: //www.gao.gov]. 

Signed by: 

If you have any further questions, please call me at (202) 512-8678, 
[Hyperlink, dagostinod@gao.gov], or Cecile Trop at (312) 220-7600, 
[Hyperlink, tropc@gao.gov]. Additional GAO contacts and staff 
acknowledgments are listed in appendix VII.

Signed by: 

Davi M. D'Agostino: 
Director, Financial Markets and Community Investment: 

[End of section]

Appendixes: 

[End of section]

Appendix I: Scope and Methodology: 

To obtain information on the prevalence and use of business-owned life 
insurance, we analyzed the quarterly financial reports--the Call Report 
and Thrift Financial Report--that banks and thrifts filed with their 
respective regulators. We obtained the data from the Federal Deposit 
Insurance Corporation (FDIC), which compiles Call Report and Thrift 
Financial Report data collected by the Board of Governors of the 
Federal Reserve System (the Federal Reserve), FDIC, the Office of the 
Comptroller of the Currency (OCC), and the Office of Thrift Supervision 
(OTS). We also obtained additional Thrift Financial Report data from 
OTS. Because regulators only began collecting the information in a 
consistent format at the beginning of calendar year 2001, our analysis 
covered the eight quarters ending March 31, 2001, through December 31, 
2002. Although we did not independently verify the accuracy of the 
data, we assessed its reliability by discussing the data system with 
bank regulatory officials and examining the data for missing or 
unreasonable values. We concluded that the data were reliable for 
purposes of this report.

To obtain further information on the prevalence and use of business-
owned life insurance, we reviewed the most recent annual Form 10-K 
financial reports that publicly traded companies had filed with the 
Securities and Exchange Commission (SEC) between January 2002 and 
September 2003. To identify information about insurance companies' 
sales of such policies, we reviewed the Forms 10-K of 32 life insurance 
companies that were among the 50 largest such companies ranked by 
assets. We also searched for references on how businesses used such 
policies in the Forms 10-K that a random sample of 100 Fortune 1000 
public companies filed with SEC. Although the examples that we 
identified were not necessarily representative of all businesses that 
own these policies, they illustrated some uses of business-owned life 
insurance. We also reviewed industry literature, including studies by 
life insurance industry consultants and brokers, and interviewed 
experts to identify other surveys related to business-owned life 
insurance sales and use. We reviewed surveys conducted by CAST 
Management Consultants, Inc. that estimated 2001 and 2002 business-
owned life insurance premiums and by Clark Consulting that reported on 
businesses' use of business-owned life insurance in 2003. We did not 
fully assess the quality of these surveys, but we determined that 
despite some limitations, the surveys illustrated the amount of some 
recent sales and some businesses' uses of business-owned life 
insurance.

We also obtained information concerning the prevalence and use of 
business-owned life insurance from officials of relevant federal 
regulatory agencies: four federal bank regulators (the Federal Reserve, 
FDIC, OCC, and OTS), SEC, and the Internal Revenue Service (IRS). In 
addition, we reviewed the Joint Committee on Taxation's and the Office 
of Management and Budget's reported estimates of forgone tax revenues 
attributable to business-owned life insurance and obtained information 
from officials of both entities about the development of these 
estimates. We also obtained information about the prevalence and use of 
business-owned life insurance from the National Association of 
Insurance Commissioners (NAIC), two life insurance trade associations 
(the American Council of Life Insurers and the Association for Advanced 
Life Underwriting), and four large banks that held business-owned life 
insurance.

In an effort to better describe the prevalence and use of business-
owned life insurance, we also considered the possibility of conducting 
a survey of life insurance companies, but did not do so. Although 
representatives of six life insurance companies cooperated in a survey 
pretest, and American Council of Life Insurers representatives said 
that they would encourage their members to participate in the survey 
itself, the results of the pretest led us to conclude that we would not 
be able to obtain sufficiently reliable data to warrant conducting the 
survey. The insurance company representatives told us that their 
companies do not have a business need to maintain the comprehensive 
data on business-owned life insurance that we needed for the survey. We 
did not verify the accuracy of these statements. Still, for the reasons 
the insurance company representatives cited, we were uncertain whether 
we would receive an acceptable response rate to a survey. Also, 
insurance companies' requests for anonymity would have precluded us 
from determining the percentage of total life insurance sales the 
survey respondents represented.

To describe federal and state regulatory requirements for and oversight 
of business-owned life insurance, we met with officials of federal and 
state agencies that have regulatory authority related to business-owned 
life insurance to discuss their requirements and oversight activities 
and reviewed agency documentation and applicable federal and state 
laws. Specifically, we discussed requirements and oversight with 
officials at each of the four federal bank regulators and reviewed 
their guidelines, regulations, and reporting forms and instructions. We 
also discussed these topics with officials at SEC and IRS and reviewed 
their regulations, reporting requirements, and applicable sections of 
the Internal Revenue Code. We also interviewed NAIC staff to gain a 
perspective on state approaches to regulating business-owned life 
insurance and to discuss the organization's model guidelines for state 
laws concerning such policies. To understand more about how states 
oversee compliance with their statutes, we obtained information from 
officials of insurance departments in California, Illinois, New York, 
and Texas. We selected these states because they represented different 
geographical regions of the United States and had differing insurable 
interest and consent provisions for business-owned life insurance; we 
did not select states whose provisions did not specifically address 
business-owned life insurance because we concluded that their insurance 
departments would not have specific oversight activities or 
requirements for business-owned life insurance. We did not conduct a 
comprehensive evaluation of the quality of federal and state 
regulators' oversight activities. For example, we did not review 
records from federal examinations of banks and thrifts or state 
examinations of insurers. In addition, although we did not review every 
state statute that could affect business-owned life insurance, we 
reviewed each state's statutes that related specifically to business-
owned life insurance. Further, to better understand differences in 
state laws concerning insurable interest and consent requirements for 
business-owned life insurance, we analyzed compendiums of state 
statutes from NAIC and the American Council of Life Insurers.

To address the potential usefulness of and costs associated with 
obtaining more comprehensive data on business-owned life insurance, we 
reviewed state and federal legislative proposals for changing the tax 
treatment of business-owned life insurance or addressing other public 
policy issues related to this insurance and determined the types of 
data that could be useful in considering these kinds of proposals. We 
also assessed the extent to which the information we obtained on the 
prevalence and use of business-owned life insurance provided a 
comprehensive basis for decision making. In addition, we reviewed IRS, 
SEC, and NAIC's reporting forms and instructions to understand what 
role these organizations or Treasury might play if Congress wanted them 
to collect, analyze, and report more comprehensive information on 
business-owned life insurance. We also discussed with representatives 
of six insurance companies the challenges insurers might face in 
providing data, including what data they would be able to readily 
provide and what data would be difficult to provide. Finally, we 
discussed challenges that might be faced in collecting the data with 
Treasury (including IRS), SEC, and NAIC representatives.

We conducted our work between February 2003 and December 2003, 
primarily in Washington, D.C., in accordance with generally accepted 
government auditing standards.

[End of section]

Appendix II: State Insurable Interest and Consent Provisions: 

Table 3 provides information on state insurable interest and 
notification and consent provisions applicable to purchases of 
business-owned life insurance by employers or employer-sponsored 
trusts.

Table 3: State Insurable Interest and Consent Laws Applicable to 
Business-Owned Life Insurance as of December 31, 2003: 

State: Alabama; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* A corporation or employer- sponsored trust established for the sole 
benefit of the corporation may insure the lives of directors, officers, 
employees, or any other person whose death might cause financial loss 
to the corporation; 
* An employer-sponsored trust established to provide employee benefits 
may insure the lives of employees, retirees, or their dependents or 
beneficiaries for whom the benefits are to be provided; 
Requirements for notifying or obtaining consent of insured employees: 
* Consent of insured is required, but the requirement is not specific 
to business- owned policies and excludes group life insurance.

State: Alaska; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* For people not closely related, an insurable interest includes a 
lawful and substantial economic interest in having the life of the 
insured person continue; 
Requirements for notifying or obtaining consent of insured employees: 
* Written consent of insured is required, but the requirement is not 
specific to business-owned policies and excludes group life insurance.

State: Arizona; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* For people not closely related, an insurable interest includes a 
lawful and substantial economic interest in having the life of the 
insured person continue; 
Requirements for notifying or obtaining consent of insured employees: 
* Consent of insured is required, but the requirement is not specific 
to business-owned policies and excludes group life insurance.

State: Arkansas; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* An employer or trust providing employee benefits may insure the lives 
of key employees and employees for whom employee benefits are to be 
provided; 
* Coverage of non-key and nonmanagement employees must be reasonably 
related to the benefits provided to the employee; 
* Insurance purchased to finance pension and welfare benefit plans is 
only allowed on the lives of employees who have a reasonable 
expectation of receiving such benefits at the time their lives are 
first insured; 
Requirements for notifying or obtaining consent of insured employees: 
* Employee written consent is required.

State: California; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* An employer may insure the lives of directors and officers or 
administrative, executive, or professional employees exempt from 
California overtime compensation requirements; 
* An employer-sponsored trust providing employee or retiree benefits 
may insure the lives of those for whom benefits are to be provided; 
Requirements for notifying or obtaining consent of insured employees: 
* Employee written consent is required; 
* Policies purchased on nonexempt employees prior to January 1, 2004, 
will be void no later than January 1, 2010, unless the employer meets 
certain exceptions, including disclosing in writing information about 
such policies to insured employees.

State: Colorado; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* No statutory definition of employer or employer-sponsored-trust 
insurable interest exists; 
Requirements for notifying or obtaining consent of insured employees: 
* No statutory consent requirement exists.

State: Connecticut; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* No statutory definition of employer or employer-sponsored-trust 
insurable interest exists; 
* The trustee of any voluntary employee benefits association may insure 
the lives of employees or retired employees to provide benefits to 
those employees; 
Requirements for notifying or obtaining consent of insured employees: 
* No statutory consent requirement exists.

State: Delaware; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* An employer providing benefits to some or all employees or their 
dependents or beneficiaries may insure the life of any employee; 
* An employer-sponsored trust established substantially for the 
employer or for the benefit of employees or their dependents or 
beneficiaries may insure the lives of such employees; 
Requirements for notifying or obtaining consent of insured employees: 
* Employee notification or consent is not required if the employer is 
located in Delaware and has at least 50 employees.

State: Florida; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* No statutory definition of employer or employer-sponsored-trust 
insurable interest exists; 
Requirements for notifying or obtaining consent of insured employees: 
* No statutory consent requirement exists.

State: Georgia; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* A corporation may insure the lives of directors, officers, employees, 
or any other person whose death might cause financial loss to the 
corporation; 
* An employer- sponsored trust providing benefits to employees, 
retirees, or their dependents or beneficiaries may insure the lives of 
employees for whom such benefits are to be provided; 
Requirements for notifying or obtaining consent of insured employees: 
* Employee written consent is required.

State: Hawaii; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* For people not closely related, an insurable interest includes a 
lawful and substantial economic interest in having the life of the 
insured person continue; 
Requirements for notifying or obtaining consent of insured employees: 
* Written consent of insured is required, but the requirement is not 
specific to business-owned policies and excludes group life insurance.

State: Idaho; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* For people not closely related, an insurable interest includes a 
lawful and substantial economic interest in having the life of the 
insured person continue; 
Requirements for notifying or obtaining consent of insured employees: 
* Written consent of insured is required, but the requirement is not 
specific to business-owned policies and excludes group life insurance.

State: Illinois; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* An employer or employer- sponsored trust may insure the lives of 
directors and officers and management, nonmanagement, and retired 
employees; 
* Coverage of nonmanagement and retired employees is limited to an 
amount commensurate with the employer's projected unfunded employee 
benefit plan liabilities for nonmanagement and retired employees; 
Requirements for notifying or obtaining consent of insured employees: 
* The consent requirement is satisfied if an employee does not reject 
coverage within 30 days of receiving written notice of the coverage.

State: Indiana; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* An employer or employer- sponsored trust may insure the lives of 
employees for whom they provide employee benefits; 
Requirements for notifying or obtaining consent of insured employees: 
* The consent requirement is satisfied if an employee does not reject 
coverage within 30 days of receiving notice of the coverage.

State: Iowa; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* An employee or employer-sponsored trust may insure the lives of 
employees, retirees, officers, managers, directors, owners, 
shareholders, and members; 
* Coverage of nonmanagement and non-key employees must be reasonably 
related to the benefits provided to the employees; 
Requirements for notifying or obtaining consent of insured employees: 
* Employee written consent is required.

State: Kansas; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* An employer or employer- sponsored trust for the benefit of employees 
may insure the lives of directors, employees, or retirees; 
* Coverage of nonmanagement and retired employees is limited to an 
amount commensurate with the aggregate projected liabilities under all 
employee welfare benefit plans; 
Requirements for notifying or obtaining consent of insured employees: 
* The consent requirement is satisfied if an employee does not reject 
coverage within 30 days of receiving notice of the coverage.

State: Kentucky; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* A corporation that provides active or retired employees with 
retirement or other benefits, or a trust established by the corporation 
for its sole benefit, may insure the lives of active or retired 
employees who are covered by the retirement or other benefit plan; 
Requirements for notifying or obtaining consent of insured employees: 
* Written consent of insured is required, but the requirement is not 
specific to business-owned policies and excludes group life insurance.

State: Louisiana; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* For people not closely related, an insurable interest includes a 
lawful and substantial economic interest in having the life of the 
insured person continue; 
Requirements for notifying or obtaining consent of insured employees: 
* Written consent of insured is required, but the requirement is not 
specific to business-owned policies and excludes group life insurance.

State: Maine; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* A corporation or trust may insure the lives of employees, former 
employees, and retirees for the purpose of funding pre-and 
postretirement benefits, provided that the insured employees are 
selected by objective standards and that the proceeds are used for the 
sole purpose of funding the benefit programs covering at least a broad 
class of employees; 
Requirements for notifying or obtaining consent of insured employees: 
* Employee written consent is required.

State: Maryland; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* A private or public corporation or a trust established by such a 
corporation for the benefit of employees may insure the lives of key 
employees; 
* A public corporation or a trust established by such a corporation may 
insure the lives of non-key employees who have been employed at least 
12 consecutive months, provided the amount of coverage on non-key 
employees is commensurate with employer-provided benefits; 
Requirements for notifying or obtaining consent of insured employees: 
* In general, consent of insured is required, but the requirement is 
not specific to business-owned policies and excludes group life 
insurance; 
* Non-key employees of public corporations must consent in writing to 
be insured.

State: Massachusetts; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* A corporation or employer-sponsored trust established for the sole 
benefit of the corporation may insure the lives of directors, officers, 
employees, or any other person whose death might cause financial loss 
to the corporation; 
* An employer-sponsored trust established to provide employee benefits 
may insure the lives of employees or retirees for whom the benefits are 
to be provided; 
Requirements for notifying or obtaining consent of insured employees: 
* Written consent of insured is required, but the requirement is not 
specific to business-owned policies and excludes group life insurance.

State: Michigan; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* An employer or a trust maintained for the purpose of providing for 
the cost of benefits under an employee benefit plan may insure the 
lives of directors, officers, and managers and nonmanagement and 
retired employees; 
* Coverage of nonmanagement and retired employees is limited to an 
amount commensurate with the employer's projected unfunded employee 
benefit plan liabilities for nonmanagement and retired employees; 
Requirements for notifying or obtaining consent of insured employees: 
* For business-owned life insurance purchased by an employer, employee 
written consent is required; 
* For business-owned life insurance purchased by a trust maintained for 
the purpose of providing for the cost of benefits, written notice is 
required, and the trust may purchase insurance only if the employee 
does not object in writing to the coverage.

State: Minnesota; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* A corporation or employer- sponsored trust providing benefits to 
employees may insure the lives of employees for whom the benefits are 
to be provided; 
Requirements for notifying or obtaining consent of insured employees: 
* Employee written consent is required.

State: Mississippi; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* A corporation or trust may insure someone's life if the corporation 
or trust has a lawful and substantial economic interest in having the 
life of the insured person continue; 
Requirements for notifying or obtaining consent of insured employees: 
* Written consent of insured is required, but the requirement is not 
specific to business-owned policies and excludes group life insurance.

State: Missouri; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* An employer or employer- sponsored trust for the benefit of employees 
may insure the lives of directors, employees, or retirees; 
* Coverage of nonmanagement and retired employees is limited to an 
amount of aggregate projected death benefits commensurate with the 
aggregate projected liabilities to employees under all employee welfare 
benefit plans; 
Requirements for notifying or obtaining consent of insured employees: 
* Written notice is required, and the insurance may be purchased only 
if the employee does not object in writing within 30 days of the notice 
of coverage.

State: Montana; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* For people not closely related, an insurable interest includes a 
lawful and substantial economic interest in having the life of the 
insured person continue; 
Requirements for notifying or obtaining consent of insured employees: 
* Written consent of insured is required, but the requirement is not 
specific to business-owned policies and excludes group life insurance.

State: Nebraska; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* For people not closely related, an insurable interest exists when, 
because of a pecuniary relationship, the beneficiary expects some 
benefit in having the life of the insured person continue; 
Requirements for notifying or obtaining consent of insured employees: 
* Written consent of insured is required, but the requirement is not 
specific to business-owned policies and excludes group life insurance.

State: Nevada; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* For people not closely related, an insurable interest includes a 
lawful and substantial economic interest in having the life of the 
insured person continue; 
Requirements for notifying or obtaining consent of insured employees: 
* Written consent of insured is required, but the requirement is not 
specific to business-owned policies and excludes group life insurance.

State: New Hampshire; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* A business may insure a person's life if the business expects 
pecuniary benefit or advantage in having the life of the insured person 
continue; 
Requirements for notifying or obtaining consent of insured employees: 
* Written consent of insured is required, but the requirement is not 
specific to business-owned policies.

State: New Jersey; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* A corporation may insure the lives of directors, officers, or 
employees whose death might cause financial loss to the corporation; 
* A trust established and fully funded by a corporation to provide 
benefits to employees may insure the lives of employees for whom such 
benefits are to be provided; 
Requirements for notifying or obtaining consent of insured employees: 
* No statutory consent requirement exists.

State: New Mexico; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* For people not closely related, an insurable interest includes a 
lawful and substantial economic interest in having the life of the 
insured person continue; 
Requirements for notifying or obtaining consent of insured employees: 
* Written consent of insured is required, but the requirement is not 
specific to business-owned policies and excludes group life insurance.

State: New York; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* Employers may insure the lives of employees in which the employer has 
a lawful and substantial economic interest in having the life of the 
insured person continue; 
* Employers may insure the lives of employees or retirees who 
participate in or are eligible to participate in an employee benefit 
plan upon satisfaction of eligibility criteria. In such cases, the 
total amount of coverage cannot exceed employee benefit costs incurred 
since date of coverage plus projected future employee benefit costs; 
Requirements for notifying or obtaining consent of insured employees: 
For all employees: ; 
* Employee notification and written consent are required; 
For employees insured under the insurable interest provision related to 
participation in an employee benefit plan: ; 
* The notification must state that the insured can have coverage 
discontinued at any time; 
* When employment terminates, employees must receive notice that they 
can have coverage discontinued. Notification is not required if the 
employee has a right to receive benefits being financed by the 
insurance coverage.

State: North Carolina; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* An employer or business trust may insure the life of any employee; 
* A trust to provide pension benefits may insure the life of any person 
covered by the pension plan; 
Requirements for notifying or obtaining consent of insured employees: 
* No statutory consent requirement exists.

State: North Dakota; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* A corporation or employer- sponsored trust providing employee 
benefits may insure the lives of employees for whom the benefits are to 
be provided; 
Requirements for notifying or obtaining consent of insured employees: 
* Employee written consent is required.

State: Ohio; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* An employer or employer-sponsored trust for the benefit of employees 
may insure the lives of directors, employees, or retirees; 
* Coverage of nonmanagement and retired employees is limited to an 
amount of aggregate projected death benefits commensurate with the 
aggregate projected liabilities to employees under all employee benefit 
plans; 
Requirements for notifying or obtaining consent of insured employees: 
* Written notice and employee written consent are required.

State: Oklahoma; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* An employer or employer- sponsored trust for the benefit of employees 
may insure the lives of directors, employees, or retirees; 
* Coverage of nonmanagement and retired employees is limited to an 
amount agreed to by the employee or, in the absence of an agreement, an 
amount of aggregate projected death benefits commensurate with the 
aggregate projected liabilities to employees under all employee welfare 
benefit plans; 
Requirements for notifying or obtaining consent of insured employees: 
* Written notice and employee written consent are required; 
* Unless otherwise agreed, the employer must offer to sell the policy 
to the employee upon termination of employment.

State: Oregon; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* No statutory definition of employer or employer-sponsored-trust 
insurable interest exists; 
Requirements for notifying or obtaining consent of insured employees: 
* Written consent of insured is required, but the requirement is not 
specific to business-owned policies and excludes group life insurance.

State: Pennsylvania; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* A corporation or a trust established to provide benefits to a 
corporation's officers, directors, principals, partners, and employees 
may insure the lives of such people; 
Requirements for notifying or obtaining consent of insured employees: 
* Written notification and written consent of insured are required.

State: Rhode Island; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* An employer or employer- sponsored trust may insure the lives of key 
employees; 
* An employer or employer-sponsored trust may insure the lives of other 
employees, former employees, and retirees for the sole purpose of 
funding the cost of preretirement and postretirement benefits; 
* The amount of coverage on non-key employees is limited to an amount 
commensurate with employer-provided benefits to those employees; 
Requirements for notifying or obtaining consent of insured employees: 
* Consent of insured is required for policies benefiting tax-exempt 
charitable organizations, but the requirement does not address business-
owned policies.

State: South Carolina; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* No statutory definition of employer or employer-sponsored-trust 
insurable interest exists; 
Requirements for notifying or obtaining consent of insured employees: 
* No statutory consent requirement exists.

State: South Dakota; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* For people not closely related, an insurable interest includes a 
lawful and substantial economic interest in having the life of the 
insured person continue; 
Requirements for notifying or obtaining consent of insured employees: 
* Written consent of insured is required, but the requirement is not 
specific to business-owned policies and excludes group life insurance.

State: Tennessee; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* No statutory definition of employer or employer-sponsored-trust 
insurable interest exists; 
Requirements for notifying or obtaining consent of insured employees: 
* No statutory consent requirement exists.

State: Texas; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* Employers may purchase a group life insurance policy to insure the 
lives of officers, directors, employees, and retired employees in an 
amount necessary to provide funds to offset liabilities related to 
fringe benefits; 
* An individual may consent in writing to the purchase of or 
application for an individual or group life insurance policy and 
designation of any entity as the beneficiary of the policy or owner of 
the policy; 
Requirements for notifying or obtaining consent of insured employees: 
* Employee consent is not required for policies purchased to offset 
liabilities related to fringe benefits.[A]; 
* Any individual may consent to a business's purchase of and 
designation as beneficiary of a policy on the individual's life.

State: Utah; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* An employer or employer-sponsored- trust may insure the lives of 
directors, officers, managers, nonmanagement employees, and retirees; 
* Coverage for nonmanagement and retired employees is limited to an 
amount commensurate with the employer's unfunded employee benefit 
liabilities; 
Requirements for notifying or obtaining consent of insured employees: 
* Employee written consent is required.

State: Vermont; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* No statutory definition of employer or employer-sponsored-trust 
insurable interest exists; 
Requirements for notifying or obtaining consent of insured employees: 
* No statutory consent requirement exists.

State: Virginia; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* A corporate employer or employee benefit trust may insure the lives 
of key employees and other employees who have been employed for 12 
consecutive months; 
* Coverage on non-key employees is limited to an amount commensurate 
with employer-provided benefits to these employees; 
Requirements for notifying or obtaining consent of insured employees: 
* Written notice is required.

State: Washington; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* For people not closely related, an insurable interest includes a 
lawful and substantial economic interest in having the life of the 
insured person continue; 
Requirements for notifying or obtaining consent of insured employees: 
* Written consent of insured is required, but the requirement is not 
specific to business-owned policies and excludes group life insurance.

State: West Virginia; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* For people not closely related, an insurable interest includes a 
lawful and substantial economic interest in having the life of the 
insured person continue; 
Requirements for notifying or obtaining consent of insured employees: 
* Written consent of insured is required, but the requirement is not 
specific to business-owned policies and excludes group life insurance.

State: Wisconsin; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* No statutory definition of employer or employer-sponsored-trust 
insurable interest exists; 
Requirements for notifying or obtaining consent of insured employees: 
* Written consent of insured is required, but the requirement is not 
specific to business-owned policies.

State: Wyoming; 
Employer and employer-sponsored trustsí insurable interest in 
current and former employees: 
* For people not closely related, an insurable interest includes a 
lawful and substantial economic interest in having the life of the 
insured person continue; 
Requirements for notifying or obtaining consent of insured employees: 
* Written consent of insured is required, but the requirement is not 
specific to business-owned policies and excludes group life insurance. 

Source: GAO analysis of state statutes.

[A] The Texas Department of Insurance noted that, notwithstanding the 
statute's language, based on its legislative history, the department 
has consistently maintained that employee consent is required.

[End of table]

[End of section]

Appendix III: Comments from the Department of the Treasury: 

DEPARTMENT OF THE TREASURY 
WASHINGTON, D.C. 20220:

APR 23 2004:

Ms. Davi M. D'Agostino:

Director, Financial Markets and Community Investment 
U.S. General Accounting Office:

441 G Street, NW, Room 2440B 
Washington, DC 20548:

Dear Ms. D'Agostino:

Because the policy issues concerned with business-owned life insurance 
are tax-related issues, Secretary Snow has asked that I provide 
Treasury's comments with regard to the GAO draft report, "Business-
Owned Life Insurance: More Data Could Be Useful in Making Decisions 
About Its Tax Treatment.":

The draft report is well-researched and informative. It provides useful 
descriptions concerning the prevalence and use of business-owned life 
insurance, current regulatory requirements regarding such insurance, 
and the potential usefulness of more comprehensive data on the 
ownership and scope of these products. Our comments are limited to a 
clarification of the current tax treatment of interest as it relates to 
business-owned life insurance and to a few remarks relevant to the 
possible collection of additional data by the Internal Revenue Service.

On the whole, the report accurately describes the tax treatment of 
business-owned life insurance and of interest on loans used to finance 
such insurance. However, the report leaves the impression that interest 
that is not linked directly to business-owned life insurance is almost 
always deductible.

"Borrowing to indirectly finance policies presents a tax advantage to 
businesses because they receive tax-deferred inside buildup from life 
insurance policies indirectly financed with debt on which the interest 
expense is tax-deductible." (p. 30).

This is not entirely correct. Subsection (f) of section 264 of the 
Internal Revenue Code generally allocates a portion of the interest 
expense of a business to its unborrowed policy cash values. Thus, in 
general, if unborrowed policy cash values comprise x percent of the 
assets of a business, then x percent of interest is held to be 
nondeductible. However, this provision does not apply to policies that 
cover the life of any person that owns at least 20 percent of the stock 
or voting power of a corporation or 20 percent of the capital or 
profits of a noncorporate business. It also does not apply to contracts 
that cover the life of a person who is an officer, director, or 
employee of the business at the time he or she is first covered by the 
contract. Thus, this rule does not apply with respect to most contracts 
considered in your report, but does apply to contracts covering 
insureds who are not employees, such as customers, borrowers, or 
lenders of the business. The provision also is limited to corporations 
and partnerships; it does not apply to sole proprietorships.

The report suggests that additional data on business-owned life 
insurance could be collected on applicable IRS forms (p. 38). We are 
somewhat apprehensive with regard to this suggestion, and are concerned 
with imposing additional reporting burdens on taxpayers when the 
information collected does not have direct usefulness in the 
calculation of tax liability or in enhancing the ability of the IRS to 
audit tax returns. The types of information being discussed (e.g., the 
purpose underlying the purchase of policies, the amounts of income not 
subject to tax, policy cash surrender values, annual premiums paid) do 
not appear to support these reasons for reporting information on tax 
returns. Therefore, we do not believe the collection of such 
information, whether administratively or as the result of a 
Congressional requirement, to be useful or advisable.

We also have doubts as to the efficacy of the report's suggestion that 
a survey, or surveys, could be employed by Treasury to gather the 
desired information (p. 38). Well-constructed surveys can be costly to 
design and distribute, and can be a burden on respondents. Past 
experience indicates that, without a penalty for noncompliance, there 
would be a low response rate to such a survey, and that such a response 
rate would cast suspicions on the results as being non-representative 
of the totality of business-owned life insurance. Furthennore, except 
as a derivative of its function as tax collector, Treasury is not a 
statistical gathering agency. We believe a survey of insurance products 
could be better performed by other organizations or agencies.

Please do not hesitate to contact us if you have further questions.

Sincerely yours,

Signed by: 

Gregory P. Jenner: 

Acting Assistant Secretary (Tax Policy):

The Department of the Treasury (Treasury) commented on our matter for 
congressional consideration, which suggested that, among other 
alternatives, Congress could assign responsibility to Treasury for 
collecting data on business-owned life insurance. We discuss these 
comments in the Agency Comments and Our Evaluation section of this 
report. We also modified the report based on the technical comments 
that Treasury provided, as appropriate. In addition, discussed below is 
GAO's detailed response to another comment from Treasury's April 23, 
2004, letter.

GAO Comments: 

1. Treasury commented that the report leaves the impression that 
interest not linked directly to business-owned life insurance is almost 
always deductible, noting that the Internal Revenue Code generally 
allocates a portion of the interest expense of a business to its 
unborrowed policy cash values. However, Treasury also noted that this 
provision does not apply to contracts that cover the life of a person 
who is an officer, director, or employee of the business. Our report 
addresses business-owned life insurance as permanent insurance that an 
employer purchases on the lives of employees, with the business as the 
beneficiary. Because the provision cited by Treasury does not apply to 
this type of insurance, we do not discuss it in the report.

[End of section]

Appendix IV: Comments from the Internal Revenue Service: 

DEPARTMENT OF THE TREASURY 
INTERNAL REVENUE SERVICE 
WASHINGTON, D.C. 20224:

COMMISSIONER:

April 22, 2004:

Ms. Davi M. D'Agostino:

Director, Financial Markets and Community Investment 
United States General Accounting Office:

Washington, DC 20548:

Dear Ms. D'Agostino,

Thank you for allowing us to review and comment on your draft report 
titled "Business-Owned Life Insurance: More Data Could Be Useful in 
Making Decisions About Its Tax Treatment." Although your comprehensive 
report does not contain audit recommendations, it does accurately 
account for the factors that influence the IRS' audits of businesses 
that own life insurance.

The IRS' efforts regarding business-owned life insurance have centered 
on broad-based Corporate-Owned Life Insurance (COLT) and have 
culminated in the favorable resolution, by litigation or settlement, of 
the vast majority of cases. The government successfully leveraged its 
litigation victories in major cases through Announcement 2002-96, which 
offered taxpayers a final opportunity to settle their cases on terms 
highly favorable to the government. Most taxpayers accepted the 
settlement and, as a result, just a small number of broad-based post-
1985 COLT cases remain unresolved.

The IRS has also conducted in-depth audits of taxpayers with certain 
pre-1986 abusive COLT plans. One such case is currently in Appeals 
jurisdiction and another one was recently docketed for trial in the 
U.S. District Court for the District of Minnesota. The government 
expects to vigorously defend its position in that case.

Audit activity regarding Bank-Owned Life Insurance (BOLT) is currently 
confined to a small number of cases judged to represent a typical 
cross-section of BOLI products and taxpayers. The results of our review 
will determine the need for any additional action.

During our exit conference with GAO, the Large andMid-Size Business 
(LMSB) Division and the LMSB Division Counsel provided detailed 
comments on your Statement of Facts for the Business-Owned Life 
Insurance review. If you have any questions, please contact John 
Petrella, Director, Heavy Manufacturing and Transportation Industry at 
(732) 452-8102.

Sincerely,

Signed for: 

Mark W. Everson:

[End of section]

Appendix V: Comments from the Securities and Exchange Commission: 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION 
WASHINGTON, D.C. 20549:
DIVISION OF CORPORATION FINANCE:

April 13, 2004:

Davi M. D'Agostino:

Director, Financial Markets and Community Investment 
441 G Street, NW:

Washington, DC 20548:

Dear Ms. D'Agostino:

Thank you for the opportunity to review and comment on the General 
Accounting Office's draft report regarding Business-Owned Life 
Insurance. While the GAO does not recommend executive action, it does 
suggest how to proceed should Congress decide that it needs more 
comprehensive data on business-owned life insurance. We appreciate the 
opportunity to comment on these suggestions.

The GAO concludes that should Congress decide it needs more data on 
business-owned life insurance, it could have the SEC, the Department of 
Treasury or the National Association of Insurance commissioners collect 
the data from businesses or insurance companies. I would like to make 
two very important points in response to this conclusion. First, the 
SEC's mission in requiring filings by public companies is to provide 
investors with information that is material to investment and voting 
decisions. With this in mind, we are concerned that the collection of 
data by the SEC for purposes other than the protection of investors may 
not be appropriate and may establish an unfortunate precedent for other 
information collections that could clutter the material information 
that investors seek and expect from the filings companies make with the 
SEC. Second, please note that the efficacy of such an information 
collection program through SEC filings would be constrained by the 
federal securities law's limitations on those companies that are 
required to file information with the SEC.

Thank you again for this opportunity to provide comments to the GAO as 
it prepares its final draft of the report.

Sincerely,

Signed by: 

Alan L. Beller, 
Director:

The Securities and Exchange Commission (SEC) commented on our matter 
for congressional consideration, which suggested that, among other 
alternatives, Congress could assign responsibility to SEC for 
collecting data on business-owned life insurance. We discuss these 
comments in the Agency Comments and Our Evaluation section of this 
report. We also modified the report based on the technical comments 
that SEC provided, as appropriate. In addition, discussed below is 
GAO's detailed response to another comment from SEC's April 13, 2004, 
letter.

GAO Comments: 

1. SEC commented that the efficacy of an information collection program 
through SEC filings would be constrained by the federal securities 
law's limitations on those companies that are required to file 
information with SEC. Our report recognizes on page 36 that SEC only 
collects data from public companies. As Congress evaluates the need for 
additional data, it might determine that data from a subset of all 
companies would provide adequate information.

[End of section]

Appendix VI: Comments from the National Association of Insurance 
Commissioners: 

NAIC: 

National Association of Insurance Commissioners: 
Executive Headquarters: 
2301 McGee Street
Suite 800
Kansas City, MO
64108-2662

Ms. Davi M. D'Agostino:

Director, Financial Markets and Community Investment:

U.S. General Accounting Office 
441 G Street, NW Washington, DC 20548:

Dear Ms. D'Agostino:

Thank you for the opportunity to provide you with feedback on the GAO's 
draft report entitled, Business-Owned Life Insurance: More Data Could 
Be Useful in Making Decisions About Its Tax Treatment. The NAIC 
appreciates the opportunity to respond to your findings in this report. 
We also appreciate the opportunity to have assisted during the 
development of the report by meeting with the GAO to provide background 
information.

The NAIC has been interested in this issue for some time and has also 
reviewed the subject. During 2002, the NAIC appointed a working group, 
chaired by Commissioner Jim Poolman of North Dakota, to review the 
NAIC's earlier guidance and to recommend an appropriate state response. 
The NAIC's COLI Working Group reviewed the model guidelines mentioned 
in your report and recommended an additional provision that requires 
written affirmative consent prior to purchase of coverage on an 
employee. The changes to the model guidelines also acknowledged that 
coverage might continue after the person was no longer employed by that 
company and prohibited the employer from retaliating in any way against 
an employee who chose not to give that consent. The working group also 
considered requiring notification of the employee's spouse and 
including a provision that would require employers to make notification 
to all existing employees where coverage was already in place. These 
provisions were not ultimately included because of the negative effect 
they would have on employers in relation to the benefit that would be 
provided.

As mentioned in the report, the majority of states do define insurable 
interest in such a way as to allow employers to purchase life insurance 
coverage on some, if not all, employees. Many states also require 
getting consent prior to that purchase. The report also notes that in 
many cases the coverage is purchased specifically to 
fund employee benefits and some state laws require that the policies be 
segregated into a trust for that purpose. Page 5 of your report may 
mislead readers by specifying that four insurance regulators have 
issued guidelines applicable to business-owned life insurance. Readers 
may assume that the report is referring to the four states interviewed, 
or may be confused by the wording to believe that only four states have 
such requirements. A reading of the chart contained in Appendix II will 
clarify that, in fact, most states have guidelines.

The report correctly states that insurance regulators have collected 
little data on business-owned life insurance because concerns about 
abuse or misuse of the policies have not been previously forthcoming. 
The GAO suggests that the NAIC might be a source of information about 
the extent of business-owned life insurance by adding the reporting of 
that information to the annual statement that insurers are required to 
file with the NAIC. As you are aware, the NAIC collects a large amount 
of data from the insurance industry, a large portion of which is 
included in the annual and quarterly financial filings submitted to the 
states to support solvency regulation. The current statutory filing 
requirements do not require the level of detail for business-owned life 
insurance, or any other specialty line of business, contemplated by the 
GAO in this report. We believe that what the GAO is suggesting by the 
collection of more detailed information on business-owned life 
insurance goes beyond that needed to support solvency regulation. We 
agree there may be a significant cost associated with the collection of 
this data, both from the reporting entity and collecting organization 
standpoint; however, the NAIC would like to better understand the type 
of information to be collected to further evaluate the need for and 
utility of this information. Perhaps instead of an ongoing data 
collection effort, a study sampling this data may be more cost 
effective in assessing the larger need for ongoing data collection.

Thank you again for the opportunity to respond to the findings in your 
report. We hope these comment are helpful and that you will contact us 
if we can be of further assistance.

Sincerely,

Signed by: 

Ernst N. Csiszar:

NAIC President:

Director, South Carolina Department of Insurance:
 

The National Association of Insurance Commissioners (NAIC) commented on 
our matter for congressional consideration, which suggested that, among 
other alternatives, Congress could encourage NAIC to collect data on 
business-owned life insurance. We discuss these comments in the Agency 
Comments and Our Evaluation section of this report. We also modified 
the report based on the technical comments that NAIC provided, as 
appropriate. In addition, discussed below is GAO's detailed response to 
another comment from NAIC's April 19, 2004, letter.

GAO Comments: 

1. NAIC commented that a statement on page 5 of our draft report may 
lead readers to believe that only four states have issued guidelines 
applicable to business-owned life insurance. We modified that statement 
to clarify that we are referring only to the four states we contacted. 
Although many other states have issued guidelines and requirements that 
are applicable to business-owned life insurance, we only discussed 
regulatory oversight of such policies with officials from the four 
states that we contacted.

[End of section]

Appendix VII: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Davi M. D'Agostino, (202) 512-8678 Cecile Trop, (312) 220-7600: 

Staff Acknowledgments: 

In addition to those individuals named above, Joseph Applebaum, Emily 
Chalmers, Rachel DeMarcus, Daniel Meyer, Marc Molino, Carl Ramirez, and 
Julianne Stephens made key contributions to this report.

(250121): 

FOOTNOTES

[1] Unlike term life insurance, permanent life insurance lasts for the 
life of the insured and accumulates cash value as it provides coverage. 
Businesses may purchase term life insurance on their employees; this 
report does not address such purchases.

[2] This report focuses on businesses that own insurance on the lives 
of their employees. As such, it does not address charitable 
organizations that purchase insurance on the lives of their members or 
donors and businesses that purchase insurance on the lives of their 
creditors.

[3] Various types of plans and accounts exist that provide some tax 
preferences for funding employee benefits. These plans and accounts are 
subject to limitations that generally do not apply to business-owned 
life insurance.

[4] U. S. General Accounting Office, Business-Owned Life Insurance: 
Preliminary Observations on Uses, Prevalence, and Regulatory Oversight, 
GAO-04-191T (Washington, D.C.: Oct. 23, 2003).

[5] The Federal Reserve regulates state-chartered banks that are 
members of the Federal Reserve System, their foreign branches and 
subsidiaries, and bank holding companies and their nonbank and foreign 
subsidiaries. FDIC regulates state-chartered banks that are not members 
of the Federal Reserve System and federally insured, state-chartered 
state savings banks. OCC regulates nationally chartered banks and 
federal branches and agencies of foreign banks. OTS regulates state and 
federally chartered savings associations and savings and loan holding 
companies. In this report, we refer to savings banks and savings 
associations as thrifts.

[6] NAIC is a membership organization of chief state insurance 
regulators that helps promote coordination among the states.

[7] "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.

[8] Bank regulators' guidelines impose additional restrictions on 
allowable life insurance purchases for banks.

[9] In New York, employees insured under broad-based plans may request 
that coverage on their lives be discontinued at any time.

[10] With a business-established trust, trust-owned life insurance is 
similar to corporate-owned or bank-owned life insurance. The business 
generally controls the trust that holds the policies--for example, a 
trust may maintain assets to fund nonqualified employee benefits.

[11] IRC ß72(e)(1).

[12] In general, the alternative minimum tax is based on a 
corporation's regular taxable income adjusted for certain tax 
preference income items, such as exclusions, deductions, and credits. 
The amount due is the amount by which the tax computed under this 
system exceeds a corporation's regular tax.

[13] Under the first of the two alternative tests to qualify as life 
insurance for tax purposes under Internal Revenue Code section 7702, 
the cash value of a policy cannot at any time exceed the net single 
premium that would have to be paid to fund the future benefits under 
the contract. This test is designed to exclude contracts with an 
investment orientation from the definition of life insurance. Under the 
second test, the cumulative premiums paid cannot exceed a limitation, 
computed at the time the policy is issued, and the ratio of the death 
benefit to the cash value of the policy can never fall below specified 
percentages. These tests are designed to restrict treatment as a life 
insurance contract to those contracts where policyholders make 
traditional levels of investment through premiums and to contracts that 
do not allow excessive amounts of cash value to build up in regard to 
the life insurance risk.

[14] The Tax Reform Act of 1986 disallowed interest deductions for 
interest on a loan in excess of $50,000 with respect to policies on the 
life of an officer, employee, or person financially interested in the 
business. This provision did not apply to policies purchased on or 
before June 20, 1986. The Health Insurance Portability and 
Accountability Act of 1996 provided that no deduction is allowed for 
interest on any indebtedness with respect to policies on any individual 
who is or has been an officer or employee or financially interested in 
any business carried on by the employer, regardless of the amount of 
debt with respect to policies covering the individual. An exception was 
provided for key persons where the indebtedness does not exceed 
$50,000. A key person was defined as an officer or 20-percent owner. 
The 1996 legislation applied generally to interest paid or accrued 
after October 13, 1995, with a phase in period. The legislation 
generally did not apply to policies purchased on or before June 20, 
1986.

[15] The 1996 legislation also amended the Internal Revenue Code 
section 264 to limit the number of policies on key persons for which 
interest remained deductible to the greater of (1) 5 individuals or (2) 
the lesser of 5 percent of the total number of officers and employees 
of the business, or 20 individuals.

[16] In addition to the 1986 and 1996 legislation addressing leveraged 
business-owned life insurance policies, IRS and the Department of 
Justice prevailed in three cases involving the deductibility of loan 
interest related to such policies. These plans covered over 55,000 
employees. The courts found that the leveraged plans lacked economic 
substance, making the interest deduction unallowable. See In re C.M. 
Holdings, Inc., 301 F.3d 96 (3rd Cir. 2002); Am. Elec. Power v. United 
States, 326 F.3d 737 (6th Cir. 2003), reh. denied, 338 F.3d 534 (6th 
Cir. 2003), cert. denied, 72 U.S.L.W. 3446 (Jan. 12, 2004); Winn Dixie 
Stores v. Commissioner, 254 F.3d 1313 (11th Cir. 2001), cert. denied, 
535 U.S. 986 (2002). The taxpayer prevailed in a fourth case. See Dow 
Chemical Co. v. United States, 250 F Supp. 2d 748 (E.D. Mich. 2003), 
modified, 278 F. Supp. 2d 844 (E. D. Mich. 2003).

[17] The data do not include bank holding companies or foreign banks 
with domestic branches. The Federal Reserve started collecting data on 
business-owned life insurance from bank holding companies in 2003, but 
the data were not available at the time of our analysis. The reporting 
form for foreign banks with domestic branches did not have a 
standardized reporting category for business-owned life insurance.

[18] The Federal Reserve, FDIC, and OCC require an institution to 
report the tax-deferred earnings on life insurance if the amount 
exceeds 1 percent of the sum of the institution's total interest and 
noninterest income. OTS requires an institution to report adjustments 
to the cash surrender value of life insurance if the amount is one of 
the two largest items comprising the "other noninterest income" item, 
which includes net income from leased property and real estate held for 
investment, adjustments to prior periods, and other items.

[19] According to the Financial Accounting Standards Board and other 
auditing guidance, the determination of what information should be 
disclosed as material in financial statements is a matter of 
professional judgment. Materiality involves both quantitative and 
qualitative considerations. Even though quantitatively immaterial, 
certain types of misstatements could have a material impact or warrant 
disclosure in the financial statements for qualitative reasons. The 
omission or misstatement of an item in a financial report is material 
if, in the light of surrounding circumstances, the magnitude of the 
item is such that it is probable that the judgment of a reasonable 
person relying upon the report would have been changed or influenced by 
the inclusion or correction of the item. 

[20] "CAST 2002 COLI Marketplace Review and Assessment," CAST 
Management Consultants, Inc. (July 2003). "CAST 2001 Bank-Owned Life 
Insurance Market Survey - Final," CAST Management Consultants, Inc. 
(April 2002).

[21] Cynthia Crosson, "Capturing COLI/BOLI," Best's Review, vol. 100, 
no. 9 (2000).

[22] A proposed IRS form, Schedule M-3, Net Income (Loss) 
Reconciliation for Corporations with Total Assets of $10 Million or 
More, would expand the current Schedule M-1 for certain corporate 
taxpayers and include specific reporting on life insurance proceeds and 
corporate-owned life insurance premiums.

[23] New York state insurance regulators said that while they did not 
collect detailed information on the prevalence or use of business-owned 
life insurance, information about insurers that have a high volume of 
business-owned life insurance sales would be useful to them in 
conducting market conduct examinations in which examiners visit an 
insurance company to evaluate its practices and procedures, such as for 
selling and underwriting insurance policies.

[24] Qualified retirement plans receive special tax treatment under 
present law and must meet requirements of the Internal Revenue Code. In 
order to be tax-qualified, private pension plans must satisfy a number 
of requirements, including minimum requirements on coverage and 
benefits, including requirements on who is covered by plans and how 
plans must provide benefits. A defined benefit plan is a qualified plan 
that promises a participant monthly payments at retirement, usually 
based on the participant's salary and years of covered service. A 
defined contribution plan, such as a 401(k) plan, is a qualified plan 
in which the employer, the employee, or both contribute to the 
employee's account under the plan, and the employee ultimately receives 
the balance of the account, which is based on contributions plus or 
minus investment gains or losses. Nonqualified retirement plans are not 
subject to many of the requirements of qualified plans and do not 
receive the same tax treatment as qualified plans. Further, in contrast 
to qualified retirement plans, assets intended to finance nonqualified 
plans are not typically beyond the reach of a business's creditors in 
bankruptcy proceedings.

[25] Present value is the value today of amounts to be paid or received 
at a later date, taking into account the time value of money--that is, 
a dollar today is worth more than a dollar in the future, because the 
dollar today can be invested and earn interest.

[26] Life insurance held in certain trusts may be subject to creditors' 
claims in bankruptcy.

[27] SEC requires companies to disclose information related to the 
compensation of top officers. Therefore, the fact that companies most 
frequently disclosed the use of business-owned life insurance in 
connection with executive compensation does not mean that this is 
necessarily the most common use of such policies.

[28] Businesses could informally fund nonqualified deferred 
compensation and supplemental executive retirement plans by placing 
assets in a trust that would restrict their use.

[29] "Executive Benefits: A Survey of Current Trends, 2003 Results," 
Clark Consulting (2003). Clark Consulting changed its name from Clark/
Bardes Consulting in 2003. Clark/Bardes published the results of 
similar surveys from prior years, but comparisons among the surveys 
cannot be used to infer trends, because the design of the survey may 
have changed from year to year. We did not assess the quality of this 
survey's methodology or the accuracy of its findings.

[30] Nonresponse bias results when potential providers of data do not 
respond; it can be introduced when respondents as a group differ from 
nonrespondents on some measured characteristic and consequently are 
likely to differ in their responses.

[31] Department of the Treasury, OCC, "Bulletin 2000-23" (July 20, 
2000). Department of the Treasury, OTS, "Regulatory Bulletin RB 32-26" 
(July 31, 2002). These bulletins rescinded previous guidelines. OCC 
officials said that the agency drafted revised guidance and circulated 
it to the other regulators for review in January 2004; the officials 
did not know when the revised guidance would be issued.

[32] The discount rate is the assumed interest rate used in a present 
value calculation, reflecting how much could be earned from investing 
today's dollars.

[33] In general, assuming a lower discount rate or including additional 
years when calculating expected employee benefit costs would increase 
the present value of the costs, which could in turn increase the amount 
of insurance that could be purchased.

[34] OCC officials cited a court decision concerning Wal-Mart Stores, 
Inc. as an illustration of transaction risk, see Mayo v. Hartford Life 
Ins. Co., 220 F. Supp. 2d 714 and 794 (S.D. Tex. 2002), aff'd, 354 F. 
3d 400 (5th Cir. 2004). In 2002, a federal district court in Texas 
found that Wal-Mart did not have an insurable interest in employees' 
lives under Texas law, given the nature of the policies taken out on 
each of 350,000 Wal-Mart employees, and that under Texas law, Wal-Mart 
could not collect on the death benefits paid under policies covering 
deceased employees. Although the policies had been held by a trust in 
Georgia, the court found that Texas insurable interest law applied.

[35] In addition to the risks identified above, the OCC and OTS 
guidelines identify other types of risk, such as interest rate risk, 
price risk, and compliance risk, that institutions should consider when 
purchasing business-owned life insurance.

[36] Since July 2002, OTS has required thrifts to request its 
permission before investing more than 25 percent of total capital in 
business-owned life insurance policies. OTS officials said that the 
agency had declined the three requests it had received as of September 
2003 because it was not convinced the thrifts needed the additional 
insurance. The other bank regulators did not have such a requirement.

[37] Tier 1 capital is a measure of the equity cushion that banks have 
available to absorb loss, including credit losses from their holdings 
of business-owned life insurance. The ratio of cash surrender value to 
tier 1 capital is used as a proxy to measure potential risk 
concentrations including credit risk (the risk of counterparty default) 
arising from a bank's business-owned life insurance holdings.

[38] OCC generally defines community banks as banks with less than $1 
billion in total assets. OCC characterizes banks in its Large Bank 
Supervision program as the largest and most complex national (federally 
chartered) banks.

[39] "Split-Dollar Life Insurance Arrangements," IRS, Department of the 
Treasury, 68 Fed. Reg. 54336 (Sept. 17, 2003).

[40] Congressional Budget Office, Budget Options (Washington, D.C.: 
March 2003). Congressional Research Service, The Library of Congress, 
Corporate-Owned Life Insurance: Tax Issues (Washington, D.C.: updated 
June 26, 2003). Congressional Research Service, The Library of 
Congress, Taxation of Life Insurance Products: Background and Issues 
(Washington, D.C.: July 18, 2003).

[41] OCC and OTS guidelines on business-owned life insurance limit 
banks and thrifts' equity holdings in separate accounts.

[42] The Texas Department of Insurance suggested that no readily 
available, cost-effective alternatives exist to test for compliance 
with business-owned life insurance consent requirements.

[43] New York insurance department officials said that other factors 
might also cause the department to investigate an insurer. For example, 
they said that the department would investigate, as part of its market 
conduct examinations, insurers that sell a significant amount of 
business-owned life insurance. Officials said that, although the 
insurance department has not systematically collected data on the 
amount of business-owned life insurance companies have sold, they might 
ask a company about the extent of such sales during a pre-examination 
meeting to help the department target its market conduct examination.

[44] The total amount of tax-free income that a business receives from 
a policy is the death benefit payment less premiums paid. A business 
would have recognized some of this payment as tax-deferred earnings 
throughout the life of the policy. However, as discussed, these 
earnings do not become tax-free unless the policy is held until the 
death of the insured.

[45] Obtaining an unduplicated count of the total number of employees 
covered by business-owned life insurance could be impractical because 
businesses can continue to hold policies on employees who have left 
their employment and, therefore, more than one business can have 
policies on the same person.

[46] Several studies have found that mandatory reporting has a positive 
effect on survey response rates. S. Cole, G. Kusch, C.E. Hoy, and J. 
Berry, "Studies of Nonresponse in Industrial Surveys" (paper presented 
at the International Conference on Establishment Surveys, Buffalo, NY, 
June 1993). D. Dillman, E. Singer, J. Clark, and J. Treat, "Effects of 
Benefits Appeals, Mandatory Appeals, and Variations in Statements of 
Confidentiality on Completion Rates for Census Questionnaires," Public 
Opinion Quarterly, vol. 60, no. 3 (1996). C. Paxson, D. Dillman, and J. 
Tarnai, "Improving Response to Business Mail Surveys," in Business 
Survey Methods, eds. B. G. Cox et al. (New York, NY: Wiley, 1995), 303-
316. E. O'Brien, "Respondent Role As A Factor In Establishment Survey 
Response," in Proceedings of the Second International Conference on 
Establishment Surveys, ed. American Statistical Association 
(Alexandria, VA: 2000), 1462-1467.

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