Business-Owned Life Insurance: More Data Could Be Useful in Making Tax Policy Decisions

GAO-04-303 Published: May 13, 2004. Publicly Released: May 13, 2004.
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Highlights

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 policies' 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 employees' 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.

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Recommendations

Matter for Congressional Consideration

Matter Status Comments
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.
Closed – Implemented
Public Law 109-280 was enacted in August 2006, requiring among other things that the Internal Revenue Service (IRS) begin to collect data on the prevalence of business-owned life insurance. Specifically, employers that hold business-owned life insurance contracts issued after August 17, 2006, are required to report to the IRS: (1) the number of employees of the policyholder at the end of the year, (2) the number of such employees insured under such contracts at the end of the year, (3) the total amount of insurance in force at the end of the year under such contracts, (4) the name, address, and taxpayer identification number of the applicable policyholder and the type of business in which the policyholder is engaged, and (5) that the applicable policyholder has a valid consent for each insured employee (or, if all such consents are not obtained, the number of insured employees for whom such consent was not obtained). To collect this information, IRS issued Form 8925, which employers must submit with their annual tax returns for tax years beginning after November 13, 2007.
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 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.
Closed – Not Implemented
As of July 15, 2008, Congress had not encouraged the National Association of Insurance Commissioners to collect data on business-owned life insurance.

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