	No Comprehensive Data Were Available on the Uses and Prevalence of Business-Owned Life Insurance

Neither federal nor state regulators collected comprehensive data on the  uses and prevalence of business-owned life insurance. However, businesses may choose to fund such future  costs using life insurance, thereby becoming eligible for tax-free policy  earnings and tax-free death benefit payments on the policies. Federal bank regulators did not collect comprehensive data on the uses  and prevalence of business-owned life insurance by banks and thrifts,  although they collected some financial information on such policies as  part of monitoring the safety and soundness of individual institutions. Our preliminary results indicated that about one-third of banks and thrifts,  including many of the largest institutions, disclosed the value of their  business-owned life insurance holdings as of December 31, 2002, either  voluntarily or because they met the reporting threshold. The federal securities  laws that SEC administers are designed to protect investors by requiring  public companies to disclose information that is “material” to investors in  their financial statements—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. IRS officials told us that the agency has not collected comprehensive  information on the value of or income from business-owned life insurance  policies, and agency officials said that they do not need this information. In an effort to compile more comprehensive data on business-owned life  insurance, we worked with the representatives of six insurance companies  and the American Council of Life Insurers (ACLI) to develop a survey of  the uses and prevalence of business-owned life insurance sales. Although  the insurance companies’ representatives cooperated in a pretest of the  survey, and ACLI 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 allow us to conduct the survey. They said  that insurers do not routinely summarize information on the numbers of  policies and insured individuals, cash surrender value of policies, and uses  of business-owned life insurance. Some businesses included anecdotal information about how they intended  to use business-owned life insurance in the annual financial statements  they filed with SEC. Some businesses have also provided survey responses on their uses of  business-owned life insurance to fund executive benefit plans. Regulators Had Guidelines or Requirements Applicable to Business-Owned Life Insurance but Did Not Identify Significant Regulatory Concerns

The federal bank regulators, SEC, the IRS, and state insurance regulators  had guidelines or requirements applicable to business-owned life  insurance but did not identify significant regulatory concerns. Bank regulatory officials said that their agencies were monitoring these  institutions’ levels of holdings, had conducted preliminary reviews or  detailed examinations, and concluded that major supervisory concerns do  not exist. 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 surface any  investor protection concerns. However, they said that, to date, such  problems have not arisen, and they have not had investor-protection  concerns about public companies holding such insurance. The IRS had some requirements related to the tax treatment of business- owned life insurance. The Internal Revenue Code defines life insurance for  tax purposes and sets out the current limitations on permissible tax  deductions that businesses can claim for the interest on policy loans  against life insurance policies. Federal laws and IRS regulations have  changed some aspects of the tax treatment of business-owned life  insurance. However, most of these states exempted  group life insurance policies from consent requirements.
Why GAO Did This Study

Business-owned life insurance is held by employers on the lives of their employees, and the employer is the beneficiary of these policies. Unless prohibited by state law, businesses can retain ownership of these policies regardless of whether the employment relationship has ended. Generally, business-owned life insurance is permanent, lasting for the life of the employee and accumulating cash value as it provides coverage. Attractive features of business-owned life insurance, which are common to all permanent life insurance, generally include both tax-free accumulation of earnings on the policies' cash value and tax-free receipt of the death benefit. To address concerns that businesses were abusing their ability to deduct interest expenses on loans taken against the value of their policies, Congress passed legislation to limit this practice, and the Internal Revenue Service (IRS) and Department of Justice pursued litigation against some businesses. But concerns have remained regarding employers' ability to benefit from insuring their employees' lives. This testimony provides some preliminary information from ongoing GAO work on (1) the uses and prevalence of business-owned life insurance and (2) federal and state regulatory requirements for and oversight of business-owned life insurance.

What GAO Found

GAO's preliminary work indicated that no comprehensive data are available on the uses of business-owned life insurance policies; however, businesses can purchase these policies to fund current and future employee benefits and receive tax advantages in the process. Federal bank regulators have collected some financial information on banks' and thrifts' business-owned life insurance holdings, but the data are not comprehensive and do not address the uses of the policies. The Securities and Exchange Commission (SEC), the IRS, state insurance regulators, and insurance companies told GAO that they generally have not collected comprehensive data on the sales or purchases of these policies or on their intended uses, because they have not had a need for such data in fulfilling their regulatory missions. In an effort to collect comprehensive data, GAO considered surveying insurance companies about their sales of business-owned life insurance. However, based on a pretest with six insurance companies, GAO determined that it would not be able to obtain sufficiently reliable data to allow it to conduct a survey. GAO found, however, that some insurers have voluntarily disclosed information about sales of business-owned policies and that some noninsurance businesses have included examples of their uses in annual financial reports filed with SEC. 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. Also, they told GAO that they have reviewed the holdings of many institutions with significant amounts of business-owned life insurance and concluded that major supervisory concerns do not exist. SEC officials said that the agency has 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; SEC did not have investor protection concerns about public firms holding business-owned life insurance. The IRS had some requirements related to the tax treatment of business-owned life insurance and expressed some concerns about compliance with these requirements. State laws governing business-owned life insurance differed; the four states' regulators that GAO interviewed described some limited oversight of the policies, and these regulators and NAIC reported no problems with them.