	Introduction

Life insurance policies taken out by and payable to companies on their employees, directors, officers, owners, and debtors are commonly known as corporate-owned life insurance (COLI) policies. (COLI is also known as company-owned life insurance.) Such policies enjoy the same two basic preferences under the tax laws as other life insurance. First, death benefits paid under life insurance policies are not taxable income to the beneficiaries of the policies. Therefore, the corporation enjoys either tax-deferred growth or tax-free growth of funds invested in COLI plans. In addition, under certain circumstances, companies have deducted the interest expense for loans from COLI policies from their taxes. Some companies have then used the loan proceeds to pay for the premiums of the life insurance policies, further enhancing the advantages of COLI-related transactions. Congress has increasingly restricted the instances in which this interest is allowed to be tax deductible. Although the federal tax preferences for life insurance have been passed by Congress, the ability of firms, as well as individuals, to purchase such insurance in the first place is regulated by the states. Some states require the insurable interest to be established only at the time the insurance is purchased; therefore, companies may continue to hold life insurance policies and enjoy the tax advantages of COLI policies covering insureds no longer employed by the company. On the other hand, critics claim that companies should not profit from the deaths of rank-and-file employees, sometimes referring to COLI as "janitor's insurance" or "dead peasant insurance," and note that although companies claim to be using COLI to finance employee benefits, there is no regulation of this use as there is for benefit plans under the Employee Retirement Income Security Act (ERISA), which also provides for tax-preferred investments to fund employee benefits. Legislative Proposals in the 112th Congress

		The Life Insurance Employee Notification Act (H.R. 130 was introduced by Representative Gene Green on January 5, 2011. This bill would require employee notice of COLI, including the benefit amount and the beneficiary of the policy and their violation would constitute an unfair trade practice. This proposal is similar to the limitations included in the Pension Protection Act of 2006 (discussed below), but these requirements would be enforced through the Federal Trade Commission Act, rather than the Internal Revenue Code. Past Limitations on COLI

Capping legislative activity from the 109 th Congress, the Pension Protection Act of 2006 included language adding requirements to the tax code in order for a COLI policy to enjoy the typical tax advantages of life insurance. The interest in COLI over the past few years is only the most recent congressional focus on the issue. State laws in the large majority of states require that to purchase COLI, the employer must have an insurable interest in the life of an insured employee. As a result corporations are unlikely to systematically underestimate the value of a key employee and, as a result, underinsure. The current tax treatment of COLI, however, distorts investment decisions. Appendix. The Senate Finance Committee hearing on COLI was held October 23, 2003; it was followed by an additional markup of the draft S. 2424 on February 2, 2004.
Life insurance policies taken out by and payable to companies on their employees, directors, officers, owners, and debtors are commonly known as corporate-owned life insurance (COLI) policies. (COLI is also known as company-owned life insurance.) Such policies are separate and distinct from typical group life insurance policies offered to many employees as an employment benefit. In general, only the company, not the employee's family or other beneficiary, receives any benefit from a COLI policy. In some cases, employees or their families have no knowledge of any policy being taken out. Concerns about people "gambling" on the deaths of strangers has led to "insurable interest" laws in most states that require some possibility of financial loss as the result of an insured's death as a prerequisite for the purchase of life insurance. Although employment has generally been accepted to fulfill the need for an insurable interest, many have expressed concern about employers holding policies on lower-paid employees and continuing to hold policies after a worker has left employment.
Although the chief historical justification for the favorable tax treatment of life insurance focuses on individuals, not companies, COLI policies enjoy the same basic preferences as other life insurance. As a result, a corporation enjoys either tax-deferred or tax-free growth of funds invested in COLI plans. These tax preferences are a large reason for companies to choose COLI policies rather than simply investing the money in a more straightforward way. Moreover, under certain circumstances, companies have taken loans using the cash value of the life insurance policy as collateral, used the loan proceeds to pay for the premiums of the life insurance policies, and then deducted the interest expense from their taxable income, further enhancing the advantages of COLI-related transactions. In the past, Congress has restricted the tax advantages of COLI, including limiting instances in which loan interest is allowed to be tax deductible. The 108th and 109th Congresses saw several bills introduced as well as floor and committee amendments on COLI. Language limiting COLI's tax advantages to policies taken out on the highest-paid 35% of employees and linking tax advantages to employee notice and consent was agreed to in the Senate Finance Committee in 2004 and ultimately incorporated into P.L. 109-280, which was passed by the 109th Congress in 2006.
In the 112th Congress, the Life Insurance Employee Notification Act (H.R. 130), introduced by Representative Gene Green, would require employee notice of COLI, similar to those enacted in 2006. These requirements, however, would be enforced through the Federal Trade Commission Act, rather than the Internal Revenue Code.
This report begins with a general background on COLI, followed by current proposals on COLI. It then addresses federal limitations on COLI from previous years, discusses state approaches to the issue, and concludes with an analysis of the issue from a public-finance perspective. An appendix provides a detailed discussion of proposals addressing COLI from the 108th through 111th Congresses. This report will be updated in the event that legislation dealing with COLI progresses.