Washington, D.C. - A General Accounting Office (GAO) study released today on business-owned life insurance finds that limited data are available on its use and prevalence. The study (GAO-04-303), undertaken at the request of U.S. Senators Daniel Akaka (D-Hawaii) and Jeff Bingaman (D-NM), is available online at GAO's Web site, www.gao.gov. GAO found that the Internal Revenue Service, the Securities and Exchange Commission, and state insurance regulators--which are all authorized to collect the data--have failed to collect comprehensive information since it is not required to fulfill their regulatory missions.
"As the federal budget deficit continues to escalate, we must carefully examine the benefits and costs that result from the preferential tax treatment of business-owned life insurance," Akaka said. "It simply does not make sense to allow these tax advantages to continue without knowing more about the prevalence and use of these policies."
Despite the lack of comprehensive data on the amount and use of business-owned life insurance, GAO's findings indicate the widespread use of business-owned life insurance. While GAO has not been able to obtain information on the holdings of banks and thrifts, it found that 3,209 banks and thrifts reported cash surrender values of their policies at $56.3 billion. Also, nine insurers reported more than $3 billion in business-owned life insurance premiums from 2002 sales. These sums, which are only a portion of the total amount of business-owned life insurance policies that exist, are significant because the earnings on the policies' cash value build up tax-free and are not taxable unless the policy is surrendered prior to the death of the insured. The Joint Committee on Taxation estimated that from 2004 through 2008 the foregone revenues of taxing business-owned life-insurance would be $7.3 billion. The Office of Management and Budget reports Treasury's estimate of forgone tax revenues as being $13 billion for 2004 through 2008. These estimates do not take into account the implications of taxing the proceeds that an employer receives upon the death of the insured employee.
"As the GAO study demonstrates, we know very little about the use of business-owned life insurance," Akaka noted. "There are no restrictions placed on the uses of the proceeds of these tax-advantaged investment vehicles. There have been examples of business-owned life insurance being used for lavish executive retirement benefits and child support payments for relatives of executives. While the policies can be used to fund retiree healthcare benefits, there is little evidence that the benefits of these policies are being used for healthcare for retirees, particularly as many employers continue to reduce retiree benefits. I am deeply concerned that while employers have been cutting back on providing retirees health care coverage, they are investing in business-owned life insurance, which some claim to be used to fund future benefits.
"The GAO study makes clear that more needs to be done to understand the justification and costs of retaining the tax advantages of business-owned life insurance. We must create additional regulatory reporting requirements so that we have more information about the use and prevalence of these policies and evaluate whether or not the tax benefits are justified."
