Senate Axes Tax Break On Corporate Life Insurance

by Leroy Baker, Tax-News.com, New York

19 September 2003

The Senate Finance Committee voted this week to lift a tax break for corporate-owned life insurance, otherwise known as COLI.

Firms do not pay tax on the proceeds from this type of life insurance even in cases where the proceeds are not distributed to the employee covered by the policy in question. This also applies if the worker is no longer employed by the firm.

The new provision will require the payment of business tax on COLI payments if the insured person has not been in the company's employ during the year preceding their death.

However, an amendment sought by Sen. Rick Santorum (R - Pa) will still exempt payments from taxation if the proceeds are paid to the worker's family, if they are used to buy back the worker's stake in the firm, or if the employee was considered a 'key man' within the firm. However, this latter condition still needs accurate definition, according to Sen. Don Nickles (R - Okla).

It is expected the axing of the COLI tax break will raise around $1 billion over the coming decade, although the insurance industry has been appeased by a number of tax breaks, by way of a compromise.

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