The federal government took aim at reducing tax deductions on company-owned life insurance last month, leaving local sources bashing the idea as devastating to the industry and self-defeating as a tax strategy. Now, at least one Massachusetts lawmaker has the insurance practice in his sights as well.
Rep. Ronald Mariano, D-3rd Norfolk, says he’s crafting legislation to change the current tax structure of company- and bank-owned life insurance in the state. He peppers his plans with several big “ifs” – chiefly, if state analysts determine the state wouldn’t garner much tax revenue from company-owned life insurance, he’ll scrap the bill – but the idea certainly has his attention.
Many banks and other companies purchase life insurance policies on their top executives, but retain the policies and cash benefits for themselves. That way, the company reaps the death benefit, even if the executive has retired or works elsewhere. Companies often use the policy to help foot the bill for executive compensation, and usually do so with significant tax deductions.
States do reap tax revenue from the policies, usually in the form of a 2 percent premium tax in the policy’s first year. Because the policies are paid in a single lump sum, that 2 percent is often a large amount.
Mariano is considering taxing the benefit as income at the time of the employee’s death. With the state struggling to balance its budget, he said, lawmakers are leaving no stone unturned in their search for revenue, and this practice, which rewards a company that has no insurable interest in the life of the insured, is a good prospect for reform.
But the idea of lobbing changes on company-owned life insurance, either at the federal or state level, would do major damage to both banking and insurance industries, said Charles W. Coldwell, executive vice president with Glenn G. Geiger Company, a Darien, Conn.-based consultancy.
The federal changes were announced earlier this month, and would garner an additional $8.5 billion in revenue by restricting companies’ deductions for interest expenses.
“It would just thoroughly destroy the banks that hold it,” he said. “The people who hold this would suddenly have enormous taxes to pay. It would destroy the life insurance industry.”
Coldwell says the extent of the damage depends on whether any new law affects current policyholders, or only those who seek to buy it in the future. A retroactive law would knock major holes in company capital sheets as well as insurance companies, but a law taxing only future buyers of the policies would still seriously wound life insurance companies, for which bank-owned life insurance is often a major moneymaker.
As soon as taxes go up on this product, no one is going to want to buy it because the incentive disappears, he said – so insurance companies are hurt and the government will still fail to raise revenue.
“Practically speaking, I don’t think it makes sense,” he said, and for that reason Coldwell is putting his money on the changes not going through.
May Lee Low, senior vice president and chief actuary for Savings Bank Life Insurance of Massachusetts, doesn’t want to jinx the industry by making prognostications; if it’s on the table, it could happen, she said.
SBLI sells a whole life policy, mostly to community banks, she said, and new laws would certainly reduce sales of those products. While not devastating for SBLI’s business, which relies heavily on individual term life sales, but it would still kill the market for that product.
William Solfisburg, CEO of Milton-based financial services adviser Alliance Resource Group, said he was more worried about a federal effort to regulate the industry than a state-level attack. Massachusetts’ insurance lobby is powerful, and lawmakers will probably be dissuaded from tinkering with BOLI because it would make the state less attractive as a business headquarters, he said.
The possibility of federal changes is more worrisome; BOLI has attracted lawmakers’ interest periodically in the past, he said, and one never knows if this might be the time such changes actually go through.
“One of the things that you worry about is the unintended impact that this has – you’re getting into how a bank runs its business,” he said.
Taking away tax deductions on BOLI would cause banks to abandon the products altogether, hurting their employee compensation packages and also hurting the insurance companies that sell such policies.
In a moment where the government is ostensibly trying to strengthen financial institutions, instituting changes to BOLI is a bad move to make, he said.
“This is exactly the wrong time to do something like that.”
