Five life insurance industry organizations have joined to combat what they say is a mischaracterization of corporate-owned life insurance by Michael Moore in his movie, “Capitalism: A Love Story.”

Michael Moore

The documentary includes a small focus on COLI, which has led to additional media reports alleging that business owners are obtaining life insurance policies on their low-level employees without their knowledge.  Nearly two decades ago, some business owners used COLI to obtain broad coverage of low-level workers – “janitor’s insurance” or “dead peasant’s insurance” – not for the insurance benefits, but as a tax shelter.

But the groups say tax laws, implemented in 2006, require employers to take out COLI only on their highly compensated employees after notice and informed consent. That approach, they say in a joint statement, has been a common practice in the industry, despite Moore’s portrayal.

The five groups — the Association for Advanced Life Underwriting (AALU), the American Council of Life Insurers, (ACLI), GAMA International, the National Association of Insurance and Financial Advisors (NAIFA) and the National Association of Independent Life Brokerage Agencies (NAILBA) – say COLI both keep businesses running and protects jobs after the death of owners or key employees.

“Through COLI, employers are taking the responsible step of setting aside assets to protect jobs and to make sure they are able to deliver on their employee benefit promises,” the joint statement said. “Employers do not receive a tax deduction for purchasing COLI and employees pay nothing but receive substantial benefits in connection with the product.”

The groups say Congress has consistently reaffirmed the benefits of COLI. Most recently, it enacted the Pension Protection Act of 2006 (PPA) on a broad bipartisan basis after three years of study, enhancing requirements and safeguards by codifying COLI best practices with a new section of the Internal Revenue Code. To ensure compliance, the IRS requires annual reporting by employers on COLI usage. Non-compliance results in the taxation of policy proceeds. The PPA locks in responsible use of COLI by making non-compliance economically untenable, the groups said in the statement.