Retirement Heist

JUST BEFORE CHRISTMAS 2008, Irma Johnson, a widow in Houston with two young children, got a check in the mail for $1,579,399. It was the death benefit proceeds from the life insurance policy on her husband, Daniel, who’d died of a brain tumor at age forty-one the summer before. But the check wasn’t payable to the Johnson family. It was made out to Amegy Bank, the company that had fired her husband six years before he died.

The check was accompanied by a note from the U.S. Postal Service, saying that the original envelope had become damaged in processing. But there was no other explanation. Mystified, Johnson called the insurer that had issued the check, Security Life of Denver Insurance Co. The person she spoke to told her that Amegy Bank of Houston was the beneficiary of a life insurance policy on her husband’s life. The insurer had already sent the bank a check to replace the one lost in the mail.

This was the first time Johnson had ever heard of the policy, and she was appalled. The bank had taken out a life insurance policy on her husband and now was going to keep the money. But she would have been even more outraged if she had known where the money would go.

In recent years, as the costs of salaries and benefits for executives have put huge IOUs on corporate books, companies have begun stuffing billions of dollars into new and existing life insurance contracts taken out on the lives of their employees. The insurance policies serve as pseudo pension funds for executives: companies deposit money into the contracts, which act like giant IRAs. Like an IRA, the money in the policies is allocated among investments and grows tax-free. When the employees die—no matter how long it’s been since they’ve left the company—the death benefit goes to the company tax-free. The primary goal, though, isn’t to harvest the death benefit but to reap tax benefits and to use the investment income to offset the cost of the executive obligations.

Technically, it’s illegal for companies to buy life insurance on workers as a tax dodge, but companies can buy it to finance “employee benefits.” This loophole was created in the 1990s when companies and life insurance lobbyists convinced lawmakers that they could use the insurance to pay for “retiree benefits.” What they didn’t tell Congress was that the retiree benefit they were referring to was executive deferred compensation.

This corporate-owned life insurance, or COLI for short, was initially nicknamed “janitors insurance,” because when companies first started taking out the coverage in the 1980s and early 1990s, the policies could cover almost anyone at a company, even the janitors. More recently, it has become known as “dead peasants insurance,” which is how an insurance consultant for Winn-Dixie Stores, who had apparently watched too many Monty Python movies, referred to it in some memos in the mid-1990s.

Although the companies receive the death benefits, it isn’t really the cash that the companies are looking for. The big money, and the big benefit they get, comes from keeping the money in the contracts. This is thanks to a cascade of tax breaks and accounting rules that enable these pseudo pension funds to generate income that boosts profits. It works like this. Let’s say a company owes its executives $1 billion in deferred compensation. Since the obligation is unfunded, the interest on the debt hurts the company’s earnings. Essentially, the executives, by deferring their pay, are making a loan to the company; the company owes them interest on the loan. The interest cost on the debt reduces the company’s income. Unlike regular pensions, executive pensions aren’t funded, so there are no investment returns to offset the cost of carrying the debt. And whereas other debt burdens, like retiree health benefits, can be—and often are—cut, companies rarely cut executive benefits.

Enter life insurance policies. The kind companies buy aren’t the simple ones that pay a death benefit, but “cash value” policies, like “whole life” and “universal life” contracts, which are investment accounts with a death benefit attached. Because the account is wrapped in an insurance policy, the investments within it accumulate untaxed. In other words, the life insurance contract is a stand-in for a tax-favored pension fund.

The life insurance contracts not only provide some of the same tax benefits as pension funds; they also provide the same accounting benefits. Investments in insurance policies not only grow tax-free, but their returns pump up company income. If the investments had a return of $100 million, the company could add the $100 million to its income that year, which would offset the interest cost on the executive obligations. This tax-free flow of investment income—like the income from investments in pension funds—offsets the interest cost of the executive obligations.

If the investments weren’t wrapped in an insurance policy, the company would have to sell the investments, then pay taxes on the gains, if it wanted to be able to report the income. Bottom line: Even though companies aren’t supposed to get tax breaks for funding executive deferred comp and pensions, they get essentially the same tax breaks—and accounting benefits—by taking out life insurance on workers.

TO DIE FOR

Though the investments are essentially locked up in the insurance policies, companies receive tax-free cash when employees and former employees die whether in car accidents, in plane crashes, or from illness. Even people who are murdered or accidentally killed at work produce death benefits for their employers.

Companies report the death benefits as income, though they usually refer to them by opaque terms. The St. Louis–based Panera Bread Company calls them “mortality dividends” and refers to a death benefit as a “mortality income receivable” in its filings.

Banks have the largest obligations for executive pay and pensions, so it’s not surprising that they are also the biggest buyers of life insurance on workers, which they call “bank-owned life insurance,” or BOLI. Industry consultants estimate that over the coming decades, banks will receive more than $400 billion in death benefits as their retirees and former employees die. Financial filings occasionally disclose income triggered by deaths. Pacific State Bancorp, of Stockton, California, reported $2.6 million in income from a death benefit in 2008. A subsidiary of Conseco, Bankers Life and Casualty, bought life insurance on employees in 2006 and got an almost immediate payout of $2.7 million that year after an employee died.

Most families have no clue that their relatives are covered. Irma Johnson certainly didn’t. Her husband, Daniel, had been a credit-risk manager for Southwest Bank of Texas, which was a predecessor to Amegy Bank. He was diagnosed with two cancerous brain tumors in 1999 and underwent two surgeries and radiation treatment that initially impaired his speech and left him unable to walk. He eventually returned to work, but in 2000 the bank criticized his communication skills and job performance and demoted him.

Despite the demotion, in May 2001, a manager took Daniel aside and told him that the compensation committee of the board of directors had selected him to be eligible for supplemental life insurance of $150,000. All he had to do was sign an agreement to receive the coverage, and a consent form authorizing the bank to purchase an insurance policy on his life. Four months later, the bank fired him. When Daniel died in August 2008, his family received no life insurance death benefits, because the company had terminated the family’s policy when it fired him.

Irma Johnson says her husband didn’t have the “necessary capacity” to make financial decisions when he signed the agreement in 2001, and that the bank should have told him how much it would get when he died. She sued in state court in Houston in February 2009; under Texas law, material omissions can constitute a form of fraud. During the proceedings, Irma learned that the bank, which maintained that it had bought the policies to offset the cost of providing “employee benefits,” had received $4.7 million when her husband died. It settled the case in 2010 for an undisclosed sum.

DEATH AND TAXES

Initially, insurance agents touted the death benefits as the most appealing feature of their plans, and some employers were disappointed when employees didn’t die quickly enough to generate the anticipated “mortality dividends” for that year. In a confidential memo in 1991, an insurance agent wrote to Mutual Benefit Life Insurance Co. that American Electric Power (20,441 employees covered), American Greetings (4,000), R.R. Donnelley (15,624), and Procter & Gamble (14,987) were “acutely aware” that mortality was running at only 50 percent of projected rates.

The Procter & Gamble plan covered only white-collar employees, which might explain its poor death rate (34 percent of projected mortality), the memo noted. But the disappointing death rate at card maker American Greetings was a puzzle, since the plan covered only blue-collar employees, who are expected to have higher mortality rates. (The white-collar employees were covered by a separate policy with Provident.)

Diebold, the agent wrote, had been expecting $675,300 in death benefits since adopting the plan; so far, it was expecting only one “mortality dividend” of $98,000. “Do you think that a mortality dividend of that size relative to their current shortfall will give them comfort?” the memo said.

A company the agent called NCC had a better death rate, he noted: People were dying at 78 percent expected mortality. “However, this includes three suicides within the first year which is highly unusual”—NCC had not had one suicide in twenty-five years until 1990. “Without these suicides, NCC would be running at 33% expected mortality. This fact highly concerns me.”

To keep track of when employees and retirees die, employers regularly check the Social Security Administration’s database of deaths. That’s how CM Holdings monitored its dead former employees. Page after page of a 1990 document called a “Death Run” lays out the names, ages, and Social Security numbers of more than 1,400 who would be worth more dead than alive. Also included was the amount of money the company was to receive when each employee died, even if the death occurred long after he or she left the job. Older workers would bring the company about $120,000 to $200,000 each, while younger workers would generate $400,000 to almost $500,000 each, the document said. (Younger workers yield bigger payouts because, based on actuarial calculations, they are less likely to die soon, so the premium amount buys more coverage for them.)

One of these workers was Felipe M. Tillman. Born in 1963, Tillman was an unlikely source of revenue for CM Holdings. A music lover whose taste ran from opera to jazz and even country music, he played keyboards and drums, sang, and was choral director at his Tulsa, Oklahoma, church. To make ends meet, he took part-time jobs in record stores, including a brief stint at a Camelot Music outlet owned by CM Holdings. As a minimum-wage, part-time employee, he didn’t have health coverage or other benefits. But CM Holdings nonetheless took out a policy on his life. It didn’t have to wait long for a payoff. Tillman died in 1992, of complications from AIDS. He was twenty-nine years old.

CM Holdings used the $168,875 death benefit it received when Tillman died to pay for executive compensation, among other things. Company documents also show that $280 went to Star County Children’s Services to help cover child support payments owed by a nephew of Camelot Music’s founder, who was working at the company at the time.

Another name on the company’s “Death Run” was Margaret Reynolds, of Uniontown, Ohio, born in 1936. Margaret was an administrative assistant and buyer for CM Holdings, making $21,000 a year. In the 1990s, she began deteriorating from the effects of amyotrophic lateral sclerosis, or Lou Gehrig’s disease. In her final years, her adult children, who took turns caring for her, begged the company to provide $5,000 to pay for a special wheelchair so they could take their mother to church. “They said it wasn’t covered,” her son John Reynolds recalled bitterly. His mother died in 1998 at age sixty-two. Her family received a $21,000 benefit from a life insurance policy provided to employees by the company; CM Holdings received a death benefit payout of $180,000.

AN INSURABLE INTEREST

Over time, life insurance began morphing from a tax shelter into a finance tool for executive pay. For decades, if an individual or company wanted to buy life insurance on someone, they had to have an “insurable interest in the person,” that is, the beneficiary of the policy would be directly affected by the insured’s death. This rule existed for obvious reasons: Without it, a person could buy life insurance on a stranger—say, a skydiver, race car driver, or coal miner—and profit from his demise. And if he didn’t die soon enough, the policyholder would have an incentive to push him over a cliff.

Initially, companies bought policies to protect them from the deaths of certain executives, or “key” employees. It made sense for partners in law and accounting firms to buy life insurance on each other. But, encouraged by insurance brokers, companies began buying it on broad swaths of their employees, because by insuring thousands of employees, not just “key men,” the companies can place greater sums in life insurance contracts.

Dow Chemical, the Midland, Michigan, company known for its manufacturing of napalm, breast implants, and Agent Orange, was initially skeptical. An internal memo noted that, except for top-paid executives, it was “doubtful that Dow has an insurable interest in any of its employees.” But it overcame its qualms and by 1992 had purchased life insurance policies on more than 20,000 employees.

Congress had no idea how widespread this practice had become until someone ratted on them. In 1995, a brown envelope was left on the desk of Ken Kies, chief of staff at the Joint Tax Committee. The envelope contained a list of companies that had bought life insurance on employees—along with calculations showing that a company might take in $1.2 billion over ten years by insuring 50,000 of its employees. It also noted that from 1993 to 1995, Wal-Mart had taken out insurance on 350,000 workers.

Lawmakers did the math and were appalled. They weren’t concerned about whether Wal-Mart had an insurable interest in its stock clerks and store greeters, but they did care a lot about the loss of tax revenue. Companies were borrowing money from the policies and deducting the interest. The IRS deemed that the leveraged COLI taken out by seven hundred companies were sham transactions with no business purpose other than to score tax breaks. It filed a flurry of tax court cases, and companies subsequently took big charges for the disallowed deductions for interest on policy loans; among them were American Greetings, the Brooklyn, Ohio, maker of Tender Thoughts brand greeting cards and owner of Holly Hobbie and Care Bears licenses, and W.R. Grace, the Columbia, Maryland, manufacturer of building materials, which took out life insurance on its workers while defending thousands of asbestos-related lawsuits.

Within minutes of the interest-deduction phase-out, companies found a way around it. Instead of borrowing money from insurance companies, they simply borrowed it elsewhere. This was called “indirect leverage.” The practice was especially appealing to banks, which can borrow money cheaply. Banks bought fresh policies on employees and in 1997 were floating the idea that they could buy life insurance on depositors and credit card holders as well. Fannie Mae, the giant mortgage buyer, proposed to insure the lives of home-mortgage holders, but the plan didn’t go far. Congress nixed those ideas and tried to plug the indirect-leverage loophole in 1998. The Joint Tax Committee’s Ken Kies, in classic revolving-door fashion, had quit his government job and was now lobbying for the COLI industry, which led a campaign that blanketed Congress with more than 170,000 letters and faxes and ran radio and newspaper ads targeting lawmakers as anti-business. The effort to close the loophole failed. Former House Ways and Means chairman Bill Archer, who had criticized janitors insurance as a tax shelter in 1995, joined the board of Clark/Bardes, the most influential COLI provider, in 2001.

“RETIREE BENEFITS”

Congress remained suspicious that companies were buying insurance on workers as a tax dodge. Employers said absolutely not: They had a sound business purpose. “The main reason employers are buying life insurance is so that they can provide benefits, in particular retiree medical benefits,” maintained Jack Dolan, a spokesman for the American Council of Life Insurers.

Employers were betting, correctly, that the people making the decisions in Washington knew little about life insurance, taxes, accrual accounting, and retiree health plans. For one thing, the assets in the policies aren’t cash that companies can pull out and spend; they don’t get cash until the covered employees die, so there’s no way the companies can use the policies as a piggy bank to “pay” for health care premiums or prescription drugs. In any case, many companies that bought life insurance on their workers didn’t provide retiree health coverage, or if they did, few of the workers were eligible for it.

Not everyone was snowed. “We do not believe that the purpose of the [plan] was to fund employee benefits,” wrote Judge Robert P. Ruwe in a 1999 U.S. Tax Court ruling against Winn-Dixie. The Jacksonville, Florida, supermarket chain was tussling with the IRS over the legitimacy of deductions it had taken for loans from policies covering 56,000 workers. Judge Ruwe pointed out that staff turnover at Winn-Dixie was so high that few employees were ever eligible for retiree medical benefits, yet the company had continued to collect death benefits on those who left the company before retirement. The judge concluded that the executives “recognized that it was a tax shelter” and that ultimately, over the sixty-year life of the policies, the company hoped to save $2 billion in taxes. The tax court wasn’t taking aim at the company’s practice of insuring its checkout clerks and bag boys; it was going after the interest deduction. And it ultimately won. In 2001, the U.S. Court of Appeals for the Eleventh Circuit in Atlanta upheld the tax court decision, and in 2008 the U.S. Supreme Court declined to hear Winn-Dixie’s appeal. The interest deduction was dead.

Though employers lost the interest deduction, they didn’t lose the desire to buy life insurance on workers, because they could still use policies as vehicles to generate tax-free income. In the early 2000s, the practice was proliferating. In 2002, Nestlé USA had policies covering 18,000 workers, Pitney Bowes Inc. had policies covering 23,000, and Procter & Gamble Co. had 15,000 covered workers. The companies all claimed they were using the policies to finance employee benefits. “We have not done this for financial gain,” Nestlé said. American Electric Power claimed that the death benefits were “dedicated to retiree benefits.” Hillenbrand Industries Inc., a coffin maker in Batesville, Indiana, said it bought the policies to beef up employee benefits.

MANAGERS INSURANCE

By the early 2000s, the days of companies buying policies on masses of low-level clerks and cashiers were largely over as more states, including California, Michigan, Ohio, Illinois, and Minnesota, required companies to secure employee consent to include them in coverage. Some companies had done this in the 1990s, including Walt Disney, which offered workers an incentive of a modest amount of life insurance without charge in exchange for giving the company permission to take out a policy on them.

This didn’t dampen sales, because companies figured they could take out larger amounts of death benefits if they bought new policies on higher-paid employees. Janitors insurance mutated into “managers insurance.”

Obtaining a manager’s consent wasn’t difficult. Bank of America appealed to their company spirit, telling managers that letting the bank buy coverage on their lives would help the company. The New York Times Co. offered a carrot: It told eligible executive-level employees they could participate in a deferred-compensation plan if they let the company make itself the beneficiary of insurance on their lives. Employers rarely tell employees how much they’re covered for, but the amounts can be substantial.

Focusing on middle managers has an additional advantage: It’s easier for employers to make the case that they use the insurance to finance employee benefits, since managers are almost always eligible for benefits, whereas store clerks usually are not. Under tax law, life insurance purchased by a corporation is supposed to have a business purpose. Illegal tax avoidance is not a sanctioned business purpose.

Initially, insurers figured this was a good move: Higher-income employees tend to have longer life expectancies, which meant the policies would eventually be worth more. But the strategy could backfire. They failed to consider that covering a group of people in one place carries additional mortality risk. After the September 11 terrorist attacks, Hartford Life Insurance reported an after-tax charge of $2 million related to the attacks. This didn’t mean that Hartford paid out only $2 million; this was how much Hartford lost on having written the policies. Companies like Aon, the giant risk manager and insurer that lost 176 employees in the World Trade Center, reaped tens of millions in death benefits.[12]

The mass death of heavily insured executives and other employees in the Trade Center attacks was a wake-up call to insurers about the amount of financial exposure they had when there was a high concentration of insureds in a single location. In 2003, at the annual Society of Actuaries meeting in Washington, D.C., a Towers Perrin group-pricing actuary noted that insurers had begun requiring employers to provide not only the ages and Social Security numbers of employees, but also their work addresses, so the employer could assess the potential financial risk of multiple casualties from mass shootings, terrorist attacks, building collapses, and other disasters.

WANTED: DEAD OR ALIVE

Janitors insurance doesn’t kill people, but it strikes many people as unseemly, if not creepy, which may explain why the sellers and buyers of the insurance aren’t eager to talk about it. Such reluctance to discuss a practice that accounts for one-third of life insurance sales might make CFOs take pause. If they really thought the practice was appropriate, it would be highlighted in the annual report.

A string of lawsuits in Texas beginning in the 1990s, in which employers have been steadily on the losing end, shows that when the practice is put before a jury (a Texas jury, at least), companies have good reason to worry.

One of the earliest suits involved the death of William Smith, in 1991. The twenty-year-old was working at a Stop N Go convenience store in Pasadena, Texas, for extra Christmas money when a robber shot him dead. Angela Smith, his eighteen-year-old widow, who was still in high school, was touched when the company offered her and her one year-old son, Brandon, a payment of $60,000.

Normally, if a worker is killed on the job, his family receives death benefits from the state workers’ compensation system. But to save money, the store’s owner, Houston-based National Convenience Stores, didn’t participate in the program. Still, to protect itself from the cost of wrongful death or negligence lawsuits arising from workplace deaths, it took out life insurance on its clerks. The policy, from Lloyd’s of London, paid NCS $250,000 after William Smith died.

Angela Smith sued NCS in state court anyway, alleging violation of Texas’s insurable-interest rules and seeking payment of the COLI money to Smith’s estate. In 1999, the court awarded the estate $456,513, which included insurance, attorney fees, and interest. NCS appealed that judgment, and in 2002 agreed to settle with Smith for $390,000. Valero Energy Corp., in San Antonio, acquired NCS and its COLI policies in 2001, through its acquisition of Ultramar Diamond Shamrock Corp., which had earlier bought NCS.

In a similar case in 1998, in which a family challenged whether NCS had an insurable interest in the deceased employee, the company argued that it did, indeed, have an insurable interest in its workers because, without workers, “NCS would not generate revenue and would cease to exist as a viable entity.” The Texas court in that case suggested that NCS consider liability insurance.

A Texas jury was also unimpressed with an employer’s claim that it had an insurable interest in a part-time employee. Peggy Stillwagoner was a temporary employee who had been at her job only two months when she died in 1994. A nurse, she had been on her way to a home-care appointment when another driver slammed into her Geo Metro. She underwent emergency surgery, but died soon after. She was fifty-one.

Facing tens of thousands of dollars in medical bills, Stillwagoner’s family asked her employer, Advantage Medical Services, if it provided any life insurance or other benefits. The owner of the company said it didn’t. But a few months after the accident, when an insurance company investigator contacted Peggy’s husband, Kenneth, asking him to sign papers releasing her medical records, he learned by chance that AMS held a $200,000 insurance policy on his wife’s life.

The family sued in state court, arguing that the company had no insurable interest in Peggy’s life, since she’d been replaced the day after her death. The family was seeking the benefit the company had collected upon her death. The company insisted that it did have an insurable interest, because the field nurse had the “opportunity to attract or create new business and was therefore a valuable employee.” The family lost in the lower court, but in late 1998 the appeals court reversed the lower court’s ruling and found that Kenneth Stillwagoner had a right to challenge the insurance payment to AMS. Subsequently, the company and Travelers Insurance Co., a unit of Citigroup Inc. that sold AMS the coverage, settled with the family for $395,000.

HOLY BOLI

The bad publicity that lawsuits like these generated spurred lawmakers to draft fresh proposals to rein in the practice. In 2003, Congressman Gene Green, a Texas Democrat, proposed requiring employers to tell all employees, past and present, about any coverage bought on their lives since 1985. Once again, insurance lobbyists fought back. COLI provider Clark/Bardes and insurance-industry groups led the opposition, aided by Ken Kies’s lobbying practice, which Clark/Bardes had acquired. The industry took out radio ads in the Washington area attacking proposals to curb what it called “business insurance.” The proposals went nowhere.

But lawmakers continued to press for more restrictions on COLI, and in 2006 it appeared they had succeeded. Congress enacted new rules that limit companies to buying life insurance on just the top one-third of earners, who must provide consent.

But the rules turned out to be a boon to insurers and employers. For one thing, they specifically permit employers to buy life insurance on the top third of earners—those most likely to participate in deferred-compensation programs. This was the first time the law deemed the practice legal. (Insurance lobbyists aren’t paid top dollar for nothing.) And though the new rules require employers to obtain employees’ consent, the rules weren’t retroactive. Thus, companies still hold old policies covering millions of employees, including lower-level workers and former employees who aren’t entitled to benefits of any kind, as well as retirees. The rules don’t require employers to notify people covered prior to August 2006.

In fact, these “restrictions” fueled the sale of billions of dollars more in COLI. Banks led the way, not only because of the new rules but because banking regulators in the Bush administration specifically affirmed the use of life insurance to finance deferred compensation.

Banks took out billions of dollars’ worth of this life insurance during the mortgage bubble, when executive pay—and the IOUs for their deferred compensation—surged. By the end of 2008, banks had a total of $122.3 billion in life insurance on employees, nearly double the $65.8 billion they held at the end of 2004. (Unlike other companies, banks are required to disclose their total life insurance holdings in regulatory filings.)

At the end of the first quarter in 2009, Bank of America had the most life insurance on employees: $17.3 billion. The bank won’t disclose how much it owes executives and insists that “Bank of America uses this insurance to help defray the cost of employee benefits.” But filings show that the bank had an unfunded obligation of only $1.3 billion for retiree health benefits; it also owes $2.6 billion for supplemental executive pensions. This suggests that at least $15 billion of the BOLI is intended to back the deferred-compensation obligations. JPMorgan Chase had $11 billion in BOLI and, coincidentally, $10 billion in deferred-compensation obligations. The size of its retiree health obligations? Only $1 billion.

Citigroup had $919 million in unfunded retiree-health obligations, $586 million in supplemental executive pension obligations, and roughly $5 billion in deferred compensation. Offsetting these obligations: $4.2 billion in life insurance. Citigroup said it had bought BOLI because it was “an attractive use of capital” and for “the tax-free nature of the death proceeds.”

Wachovia Corp. had $12 billion in BOLI at the end of 2008, when it was acquired by Wells Fargo (which had $5.7 billion). None of the banks would say how many employees it had life insurance policies on, or whether they were still employed by the bank.

UNDERGROUND

Life insurance on employees accounts for an estimated one-third of all sales of cash-value life insurance. The amounts companies hold can exceed the size of their pension plans. Yet companies and insurers are required to report almost nothing on it, making it impossible for employees, regulators, and lawmakers to determine just how much money companies have stashed away in the insurance.

Insurance regulators, who often accommodate the wishes of the industry, help keep the practice a mystery. The National Association of Insurance Commissioners says it has no data about the scope of the sales, and, though banks report their total holdings to regulators, other companies aren’t required to.

Even bank regulators, including the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corp., have little data. Banks are required to disclose the total cash surrender value of their policies in quarterly bank filings. This is the amount of money they have stuffed into the contracts, plus interest. But they don’t have to disclose anything else, including how much the investments are contributing to earnings. In 2007, the IRS began requiring companies to report the number of employees they purchase insurance on, and the total amount. But companies don’t have to provide any figures for insurance they held prior to these new disclosure rules.

The insurance industry won’t talk about it, either. The American Council of Life Insurers, which has lobbied strongly to oppose restrictions on COLI, says it doesn’t have any data on the product. The National Association of Life Underwriters, despite devoting one-third of its annual conference on life insurance to COLI, says it doesn’t know how much companies are buying.

The Life Insurance Marketing and Research Association says it doesn’t ask companies how much of the insurance they have, and A.B. Best Co., which sells a report on COLI on its Web site, says it doesn’t know how much employers buy or what percentage of life insurance sales it accounts for.

Some insurance consultants used to provide figures to the public, but they stopped. CAST Management Consultants in Los Angeles reported in the early 2000s that sales of new corporate-owned life had risen 60 percent. But it has kept mum since.

Insurance companies that sell COLI don’t even mention the products in their SEC filings. Hartford Life, a major COLI provider, used to. In 2001, it had janitors insurance with a face value of $4.3 billion in force among its clients, according to its annual report. COLI in all its forms brought the company $37 million of its $1 billion of net income that year. But Hartford stopped providing such disclosures. The insurers also stopped mentioning in filings that they owned policies on their own employees. Hartford took out an undisclosed amount of insurance on about eight hundred of its own managers in 2002, but current filings don’t mention it.

Prudential Insurance Co. of America had four groups of policies on workers’ lives, valued at $813 million, in the early 2000s. MetLife Inc., a big seller of corporate-owned life insurance, bought policies on “several thousand” of its own employees in 1993, 1998, and 2001. (There’s sometimes a bit more disclosure when insurers buy life insurance on their own employees; if they buy the policies from a subsidiary, they have to disclose the purchases as related-party transactions.)

The SEC requires that companies report increases in the amount of life insurance they have—but only if the increases are “material.” Materiality isn’t defined. “So some large companies with COLI don’t need to report it at all,” says a former government tax official.

Further, when companies report the holdings, they commonly report all their life insurance in aggregate. This includes “key man” policies taken out on top executives, and split-dollar policies, which are used to funnel lavish retirement benefits to top executives.

For investors, another challenge is knowing how much life insurance might be contributing to a company’s bottom line. Companies commonly aggregate the insurance-related income with other items in the “other income” section of their filings.

Clark/Bardes, the COLI consultant, is also vague. A footnote in the income section of its 2000 filing says the “other income” category “includes $1 million in life insurance proceeds.” The company received the $1 million when an employee died in a plane crash.