a

GAO

United States General Accounting Office

Report to Congressional Requesters

May 2004 BUSINESS-OWNED 

LIFE INSURANCE

More Data Could Be 

Useful in Making Tax 

Policy Decisions

GAO-04-303
www.gao.gov/cgi-bin/getrpt?GAO-04-303.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Davi M. 

D'Agostino at (202) 512-8678 or 

dagostinod@gao.gov. 

Highlights of GAO-04-303, a report to

congressional requesters 

May 2004

BUSINESS-OWNED LIFE INSURANCE

More Data Could Be Useful in Making Tax 

Policy Decisions 

Limited data are available on the prevalence and use of business-owned life 

insurance. Federal bank regulators have financial reporting requirements, 

but not all institutions holding policies meet reporting thresholds. The 

Securities and Exchange Commission (SEC), the Internal Revenue Service 

(IRS), and state insurance regulators told GAO that they generally have not 

collected comprehensive policy data because they have not had a need for 

such data in fulfilling their regulatory missions. GAO found, however, that 

some insurers have disclosed information about policy sales. Also, the Joint 

Committee on Taxation and the Office of Management and Budget have 

reported estimates of forgone tax revenues from these policies as $7.3 billion 

to $13 billion for the period 2004–2008, excluding forgone tax revenues on 

additional income from death benefit payments. Regulators said that they do 

not generally collect data on the intended use of policies, but that businesses 

can, for example, use business continuation policies to insure against the 

loss of a key employee or broad-based policies to fund employee benefits. 

The federal bank regulators told GAO that they have reviewed the holdings 

of institutions with significant amounts of business-owned life insurance 

against their guidelines and concluded that no major supervisory concerns 

exist. SEC officials said that the agency has relied on its broadly applicable 

requirement that public companies disclose information material to 

investors in their financial statements, which would include any material 

information related to business-owned life insurance; SEC did not have 

investor protection concerns about public firms’ ownership of the insurance. 

IRS had some requirements related to the tax treatment of the insurance and 

is reviewing compliance with these requirements. State laws governing the 

insurance differed; the four states’ regulators that GAO contacted described 

limited oversight of the policies, and these regulators and the National 

Association of Insurance Commissioners (NAIC) generally reported no 

problems with the policies. 

More comprehensive data could be useful to Congress in assessing the 

potential effects of legislative proposals that address the tax-favored 

treatment of business-owned life insurance. Costs would be incurred in 

obtaining the data. Such data would be most useful if reported separately for 

business continuation and broad-based policies because legislative 

proposals have generally treated these policies differently. Data on the 

amount of tax-free income that businesses received from death benefits 

could help explain the potential effect of changes to the tax treatment of 

policies on tax revenues. Businesses holding the policies or insurance 

companies that sold them could provide this and other data. SEC, 

Department of the Treasury (Treasury), and NAIC already collect financial 

information from businesses and insurers and could be required or asked to 

collect the data. Should Congress decide that the data would be useful, 

decisions would be required on, among other things, whether the benefits of 

collecting the data outweigh the costs of doing so. 

Business-owned life insurance is 

permanent insurance held by 

employers on the lives of their 

employees, and the employer is the 

beneficiary of these policies. Its 

attractive features, common to all 

permanent life insurance, generally 

include both tax-deferred 

accumulation of earnings on the 

policies’ cash value and tax-free 

receipt of the death benefit. 

Legislators have expressed 

concerns about the ability of 

employers to receive tax-favored 

treatment from insuring their 

employees’ lives. 

GAO was asked to discuss (1) the 

prevalence and use of businessowned life insurance, (2) federal 

and state regulation and oversight 

of these policies, and (3) the 

potential usefulness of and costs 

associated with obtaining more 

comprehensive data on businessowned life insurance. 

If Congress decides that it needs 

more data on business-owned life 

insurance, it may wish to consider 

having SEC, Treasury, or NAIC 

collect the data from businesses or 

insurance companies. SEC and 

Treasury expressed reservations 

about collecting the data, noting 

that the data is not needed to fulfill 

their regulatory missions. GAO 

recognized that these agencies do 

not need the data to fulfill their 

regulatory missions. That is, the 

data would be used in making tax 

policy decisions rather than doing 

regulatory oversight. 
Page i GAO-04-303 Business-Owned Life Insurance

Contents

Letter 1

Results in Brief 4

Background 7

Available Information on the Prevalence and Use of 

Business-Owned Life Insurance Is Limited 10

Regulators Have Applied Their Guidelines or Requirements and 

Have Generally Not Had Significant Regulatory Concerns about 

Business-Owned Life Insurance 21

More Comprehensive Data Could Be Useful to Congress; Costs 

Would Be Incurred in Obtaining the Data 34

Conclusions 36

Matter for Congressional Consideration 37

Agency Comments and Our Evaluation 37

Appendixes

Appendix I: Scope and Methodology 41

Appendix II: State Insurable Interest and Consent Provisions 44

Appendix III: Comments from the Department of the Treasury 51

GAO Comments 53

Appendix IV: Comments from the Internal Revenue Service 54

Appendix V: Comments from the Securities and Exchange Commission 55

GAO Comments 56

Appendix VI: Comments from the National Association of Insurance 

Commissioners 57

GAO Comments 59

Appendix VII: GAO Contacts and Staff Acknowledgments 60

GAO Contacts 60

Staff Acknowledgments 60

Tables Table 1: Banks and Thrifts with the Largest Concentrations of 

Business-Owned Life Insurance as of December 31, 2002, 

and Issues Cited in Regulators’ Most Recent 

Examinations 27

Table 2: State Insurable Interest and Consent Laws Applicable to 

Business-Owned Life Insurance in Selected States as of 

December 31, 2003 32
Contents

Page ii GAO-04-303 Business-Owned Life Insurance

Table 3: State Insurable Interest and Consent Laws Applicable to 

Business-Owned Life Insurance as of December 31, 

2003 44

Figures Figure 1: Cash Surrender Value of Business-Owned Life Insurance 

Reported by Some Banks and Thrifts as of December 31, 

2002 12

Figure 2: NAIC Model Guidelines on Business-Owned Life 

Insurance, December 2002 Revision 30

Abbreviations

FDIC Federal Deposit Insurance Corporation

IRS Internal Revenue Service

NAIC National Association of Insurance Commissioners

OCC Office of the Comptroller of the Currency

OMB Office of Management and Budget

OTS Office of Thrift Supervision

SEC Securities and Exchange Commission

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately.
Page 1 GAO-04-303 Business-Owned Life Insurance

United States General Accounting Office

Washington, D.C. 20548

A

May 13, 2004 Letr

The Honorable Daniel K. Akaka

The Honorable Jeff Bingaman

United States Senate

Congress has debated the appropriate income tax treatment of businessowned life insurance since at least the mid-1980s and is likely to continue 

doing so. Most recently, some members of Congress have expressed 

concern that more complete data are not available describing the 

prevalence and use of the insurance, information that could be used in 

assessing its income tax treatment and related policy issues. Businessowned life insurance—including corporate-owned, bank-owned, and trustowned life insurance—is permanent insurance1

 that an employer 

purchases on the lives of its employees, with the business as the policy 

beneficiary.2

 Attractive features of business-owned life insurance, which 

are features common to all permanent life insurance, generally include 

both tax-deferred earnings on the policies’ cash value and, if the policy is 

held until the death of the insured, tax-free income from the death benefit 

itself. Some business-owned life insurance protects against the death of 

owners or key employees (business continuation insurance), while some of 

it covers larger groups of employees (broad-based insurance). Generally, 

businesses can retain ownership of these policies after the employment 

relationship has ended. 

Before 1986, businesses could take loans against the cash value of their 

business-owned life insurance policies and deduct the interest expense 

from their taxable income without limitation. To address concerns that 

businesses were abusing their ability to deduct these interest expenses, 

Congress passed legislation in 1986 and 1996 to limit this practice. The 

Internal Revenue Service (IRS) and Department of Justice also pursued 

litigation against some businesses. Nonetheless, public policy issues have 

remained regarding the extent to which businesses should be allowed to 

1

Unlike term life insurance, permanent life insurance lasts for the life of the insured and 

accumulates cash value as it provides coverage. Businesses may purchase term life 

insurance on their employees; this report does not address such purchases.

2

This report focuses on businesses that own insurance on the lives of their employees. As 

such, it does not address charitable organizations that purchase insurance on the lives of 

their members or donors and businesses that purchase insurance on the lives of their 

creditors.
Page 2 GAO-04-303 Business-Owned Life Insurance

benefit from insuring their employees’ lives, with or without their consent, 

and the extent to which they should be allowed to receive tax advantages 

from holding these policies. Proponents of continuing the tax advantages 

of broad-based business-owned life insurance assert that these advantages 

are important to financing employee benefits because rules relating to 

other tax-favored financing mechanisms for employee benefits are too 

restrictive.3

 Some proponents also assert that changing the tax treatment of 

business-owned life insurance would affect businesses’ ability to provide 

employee benefits. Opponents of continuing the tax advantages of broadbased business-owned life insurance, while not directly addressing the 

potential effect of a change in tax treatment on the provision of employee 

benefits, state that Congress has already provided specific tax-favored 

financing mechanisms for these benefits and has determined the 

appropriate scope of such financing. Some opponents are also concerned 

that policy proceeds can be used for any purpose, even when the purchase 

was justified based on projected employee benefit liabilities, and that the 

tax-favored treatment of the policies gives them a competitive advantage 

over other investments. 

This report provides information for use in discussing the public policy 

issues related to permanent business-owned life insurance and expands on 

the preliminary observations we presented in October 2003 testimony 

before the Senate Finance Committee.4

 As agreed with your staff, the 

report discusses (1) the prevalence and use of business-owned life 

insurance, (2) federal and state regulatory requirements for and oversight 

of business-owned life insurance, and (3) the potential usefulness of and 

costs associated with obtaining more comprehensive data on businessowned life insurance. 

To obtain information on the prevalence and use of business-owned life 

insurance, we met with officials from federal agencies that require financial 

reporting from businesses, including: the federal bank regulators—

meaning for this report, the Board of Governors of the Federal Reserve 

System (the Federal Reserve), Federal Deposit Insurance Corporation 

3

Various types of plans and accounts exist that provide some tax preferences for funding 

employee benefits. These plans and accounts are subject to limitations that generally do not 

apply to business-owned life insurance.

4

U. S. General Accounting Office, Business-Owned Life Insurance: Preliminary 

Observations on Uses, Prevalence, and Regulatory Oversight, GAO-04-191T (Washington, 

D.C.: Oct. 23, 2003).
Page 3 GAO-04-303 Business-Owned Life Insurance

(FDIC), Office of the Comptroller of the Currency (OCC), and Office of 

Thrift Supervision (OTS);5

 the Securities and Exchange Commission (SEC); 

and IRS. We analyzed quarterly financial reports that banks and thrifts filed 

with federal bank regulators and annual financial reports (Forms 10-K) that 

publicly traded companies filed with SEC. In addition, we obtained some 

information on the prevalence and use of such insurance from the National 

Association of Insurance Commissioners (NAIC) and two life insurance 

trade associations.6

 We considered conducting a survey of life insurance 

companies to gather additional data but did not do so after a survey pretest 

in which insurance companies’ representatives told us that their companies 

did not routinely maintain the data we sought. We did not verify the 

accuracy of their statements. To describe federal and state regulatory 

requirements for and oversight of business-owned life insurance, we 

obtained information from officials of the federal bank regulators, SEC, 

IRS, NAIC, and the insurance departments of four states with differing 

business-owned life insurance provisions. To address the potential 

usefulness of and costs associated with obtaining more comprehensive 

data on business-owned life insurance, we reviewed legislative proposals 

to determine the types of data that could be useful and IRS, SEC, and 

NAIC’s reporting forms and instructions to understand what role these 

organizations or the Department of the Treasury (Treasury) might play in 

collecting more comprehensive data. We also discussed the challenges 

insurers might face in providing data and organizations might face in 

collecting it with insurance companies, Treasury (including IRS), SEC, and 

NAIC representatives, as applicable. Appendix I provides detailed 

information on our scope and methodology. We conducted our work 

between February 2003 and December 2003, in accordance with generally 

accepted government auditing standards.

5

The Federal Reserve regulates state-chartered banks that are members of the Federal 

Reserve System, their foreign branches and subsidiaries, and bank holding companies and 

their nonbank and foreign subsidiaries. FDIC regulates state-chartered banks that are not 

members of the Federal Reserve System and federally insured, state-chartered state savings 

banks. OCC regulates nationally chartered banks and federal branches and agencies of 

foreign banks. OTS regulates state and federally chartered savings associations and savings 

and loan holding companies. In this report, we refer to savings banks and savings 

associations as thrifts.

6

NAIC is a membership organization of chief state insurance regulators that helps promote 

coordination among the states.
Page 4 GAO-04-303 Business-Owned Life Insurance

Results in Brief Federal and state regulators, in pursuing their regulatory responsibilities, 

have collected limited data on the prevalence and use of business-owned 

life insurance. Federal bank regulators have collected more data than other 

regulators. Our analysis of the data showed that at least one-third of banks 

and thrifts held business-owned life insurance with a total cash surrender 

value of more than $56 billion as of December 31, 2002, and that banks and 

thrifts earned at least $2 billion from such policies in 2002.7

 We also found 

that, although SEC does not specifically require reporting on businessowned life insurance, nine of the largest life insurance companies reported 

to SEC in their Forms 10-K total premiums of more than $3 billion in 2002 

from their sales of such insurance. Also, surveys of life insurance 

companies estimated that premiums from new sales of business-owned life 

insurance totaled more than $9 billion in 2001. Further, although IRS has 

not collected comprehensive tax-related data on business-owned life 

insurance policies, the Joint Committee on Taxation and the Office of 

Management and Budget (OMB) have reported estimates of forgone tax 

revenues from these policies as $7.3 billion to $13 billion for the period 

2004–2008, excluding forgone tax revenues on additional income from 

death benefit payments. State insurance regulators have collected 

extensive financial information from insurance companies, but the data 

have not addressed the prevalence of business-owned life insurance. Some 

state insurable interest laws permit businesses to purchase businessowned life insurance to provide for business continuation when a key 

employee dies or as a strategy to help defray the costs of providing a 

variety of benefits to current and retired employees. However, unless a 

business places its policies in a trust that restricts the use of the proceeds 

to specific purposes, the business may use the proceeds for any purpose. 

Although federal and state regulators generally have not collected data that 

distinguish among the uses of business-owned life insurance, we found 

examples of how businesses stated they intended to use such policies from 

our analysis of Forms 10-K and a consulting firm’s survey. 

Federal bank regulators, SEC, IRS, and four state insurance regulators that 

we contacted have issued guidelines or requirements that are applicable to 

business-owned life insurance and generally have not had significant 

regulatory concerns about such insurance. As part of their responsibility to 

7

“Banks and thrifts” or “institutions,” as referred to in this report, are the commercial bank 

and thrift institutions regulated by the Federal Reserve, FDIC, OCC, and OTS. However, the 

report does not cover bank and thrift holding companies and foreign banks with domestic 

branches.
Page 5 GAO-04-303 Business-Owned Life Insurance

oversee the safety and soundness of banks and thrifts, the federal bank 

regulators have issued guidelines for institutions that buy business-owned 

life insurance. These regulators told us that they have applied the 

guidelines in their risk-based examinations of institutions with significant 

amounts of business-owned life insurance and generally have concluded 

that no major supervisory concerns exist. SEC officials said that the agency 

had not issued specific requirements for holders of business-owned life 

insurance, relying instead on its broadly applicable requirement that public 

companies disclose information material to investors in their financial 

statements. These officials also said that, in the absence of any past 

problems, SEC did not have investor-protection concerns about public 

firms’ ownership of business-owned life insurance. The Internal Revenue 

Code includes statutory requirements and IRS has issued regulatory 

requirements related to the tax treatment of the insurance. IRS officials 

said that the agency has been studying potential concerns related to the use 

of the policies. State laws governing business-owned life insurance 

differed; the four states’ regulators that we contacted described limited 

oversight of the policies, primarily involving the regulators’ review of 

proposed policy forms that insurers must submit for approval before using 

the forms to sell policies in their states. The state officials said that their 

departments had not routinely verified that employees covered by the 

policies had consented to being insured. However, these regulators and 

NAIC generally reported no problems with the policies.

More comprehensive data on the prevalence and use of business-owned life 

insurance could be useful to Congress in assessing the potential effects of 

legislative proposals that address the tax-favored treatment of the 

insurance. Costs would be incurred in obtaining the data. Such data would 

be most useful if reported separately for business continuation and broadbased policies because legislative proposals that would further limit the 

tax-favored treatment of these policies generally have treated these 

policies differently. Data on both categories could help in understanding 

the proportion of the total business-owned life insurance market that might 

be affected by future legislative proposals. Useful data that are not 

available include the amount of tax-free death benefit income that 

businesses received from these two types of policies—data that could help 

Congress better understand the potential effect of changes to their tax 

treatment on tax revenues. Other data on business continuation and broadbased policies that might be helpful to Congress in evaluating the potential 

effects of legislative proposals on businesses, their employees, and 

insurance companies include the annual premiums paid on new policies, 

the number and types of businesses that hold such policies, and the 
Page 6 GAO-04-303 Business-Owned Life Insurance

number of covered employees. Businesses that hold the policies or 

insurance companies that sold them could provide the data, but both types 

of entities would incur administrative costs in extracting the required 

information from their records and summarizing it. We did not discuss 

these costs with businesses, however, we expect that they would maintain 

records from which the required data could be extracted. Also, some 

businesses already aggregate this information for use in completing forms 

filed with IRS and SEC, which suggests that some businesses would not 

have difficulty providing the data. Nonetheless, businesses might differ in 

their willingness to voluntarily provide the data, depending at least in part 

on the cost and their perception of the benefits of doing so. While we did 

not independently determine the costs that insurers would incur in 

collecting the data, officials from several insurance companies told us that 

extensive effort would be required to identify the relevant policies. 

Although businesses might be able to identify the policies and provide the 

data more easily, requiring insurance companies to provide the data would 

substantially limit the number of affected entities. Similar to the data 

providers, the organization collecting, analyzing, and reporting the data 

would incur costs. SEC, Treasury, and NAIC are candidates for this role 

because each already collects financial information from businesses, 

insurers, or both and could modify existing reporting forms or, 

alternatively, conduct a survey to obtain the data. 

This report includes a matter that Congress may want to consider if it 

decides that it needs more comprehensive data on the prevalence and use 

of business-owned life insurance. Specifically, Congress could direct SEC 

or Treasury or encourage NAIC to obtain the needed data from either the 

holders of business-owned life insurance or life insurance companies. 

We received written comments on a draft of this report from Treasury, IRS, 

SEC, and NAIC that are reprinted in appendixes III–VI, respectively. 

Treasury commented that the report is well-researched and informative. In 

response to the matter for congressional consideration, SEC and Treasury 

expressed reservations about having a potential role in collecting data on 

business-owned life insurance, stating that assuming such a role would not 

be necessary to fulfill their regulatory missions. We recognized in the 

report that these agencies do not need the data to fulfill their regulatory 

missions. That is, the data would be used in making tax policy decisions 

rather than doing regulatory oversight. NAIC did not express reservations 

about collecting the data, but said that it would like to better understand 

and evaluate the need for and utility of the data and favored using a survey 
Page 7 GAO-04-303 Business-Owned Life Insurance

as an initial step in the data gathering process. The comments are 

discussed in greater detail at the end of this letter.

Background A business is generally allowed to insure an employee’s life when the 

business has an insurable interest in the employee.8

 Insurable interest is 

defined by state law and, once established at the time of purchase, 

continues for the life of the insured.9

 Thus, a business generally may 

maintain life insurance on employees even after their employment has 

ended. Business-owned life insurance can refer to corporate-owned life 

insurance (held by all types of corporations or only nonbank corporations), 

bank-owned life insurance, trust-owned life insurance (held by businessestablished trusts), or all three.10

Business-owned life insurance is permanent life insurance, which has an 

insurance component and a savings component. The premium for a newly 

issued permanent life insurance policy pays for the insurance component, 

but the premium initially exceeds the cost of providing life insurance 

protection for the insured person. The excess amount is added to the 

policy’s cash value, which earns interest or other investment income—

called inside buildup. The inside buildup is accrued income because the 

policyholder does not receive cash payment as the policy earns income. 

The Internal Revenue Code allows for the deferral of income tax on the 

accumulated inside buildup on life insurance policies and some other 

investments that appreciate in value, such as stocks, some bonds, and real 

estate.11 However, the Internal Revenue Code provides for income tax-free 

death benefit payments on life insurance, so that unlike other investments, 

the accrued income is not taxed if the policy is held until the insured party’s 

death. However, if a policy owner surrenders a policy before the death of 

the insured, the owner may incur a tax liability to the extent that the 

8

Bank regulators’ guidelines impose additional restrictions on allowable life insurance 

purchases for banks.

9

In New York, employees insured under broad-based plans may request that coverage on 

their lives be discontinued at any time.

10With a business-established trust, trust-owned life insurance is similar to corporate-owned 

or bank-owned life insurance. The business generally controls the trust that holds the 

policies—for example, a trust may maintain assets to fund nonqualified employee benefits.

11IRC §72(e)(1).
Page 8 GAO-04-303 Business-Owned Life Insurance

policy’s cash surrender value exceeds its cost base and may incur a tax 

penalty. The cost base is equal to the total premiums paid less dividends 

and withdrawals received from the policy. Also, if a business owns life 

insurance policies, the annual earnings and death benefit proceeds are 

among the factors that could make the business subject to the alternative 

minimum tax.12

To qualify as life insurance for tax purposes, a contract must qualify as a 

life insurance contract under applicable state law and meet one of two tests 

defined in Internal Revenue Code section 7702 to ensure that the contract 

is not overly investment oriented.13 In addition, while policy owners may 

access the cash value of their policies by borrowing against them, policy 

owners’ ability to deduct the interest on such loans in connection with 

policies covering employees, officers, and individuals financially interested 

in the business was limited to loans up to $50,000 per policy by the Tax 

Reform Act of 1986.14 The Health Insurance Portability and Accountability 

Act of 1996 eliminated the interest deductibility for these individuals,

12In general, the alternative minimum tax is based on a corporation’s regular taxable income 

adjusted for certain tax preference income items, such as exclusions, deductions, and 

credits. The amount due is the amount by which the tax computed under this system 

exceeds a corporation’s regular tax.

13Under the first of the two alternative tests to qualify as life insurance for tax purposes 

under Internal Revenue Code section 7702, the cash value of a policy cannot at any time 

exceed the net single premium that would have to be paid to fund the future benefits under 

the contract. This test is designed to exclude contracts with an investment orientation from 

the definition of life insurance. Under the second test, the cumulative premiums paid cannot 

exceed a limitation, computed at the time the policy is issued, and the ratio of the death 

benefit to the cash value of the policy can never fall below specified percentages. These 

tests are designed to restrict treatment as a life insurance contract to those contracts where 

policyholders make traditional levels of investment through premiums and to contracts that 

do not allow excessive amounts of cash value to build up in regard to the life insurance risk.

14The Tax Reform Act of 1986 disallowed interest deductions for interest on a loan in excess 

of $50,000 with respect to policies on the life of an officer, employee, or person financially 

interested in the business. This provision did not apply to policies purchased on or before 

June 20, 1986. The Health Insurance Portability and Accountability Act of 1996 provided that 

no deduction is allowed for interest on any indebtedness with respect to policies on any 

individual who is or has been an officer or employee or financially interested in any business 

carried on by the employer, regardless of the amount of debt with respect to policies 

covering the individual. An exception was provided for key persons where the indebtedness 

does not exceed $50,000. A key person was defined as an officer or 20-percent owner. The 

1996 legislation applied generally to interest paid or accrued after October 13, 1995, with a 

phase in period. The legislation generally did not apply to policies purchased on or before 

June 20, 1986.
Page 9 GAO-04-303 Business-Owned Life Insurance

except for policies on a limited number of key persons.15 Before the 

limitations adopted in 1986 and 1996, some businesses purchased 

“leveraged business-owned life insurance,” in which they leveraged their 

life insurance ownership by borrowing against the policies to pay a 

substantial portion of the insurance premiums and in doing so incurred a 

tax-deductible interest expense while realizing tax-free investment 

returns.16

State and federal legislatures considered numerous proposals in 2003 and 

early 2004 that would change the conditions under which businesses may 

purchase business-owned life insurance, the consent requirements for such 

purchases, or the tax treatment of the insurance. For example, California 

considered and passed a law to prohibit businesses from purchasing life 

insurance policies on employees that are not exempt from the state’s 

overtime compensation requirements. Texas considered, but did not adopt, 

a proposal to prohibit business-owned life insurance except in certain 

cases, such as when an employee is eligible to participate in an employee 

benefit plan and consents to being insured. Also, several members of 

Congress introduced legislation in 2003 that would have required employee 

consent or limited the tax-favored treatment of business-owned life 

insurance on policies taken out on employees that were not key persons, 

although none had been enacted by the end of the first session of the 108th 

Congress. The legislation would have affected the tax-favored treatment of 

such policies in various ways, such as taxing policy earnings and income 

from death benefits except on key person policies, taxing the death benefit 

payments on policies where the employee died more than 1 year after 

leaving employment, and limiting allowed deductions for a business’s 

general interest expenses based on its business-owned life insurance 

15The 1996 legislation also amended the Internal Revenue Code section 264 to limit the 

number of policies on key persons for which interest remained deductible to the greater of 

(1) 5 individuals or (2) the lesser of 5 percent of the total number of officers and employees 

of the business, or 20 individuals.

16In addition to the 1986 and 1996 legislation addressing leveraged business-owned life 

insurance policies, IRS and the Department of Justice prevailed in three cases involving the 

deductibility of loan interest related to such policies. These plans covered over 55,000 

employees. The courts found that the leveraged plans lacked economic substance, making 

the interest deduction unallowable. See In re C.M. Holdings, Inc., 301 F.3d 96 (3rd Cir. 

2002); Am. Elec. Power v. United States, 326 F.3d 737 (6th Cir. 2003), reh. denied, 338 F.3d 

534 (6th Cir. 2003), cert. denied, 72 U.S.L.W. 3446 (Jan. 12, 2004); Winn Dixie Stores v. 

Commissioner, 254 F.3d 1313 (11th Cir. 2001), cert. denied, 535 U.S. 986 (2002). The 

taxpayer prevailed in a fourth case. See Dow Chemical Co. v. United States, 250 F Supp. 2d 

748 (E.D. Mich. 2003), modified, 278 F. Supp. 2d 844 (E. D. Mich. 2003).
Page 10 GAO-04-303 Business-Owned Life Insurance

holdings. In addition, pension legislation that the Senate Finance 

Committee passed in February 2004 included provisions that would 

generally limit the tax-favored treatment of business-owned life insurance, 

except for policies on those individuals the legislation defined as key 

persons; require employees’ written consent for a business to hold 

insurance on their lives; and require businesses to report policy 

information to IRS.

Available Information 

on the Prevalence and 

Use of BusinessOwned Life Insurance 

Is Limited

In pursuing their regulatory missions, federal and state regulators have 

collected limited information on the prevalence and use of business-owned 

life insurance. Federal bank regulators have collected more data than other 

regulators on the prevalence of business-owned life insurance; however, 

the data are limited because the regulators did not require all banks and 

thrifts to report it. While SEC has not specifically required reporting on 

business-owned life insurance, we found that some life insurance 

companies had reported information on policy sales in their Forms 10-K 

and in a life insurance industry survey. Federal revenue estimators have 

estimated the annual forgone tax revenue attributable to earnings on the 

insurance, although IRS has not required businesses to report on the 

prevalence of business-owned life insurance. Information at the state level 

is limited, however, because state insurance regulators have not collected 

information on the prevalence of the policies through their financial 

reporting forms. Some state laws permit businesses to purchase businessowned life insurance for business continuation purposes or in connection 

with employee benefit plans, but businesses generally are not obligated to 

use the death benefit proceeds for a particular purpose. Although federal 

and state regulators generally have not collected data on the uses of 

business-owned life insurance, we found some examples of how 

businesses said they intended to use such policies. 

Federal Bank Regulators 

Have Collected the Most 

Data on the Prevalence of 

the Policies, but Not All 

Banks and Thrifts Provided 

Information 

In monitoring the safety and soundness of individual institutions, federal 

bank regulators have collected more financial information than other 

federal and state regulators on business-owned life insurance policies. For 

supervisory purposes, federal bank regulators have required that regulated 

institutions disclose in quarterly financial reports earnings from and the 

cash surrender value of business-owned life insurance if the amounts 

exceed a certain threshold. As discussed below, the regulators have used 

the amounts reported to determine the need for further review of 

institutions’ risk exposure. Business-owned life insurance is an asset 
Page 11 GAO-04-303 Business-Owned Life Insurance

reported at cash surrender value—that is, the sum of accumulated 

premium payments and inside buildup, less accumulated insurance costs, 

fees, and charges that the policyholder would be required to pay for 

surrendering the policy. It does not take into account income tax liabilities 

that might result from the surrender. The Federal Reserve, FDIC, and OCC 

require the institutions they regulate to disclose the cash surrender value of 

policies worth more than $25,000 in aggregate and exceeding 25 percent of 

“other assets,” which include such items as repossessed personal property 

and prepaid expenses. Through the end of 2003, OTS required the thrifts it 

supervises to report the cash surrender value of policies if the value was 

one of the three largest components of “other assets;” in 2004, OTS began 

requiring all the thrifts it supervises to report the cash surrender value of 

their policies. 

We found that about one-third of banks and thrifts—3,209 of 9,439, 

including many of the largest institutions—had disclosed the cash 

surrender value of their business-owned life insurance holdings as of 

December 31, 2002.17 The remaining two-thirds either did not hold 

business-owned life insurance or held such insurance but did not meet the 

reporting threshold. The total cash surrender value of reporting 

institutions’ policies was $56.3 billion. A total of 259 banks and thrifts with 

assets of $1 billion or more owned 88 percent ($49.4 billion) of the total 

reported cash surrender value (fig. 1). These 259 institutions included 23 

banks and thrifts that were among the top 50 largest institutions and that 

owned 66 percent ($36.9 billion) of the total reported cash surrender value. 

Because not all institutions that owned policies met the reporting 

threshold, these data indicate the minimum number of institutions that 

held business-owned life insurance and the aggregate cash surrender value 

of their policies; with this data we could not estimate the prevalence of 

business-owned life insurance or its value among institutions that did not 

report on their holdings. 

17The data do not include bank holding companies or foreign banks with domestic branches. 

The Federal Reserve started collecting data on business-owned life insurance from bank 

holding companies in 2003, but the data were not available at the time of our analysis. The 

reporting form for foreign banks with domestic branches did not have a standardized 

reporting category for business-owned life insurance.
Page 12 GAO-04-303 Business-Owned Life Insurance

Figure 1: Cash Surrender Value of Business-Owned Life Insurance Reported by 

Some Banks and Thrifts as of December 31, 2002

The federal bank regulators’ thresholds for reporting business-owned life 

insurance earnings differed from the ones for reporting cash surrender 

value, so not all of the same institutions reported earnings as reported cash 

surrender value.18 We found that nearly one-fifth of banks and thrifts 

reported their 2002 annual earnings on the cash surrender value of 

business-owned life insurance. As of December 31, 2002, some 1,563 

institutions reported $2.2 billion in such earnings. 

18The Federal Reserve, FDIC, and OCC require an institution to report the tax-deferred 

earnings on life insurance if the amount exceeds 1 percent of the sum of the institution’s 

total interest and noninterest income. OTS requires an institution to report adjustments to 

the cash surrender value of life insurance if the amount is one of the two largest items 

comprising the “other noninterest income” item, which includes net income from leased 

property and real estate held for investment, adjustments to prior periods, and other items.

Sources: GAO analysis of FDIC and OTS data.

12%

66%

12% share owned by

2,950 banks and thrifts

with less than $1 billion

total assets

Share owned by 

236 remaining

banks and thrifts

Share owned by 

23 of the 50 

largest banks

and thrifts 88% share owned by

259 banks and thrifts

with $1 billion total

assets or more

Total reported cash surrender value: $56.3 billion

22%
Page 13 GAO-04-303 Business-Owned Life Insurance

SEC Has Not Specifically 

Required Reporting on the 

Policies, but Some Insurers 

Have Reported Sales

SEC officials told us that the agency has not specifically required 

businesses to report on their purchases or sales of business-owned life 

insurance because such data generally are not material to public 

companies. According to SEC officials, agency regulations do not 

specifically require public companies to disclose the value of their 

business-owned life insurance in the financial statements submitted to the 

agency. Similarly, SEC does not specifically require public companies that 

sell business-owned life insurance to report on those sales. Rather, in 

administering federal securities laws, SEC requires public companies to 

prepare their financial statements in accordance with generally accepted 

accounting principles, which would require them to disclose information 

about business-owned life insurance policies that is material—that is, 

according to SEC, information that an investor would consider important 

in deciding whether to buy or sell a security or in making a voting decision 

related to a security that the investor owns.19 According to SEC officials, 

however, following generally accepted accounting principles would rarely 

require holdings of and earnings from business-owned life insurance to be 

shown as separate line items because they are unlikely to be financially 

material to a company.

Although SEC does not explicitly require insurance companies to report 

information on the business-owned life insurance policies they have sold, 

some insurance companies have disclosed such information on their Forms 

10-K. By reporting their revenue from business-owned life insurance 

premiums, life insurance companies show how significant sales of such 

policies are compared with total sales; they also provide an indication of 

the level of demand for business-owned life insurance. We reviewed the 

Forms 10-K of 32 life insurance companies that were among the 50 largest 

such companies ranked by assets. We found that nine insurers reported 

receiving, in aggregate, over $3 billion in total business-owned life 

insurance premiums in 2002 from new and, in some cases, previous sales. 

The amount of business-owned life insurance premiums received in 2002 

19According to the Financial Accounting Standards Board and other auditing guidance, the 

determination of what information should be disclosed as material in financial statements is 

a matter of professional judgment. Materiality involves both quantitative and qualitative 

considerations. Even though quantitatively immaterial, certain types of misstatements could 

have a material impact or warrant disclosure in the financial statements for qualitative 

reasons. The omission or misstatement of an item in a financial report is material if, in the 

light of surrounding circumstances, the magnitude of the item is such that it is probable that 

the judgment of a reasonable person relying upon the report would have been changed or 

influenced by the inclusion or correction of the item. 
Page 14 GAO-04-303 Business-Owned Life Insurance

ranged from 11 to 53 percent of each company’s 2002 total life insurance 

premiums for the four companies that reported this information. In 

addition, three insurance companies reported the accumulated cash 

surrender value of business-owned life insurance policies they had 

previously sold as totaling about $28 billion as of December 31, 2002. 

Separate from reporting to SEC, some insurance companies have also 

reported business-owned life insurance sales in response to industry 

surveys. CAST Management Consultants, Inc., conducts research on 

business-owned life insurance and has reported on premiums paid on new 

policies. A life insurance industry association and life insurance companies 

cited CAST’s surveys as the only currently available information on 

aggregate business-owned life insurance premiums. CAST estimated that in 

2001, premiums from new sales of business-owned life insurance totaled 

$9.3 billion: $5.2 billion in bank-owned life insurance premiums and $4.1 

billion in corporate-owned (excluding bank-owned) life insurance 

premiums. CAST also estimated that in 2002, premiums from new sales of 

corporate-owned (excluding bank-owned) life insurance totaled $3.2 

billion. CAST did not estimate bank-owned life insurance premiums for 

2002. CAST’s estimates were based on responses to a 2003 survey 

concerning corporate-owned life insurance premiums and a 2002 survey 

concerning bank-owned life insurance, increased by CAST adjustments. 

Each survey received responses from 20 life insurance companies, 

although not all of the same companies responded to both surveys.20 In 

addition, a representative of the A.M. Best insurer rating company said that 

the company collects information on business-owned life insurance, but 

does not currently report the data. A.M. Best reported aggregate premiums 

from business-owned life insurance for 1998 (the last year for which it 

reported data) as more than $10 billion for 20 large insurers.21 Because 

these surveys did not use statistical samples of insurers, the resulting 

estimates made from the limited number of respondents do not represent 

statistically valid estimates of all business-owned life insurance sales and, 

therefore, our interpretation of the resulting data is limited. The statistics 

from these surveys are meant to indicate only that some large insurance 

companies have had active sales in recent years and that the premiums in 

the aggregate are significant.

20“CAST 2002 COLI Marketplace Review and Assessment,” CAST Management Consultants, 

Inc. (July 2003). “CAST 2001 Bank-Owned Life Insurance Market Survey – Final,” CAST 

Management Consultants, Inc. (April 2002). 

21Cynthia Crosson, “Capturing COLI/BOLI,” Best’s Review, vol. 100, no. 9 (2000).
Page 15 GAO-04-303 Business-Owned Life Insurance

IRS Has Not Collected 

Information on the Policies, 

but Federal Revenue 

Estimators Have Estimated 

the Forgone Tax Revenues

IRS officials told us that the agency has not generally required businesses 

to report on the value of, earnings on, or death benefit income from 

business-owned life insurance policies. The officials noted that these 

amounts are not typically included in taxable income and that, therefore, 

the information is generally not needed. Businesses that are subject to the 

alternative minimum tax include income from death benefits and earnings 

from insurance when calculating the tax, but they are not required to list 

the insurance-related values on the alternative minimum tax form. Also, 

businesses that are required to complete Schedule M-1, Reconciliation of 

Income (Loss) per Books with Income per Return, as part of their Form 

1120, U.S. Corporation Income Tax Return, would report earnings on 

business-owned life insurance as part of the income recorded on their 

books but not on the tax return. However, according to IRS officials, these 

earnings might not be identified as earnings from business-owned life 

insurance, as they are often lumped together with other adjustments.22

Federal revenue estimators have estimated that the current tax treatment 

of earnings on the cash value of business-owned life insurance results in 

over a billion dollars in forgone tax revenues annually. In its “Estimates of 

Federal Tax Expenditures for Fiscal Years 2004-2008,” prepared for 

congressional use in analyzing the federal budget, the Joint Committee on 

Taxation estimated that the forgone tax revenues resulting from the tax 

treatment of investment income on life insurance for corporations would 

total $7.3 billion for 2004 through 2008. Similarly, OMB, in its fiscal year 

2005 budget “Analytical Perspectives,” reported Treasury’s estimate of 

forgone tax revenues resulting from the tax treatment of life insurance as 

$13 billion for 2004 through 2008. These estimates assumed policies would 

be held until the insureds’ deaths, making the current tax-deferred earnings 

tax-free. The estimates did not reflect the forgone tax revenues on the 

additional income from death benefit payments in excess of the premiums 

paid and the accumulated tax-deferred earnings. Officials involved in 

preparing these estimates said that, lacking comprehensive data on the 

earnings on business-owned life insurance, they developed their estimates 

using available data on life insurance companies’ investment income and 

assumptions about business-owned life insurance’s share of the total life 

insurance market. 

22A proposed IRS form, Schedule M-3, Net Income (Loss) Reconciliation for Corporations 

with Total Assets of $10 Million or More, would expand the current Schedule M-1 for certain 

corporate taxpayers and include specific reporting on life insurance proceeds and 

corporate-owned life insurance premiums.
Page 16 GAO-04-303 Business-Owned Life Insurance

State Insurance Regulators 

Have Not Collected Data on 

the Prevalence of the 

Policies

State insurance regulators, concerned with state requirements, rates, and 

solvency issues, have collected extensive financial information from 

insurers through NAIC’s standardized financial reporting forms, but not at 

the level of detail that would describe the prevalence of business-owned 

life insurance policies. State insurance regulators use insurers’ financial 

statements to monitor individual companies’ solvency. According to the 

four state regulators we contacted and NAIC, information on businessowned life insurance is not required or necessary for regulating solvency.23

Insurers’ financial statements list the number of policies and premiums 

collected during the reporting period, but the amounts are broken out only 

by individual and group policies, not by whether businesses or individuals 

owned the policies.

Businesses May Purchase 

Business-Owned Life 

Insurance for Various 

Purposes but Generally Are 

Not Required to Use Policy 

Proceeds for Those 

Purposes

Under state laws that define insurable interest, businesses may purchase 

life insurance for various purposes, including for business continuation—

that is, to ensure that a business can continue to operate when a key 

employee or owner dies. Historically, insurable interest reflected a family 

or business’s dependency on an individual and the risk of financial loss in 

the event of that individual’s death. Accordingly, a traditional use of 

business-owned life insurance is as key-person insurance, which is 

intended to ensure recovery of losses—such as a loss of earnings or added 

hiring costs—in the event of the death of key employees. In addition, 

businesses may use business-owned life insurance as part of “buy-sell 

arrangements” that allow the surviving owners to use the death benefits to 

purchase a deceased owner’s share of the business from the estate or heirs. 

In the 1980s and 1990s, several states expanded their definitions of 

employers’ insurable interest to permit purchases of broad-based businessowned life insurance in connection with employee compensation and 

benefit programs. Several of these states limit the aggregate amount of 

insurance coverage on nonmanagement employees to an amount 

commensurate with the business’s employee benefit plan liabilities or 

require that insured employees be eligible to receive employee benefits. 

23New York state insurance regulators said that while they did not collect detailed 

information on the prevalence or use of business-owned life insurance, information about 

insurers that have a high volume of business-owned life insurance sales would be useful to 

them in conducting market conduct examinations in which examiners visit an insurance 

company to evaluate its practices and procedures, such as for selling and underwriting 

insurance policies.
Page 17 GAO-04-303 Business-Owned Life Insurance

Information we obtained from officials of large banks and from our 

analysis of a sample of public companies’ Forms 10-K indicates that firms 

have related their purchases of broad-based business-owned life insurance 

to various types of employee benefit costs, including health care for 

current or retired employees, life and disability insurance for current or 

retired employees, workers’ compensation, qualified retirement plans—

including defined benefit and defined contribution plans, such as 401(k) 

plans—and nonqualified retirement plans, such as supplemental executive 

retirement plans.24 Consistent with this expanded use of business-owned 

life insurance, NAIC has observed that many products sold by life insurers 

have evolved to become primarily investment products. Also, consulting 

firms that specialize in business-owned life insurance transactions, life 

insurance brokers, and industry experts have emphasized the potential use 

of broad-based business-owned life insurance as a profitable long-term 

investment strategy to finance employee benefit costs and not merely as 

protection against financial losses that a business would incur in the event 

of the death of key persons.

According to bank regulators and life insurance industry representatives, 

when purchasing life insurance, businesses generally relate the amount of 

coverage they purchase on a group of employees to the value of their 

projected employee benefit costs. For example, a business might insure the 

lives of a group of employees such that the present value of expected cash 

flows to be received from the policies over time, net of premiums, would 

cover some portion or all of the present value of the business’s employee 

benefit expenses over the same period of time.25 When calculating the 

24Qualified retirement plans receive special tax treatment under present law and must meet 

requirements of the Internal Revenue Code. In order to be tax-qualified, private pension 

plans must satisfy a number of requirements, including minimum requirements on coverage 

and benefits, including requirements on who is covered by plans and how plans must 

provide benefits. A defined benefit plan is a qualified plan that promises a participant 

monthly payments at retirement, usually based on the participant’s salary and years of 

covered service. A defined contribution plan, such as a 401(k) plan, is a qualified plan in 

which the employer, the employee, or both contribute to the employee’s account under the 

plan, and the employee ultimately receives the balance of the account, which is based on 

contributions plus or minus investment gains or losses. Nonqualified retirement plans are 

not subject to many of the requirements of qualified plans and do not receive the same tax 

treatment as qualified plans. Further, in contrast to qualified retirement plans, assets 

intended to finance nonqualified plans are not typically beyond the reach of a business’s 

creditors in bankruptcy proceedings.

25Present value is the value today of amounts to be paid or received at a later date, taking 

into account the time value of money—that is, a dollar today is worth more than a dollar in 

the future, because the dollar today can be invested and earn interest.
Page 18 GAO-04-303 Business-Owned Life Insurance

expected future cash flows from the insurance, businesses would not 

generally assume policies will be surrendered if employees leave or retire 

because surrendering the policies would result in taxation and possibly 

surrender charges; rather, businesses would assume that they will hold the 

policies until the insured employees die.

Because businesses may hold business-owned life insurance policies for 

many years before receiving death benefit payments, businesses do not 

necessarily receive the cash flows from business-owned life insurance at 

the same time that they must pay their employee benefit expenses. 

According to insurance industry representatives, when businesses use the 

insurance in connection with health care benefits for retired employees, 

the death benefit proceeds are well timed for reimbursing the benefit costs, 

because retirees tend to incur their largest medical expenses in the last 

months of their lives. However, we found examples of businesses that said 

they used the insurance in connection with current employee benefit costs, 

such as active employee health care. In such cases, the timing of the death 

benefit payments would not necessarily correspond to the timing of 

employee benefit expenses because businesses must pay those expenses 

years before receiving death benefits on most insured employees. 

Regardless of a business’s reported purpose for purchasing businessowned life insurance, the business generally does not have an obligation to 

restrict its use of the life insurance proceeds to these purposes. Although 

the expected income from broad-based business-owned life insurance 

policies over time might be commensurate with a business’s expected 

employee benefit costs at the time of the insurance purchase, businesses 

are generally not required to use the proceeds from the policies to pay for 

employee benefits. Unless the policies were placed in a trust that restricted 

their use to employee benefit payments, the life insurance policies would 

be part of the unrestricted general assets of the business and, as such, 

could be used to pay any obligations of the business.26

Limited Data Show That 

Some Businesses Use Life 

Insurance in a Variety of 

Ways

Of the federal and state regulators we contacted, only OTS has required the 

institutions it regulates to provide information that distinguishes among the 

uses of business-owned life insurance. Through the end of 2003, OTS 

required the thrifts it supervises to report the value of their key-person 

26Life insurance held in certain trusts may be subject to creditors’ claims in bankruptcy.
Page 19 GAO-04-303 Business-Owned Life Insurance

policies and the value of business-owned life insurance policies purchased 

for other purposes as separate items, if the amounts met the reporting 

threshold. Of the $3.3 billion cash surrender value that 249 OTS-supervised 

thrifts reported owning as of December 31, 2002, about $400 million was for 

key-person insurance and $2.9 billion was for other business-owned life 

insurance. However, these amounts may not be representative of the 

proportions of key-person and other business-owned life insurance that 

these thrifts held. OTS’s disclosure threshold applied separately to each 

category, so that OTS-supervised thrifts could have been required to report 

on only one type of policy rather than the total value of their businessowned life insurance holdings. Beginning in 2004, OTS eliminated its 

reporting threshold so that all the thrifts it supervises are required to report 

the value of both their key-person and other business-owned life insurance 

policies. The new requirement will allow OTS to determine the cash 

surrender value of all key-person and other business-owned life insurance 

held by the institutions it supervises. 

Although SEC did not specifically require them to do so, we found that 

some businesses included information on how they intended to use 

business-owned life insurance in the Forms 10-K they filed with SEC. We 

reviewed the Forms 10-K of 100 randomly selected Fortune 1000 public 

companies. Of these, 11 provided information on the intended use of their 

business-owned life insurance policies. All 11 businesses reported using 

these policies to provide deferred compensation or benefits for executives; 

1 also reported using them to provide postretirement health care.27 For 

example, 1 of the 11 businesses reported having a supplemental executive 

retirement plan financed by life insurance that had a cash surrender value 

of about $66 million as of December 31, 2002. The amount of insurance 

coverage was designed to cover the full cost of the plan, which at that time 

was estimated to have a present value of about $69 million. Another 1 of the 

11 businesses reported that it had purchased policies with a cash surrender 

value of about $161 million as of February 28, 2003, with the intention of 

using the policies’ proceeds as a future financing source for postretirement 

medical benefits, deferred compensation, and supplemental retirement 

plan obligations aggregating $241.3 million. However, the business noted 

that the life insurance assets did not represent a committed financing 

27SEC requires companies to disclose information related to the compensation of top 

officers. Therefore, the fact that companies most frequently disclosed the use of businessowned life insurance in connection with executive compensation does not mean that this is 

necessarily the most common use of such policies.
Page 20 GAO-04-303 Business-Owned Life Insurance

source and that the business could redesignate them for another purpose at 

any time. 

Some large businesses have also provided survey responses suggesting that 

some business-owned life insurance is used to finance executive benefit 

plans. Clark Consulting has conducted annual executive benefits surveys of 

Fortune 1000 corporations and reported on respondents’ use of businessowned life insurance to informally fund nonqualified deferred 

compensation and supplemental executive retirement plans. Businesses 

informally fund such plans by planning to have assets available to pay for 

them, although the assets would not generally be protected in bankruptcy.28

From its 2003 survey, which had a 22 percent response rate, Clark 

Consulting reported that 93 percent of the respondents offered 

nonqualified deferred compensation plans, 69 percent of those with 

nonqualified deferred compensation plans informally funded them, and 55 

percent of those that informally funded the plans used business-owned life 

insurance to do so.29 Similarly, 71 percent of the respondents offered 

supplemental executive retirement plans, 53 percent of those respondents 

informally funded the plans, and 61 percent of those that informally funded 

the plans used business-owned life insurance to do so. Because the survey 

did not use a statistical sample of businesses and may be subject to other 

sources of error such as nonresponse bias, respondents’ answers cannot be 

projected to all Fortune 1000 companies or to all businesses in the United 

States.30 The statistics reported here are meant to indicate only that some 

large businesses are using life insurance in a variety of ways.

28Businesses could informally fund nonqualified deferred compensation and supplemental 

executive retirement plans by placing assets in a trust that would restrict their use.

29“Executive Benefits: A Survey of Current Trends, 2003 Results,” Clark Consulting (2003). 

Clark Consulting changed its name from Clark/Bardes Consulting in 2003. Clark/Bardes 

published the results of similar surveys from prior years, but comparisons among the 

surveys cannot be used to infer trends, because the design of the survey may have changed 

from year to year. We did not assess the quality of this survey’s methodology or the accuracy 

of its findings.

30Nonresponse bias results when potential providers of data do not respond; it can be 

introduced when respondents as a group differ from nonrespondents on some measured 

characteristic and consequently are likely to differ in their responses.
Page 21 GAO-04-303 Business-Owned Life Insurance

Regulators Have 

Applied Their 

Guidelines or 

Requirements and 

Have Generally Not 

Had Significant 

Regulatory Concerns 

about Business-Owned 

Life Insurance

Banks and thrifts are required to follow federal regulatory guidelines in 

purchasing business-owned life insurance. Officials from federal bank 

regulators that had examined some institutions’ purchases told us that 

these purchases had not raised major supervisory concerns. SEC’s general 

disclosure requirements apply to business-owned life insurance; the agency 

has not had specific investor-protection concerns about such policies. The 

Internal Revenue Code includes statutory requirements, and IRS has issued 

regulatory requirements related to the tax treatment of the insurance. IRS 

officials told us that the agency was studying potential concerns. States had 

differing laws concerning insurable interest and consent requirements for 

business-owned life insurance. The insurance regulators of the four states 

we contacted described limited oversight of business-owned life insurance 

sales, and the four state regulators and NAIC generally did not have 

concerns about the policies.

Federal Bank Regulators 

Examined Some 

Institutions’ Purchases of 

Business-Owned Life 

Insurance and Have Not 

Had Major Supervisory 

Concerns

Federal bank regulators have issued guidelines for purchases of businessowned life insurance that they have used in overseeing banks and thrifts’ 

holdings of such policies. The regulators’ oversight, consistent with their 

missions, includes assessing the safety and soundness of supervised 

institutions, and regulatory officials said that the agencies generally have 

not had major supervisory concerns about banks and thrifts’ businessowned life insurance holdings. They said that while business-owned life 

insurance carries some risk, policies that were purchased in accordance 

with their guidelines are generally not a major threat to an institution’s 

safety and soundness. The regulators cited other types of activities—such 

as commercial real estate, specialized, and subprime lending—as generally 

raising more supervisory concerns than business-owned life insurance 

because of increased risk or volatility.

OCC and OTS guidelines describe the permissible uses of business-owned 

life insurance.31 According to Federal Reserve and FDIC officials, their 

agencies generally follow OCC’s guidelines. The OCC and OTS guidelines 

state that banks and thrifts may purchase life insurance only for reasons 

incidental to banking, including insuring key persons and borrowers and 

31Department of the Treasury, OCC, “Bulletin 2000-23” (July 20, 2000). Department of the 

Treasury, OTS, “Regulatory Bulletin RB 32-26” (July 31, 2002). These bulletins rescinded 

previous guidelines. OCC officials said that the agency drafted revised guidance and 

circulated it to the other regulators for review in January 2004; the officials did not know 

when the revised guidance would be issued.
Page 22 GAO-04-303 Business-Owned Life Insurance

purchasing insurance in connection with employee compensation and 

benefit plans. The guidelines require that, before purchasing policies, a 

bank or thrift’s management conduct a prepurchase analysis that, among 

other things, determines the need for insurance and ensures that the 

amount of insurance purchased is not excessive in relation to the estimated 

obligation or risk. For example, the guidelines state that when purchasing 

life insurance on a group of employees, the institution may compare the 

aggregate obligation to the group (such as employee benefit costs) with the 

aggregate amount of insurance purchased. 

The guidelines require that the prepurchase analysis determine the amount 

of insurance needed using “reasonable” financial and actuarial 

assumptions, such as those for the time period or the discount rate used to 

calculate the present value of expected employee benefit costs.32 However, 

the guidelines do not specify parameters for the assumptions, such as the 

discount rate or time period, to be used in the prepurchase analysis—

parameters that affect the amount of insurance that can be purchased.33

OCC officials stated that specifying such parameters would have little or no 

effect because banks tend to purchase less insurance than they could 

justify based upon their expected employee benefit expenses, regardless of 

the assumptions used in prepurchase analyses. In addition to the 

requirements for determining the need for insurance, the guidelines state 

that banks and thrifts using business-owned life insurance for executive 

compensation should ensure that total compensation is not excessive—

that is, unreasonable or disproportionate to the services performed, taking 

into account factors such as the financial condition of the institution and 

compensation practices at comparable institutions. 

The OCC and OTS guidelines also require the bank or thrift’s prepurchase 

analysis to consider the risks associated with business-owned life 

insurance and to maintain effective senior management and board 

oversight of the purchases. In addition, the guidelines state that a bank or 

thrift should consider the size of its purchase of business-owned life 

insurance relative to the institution’s capital and diversify risks associated 

with the policies. The OCC and OTS guidelines require banks and thrifts to 

32The discount rate is the assumed interest rate used in a present value calculation, 

reflecting how much could be earned from investing today’s dollars.

33In general, assuming a lower discount rate or including additional years when calculating 

expected employee benefit costs would increase the present value of the costs, which could 

in turn increase the amount of insurance that could be purchased. 
Page 23 GAO-04-303 Business-Owned Life Insurance

document their decisions and continue to monitor, on an ongoing basis, the 

financial condition of the insurance companies that carry their policies. For 

example, the guidelines state that institutions should review an insurance 

company’s ratings and conduct further independent financial analysis, with 

the depth and frequency of such analysis determined by the relative size 

and complexity of the transaction. 

OCC officials explained that the agency’s guidelines do not require 

institutions to continue to compare their projected employee benefit costs 

with the projected cash flows from the insurance after purchasing the 

policies. However, purchases of additional insurance would require a 

prepurchase analysis, so that institutions would be required to update their 

comparisons at such times. Officials at three large banks said that their 

banks had not compared the projected employee benefit costs and 

projected insurance cash flows after purchasing the insurance. Officials at 

a fourth large bank said their bank had updated the comparison annually in 

conjunction with additional insurance purchases in recent years. 

Federal bank regulators told us that their risk-based examination programs 

are designed to target aspects of banks and thrifts’ purchases of businessowned life insurance that would raise supervisory concerns about 

institutions’ safety and soundness. They specifically identified the credit 

and liquidity risks associated with business-owned life insurance as 

concerns that could warrant attention during an examination. Credit risk 

arises from the potential failure of an insurance carrier that might then be 

unable to pay death benefits or return the cash surrender value of policies 

upon request. OCC and Federal Reserve officials said they were less 

concerned about credit risk when it was diversified—for example, when 

institutions held policies with several highly rated insurers. Liquidity risk 

arises from the long-term nature of life insurance and the cost to the bank 

or thrift of surrendering policies. 

OCC officials emphasized that other risks associated with business-owned 

life insurance could also raise supervisory concerns, particularly among 

institutions with relatively large holdings. Specifically, OCC officials said 

that the potential risk to institutions’ reputations could be of concern as a 

result of negative perceptions of their holding the policies. For example, 

the officials noted that under California’s new law, businesses must 

disclose to insured employees the existence and face amount of insurance 

policies purchased on their lives by the end of March 2004, which could 

negatively affect the businesses’ reputations if employees were unaware 

that the policies existed. The officials also cited potential concerns about 
Page 24 GAO-04-303 Business-Owned Life Insurance

transaction risk, which arises from an institution not fully understanding or 

properly implementing a transaction. For example, if an institution did not 

comply with applicable insurable interest laws in purchasing a policy, it 

may not be able to collect the death benefits on the policy.34 Finally, OCC 

and Federal Reserve officials cited potential concerns about tax risk—the 

risk that Congress could change the tax treatment of business-owned life 

insurance. If any such changes were applied to previously purchased 

policies, banks might not receive the returns on the policies that they had 

expected, which could, in turn, raise supervisory concerns with respect to 

certain institutions.35

The federal bank regulators explained that they determined whether to 

include business-owned life insurance in the scope of an examination 

based not only on their preliminary assessment of the level of risk 

associated with business-owned life insurance but also on the size of an 

institution’s holdings relative to capital. The regulators’ examination 

procedures, in general, direct examiners to identify concentrations of 

credit—instances where the institution’s exposure to a creditor or, in some 

cases, a group of creditors (such as an insurance company or companies 

from which the institution has purchased policies) exceeds 25 percent of 

the regulator’s measure of the institution’s capital. All of the regulators said 

that, if the cash surrender value of a bank or thrift’s policies exceeded this 

threshold, they would consider whether further supervisory review of 

these holdings was warranted. Such a review would help to ensure that the 

institution was not unduly exposed to credit or liquidity risk and that it was

34OCC officials cited a court decision concerning Wal-Mart Stores, Inc. as an illustration of 

transaction risk, see Mayo v. Hartford Life Ins. Co., 220 F. Supp. 2d 714 and 794 (S.D. Tex. 

2002), aff'd, 354 F. 3d 400 (5th Cir. 2004). In 2002, a federal district court in Texas found that 

Wal-Mart did not have an insurable interest in employees’ lives under Texas law, given the 

nature of the policies taken out on each of 350,000 Wal-Mart employees, and that under 

Texas law, Wal-Mart could not collect on the death benefits paid under policies covering 

deceased employees. Although the policies had been held by a trust in Georgia, the court 

found that Texas insurable interest law applied.

35In addition to the risks identified above, the OCC and OTS guidelines identify other types 

of risk, such as interest rate risk, price risk, and compliance risk, that institutions should 

consider when purchasing business-owned life insurance.
Page 25 GAO-04-303 Business-Owned Life Insurance

complying with the guidelines on business-owned life insurance.36 OCC 

officials also said that the difficulty of quantifying the reputation, 

transaction, and tax risks associated with the policies underscored the 

importance of examiners considering whether institutions had overly 

concentrated holdings of business-owned life insurance.

As of December 31, 2002, 467 banks and thrifts reported business-owned 

life insurance holdings in excess of 25 percent of their tier 1 capital.37 We 

asked the bank regulators to explain their oversight of 58 institutions with 

the largest concentrations, all in excess of 40 percent of tier 1 capital. Bank 

regulatory officials said that their agencies were monitoring these 

institutions’ levels of holdings through reviews of quarterly financial 

reports and had conducted reviews of the holdings as part of their 

examinations at many of the institutions. Officials from each regulator told 

us their agencies had concluded that major supervisory concerns did not 

exist about the amount of insurance the institutions owned, although the 

Federal Reserve and OCC had cited the need for some institutions to 

improve their oversight or internal controls related to the policies. 

Specifically, Federal Reserve officials said that the agency had reviewed 

business-owned life insurance holdings as part of its examinations of the 

nine Federal Reserve-supervised banks that we identified (table 1). Federal 

Reserve officials said that the agency’s examinations did not raise concerns 

about the nine banks’ total holdings of business-owned life insurance. 

However, the officials said that the Federal Reserve had made 

recommendations to four of the banks, including that they conduct more 

diligent prepurchase analyses, communicate more information to board 

members, enhance internal controls, and conduct quarterly reviews of 

insurance carriers’ financial condition. Based on a review of examination 

summary reports, FDIC officials said that FDIC had criticized the level of 

business-owned life insurance at only 1 of the 32 FDIC-supervised 

36Since July 2002, OTS has required thrifts to request its permission before investing more 

than 25 percent of total capital in business-owned life insurance policies. OTS officials said 

that the agency had declined the three requests it had received as of September 2003 

because it was not convinced the thrifts needed the additional insurance. The other bank 

regulators did not have such a requirement.

37Tier 1 capital is a measure of the equity cushion that banks have available to absorb loss, 

including credit losses from their holdings of business-owned life insurance. The ratio of 

cash surrender value to tier 1 capital is used as a proxy to measure potential risk 

concentrations including credit risk (the risk of counterparty default) arising from a bank’s 

business-owned life insurance holdings.
Page 26 GAO-04-303 Business-Owned Life Insurance

institutions we identified; the officials said that the summaries might only 

note the results of a review of business-owned life insurance if examiners 

identified problems, so it was unclear how many of the other institutions’ 

holdings had been reviewed. OCC officials told us that OCC did not have 

safety and soundness concerns about the amount of holdings at any of the 

15 OCC-supervised banks we identified. The officials distinguished 

between community banks (4 of the 15 we identified) and large banks (11 

of the 15 we identified), noting that OCC’s primary supervisory concern has 

been with the effectiveness of community banks’ ongoing oversight of their 

business-owned life insurance.38 They said that OCC had reviewed the 

holdings of at least three of the community banks we identified and had 

cited the need for one of these banks to improve ongoing risk management 

of the policies. In contrast, the OCC officials said that large banks generally 

have sophisticated risk management systems and manage their insurance 

investments well. Although the officials did not report how many of the 

large banks’ business-owned life insurance holdings had been reviewed 

during examinations, they said that these banks sometimes approach OCC 

examiners before making new insurance purchases and that, in this 

respect, OCC monitors some banks’ business-owned life insurance 

programs on an ongoing basis. OTS officials told us that OTS had examined 

both of the thrifts we identified and did not have supervisory concerns 

about their current holdings or policy oversight. 

38OCC generally defines community banks as banks with less than $1 billion in total assets. 

OCC characterizes banks in its Large Bank Supervision program as the largest and most 

complex national (federally chartered) banks. 
Page 27 GAO-04-303 Business-Owned Life Insurance

Table 1: Banks and Thrifts with the Largest Concentrations of Business-Owned Life Insurance as of December 31, 2002, and 

Issues Cited in Regulators’ Most Recent Examinations

Sources: GAO analysis of FDIC and OTS data for the number of institutions with largest concentrations and all four federal bank regulators for the number of examinations that cited concerns.

a

Examinations were conducted through September 2003, except that the Federal Reserve 

examinations were conducted through November 2003. 

b

FDIC and OCC officials did not report whether all examinations had included a review of businessowned life insurance holdings.

c

Of the 15 OCC-supervised banks, 4 were community banks and 11 were large banks. OCC generally 

defines community banks as banks with less than $1 billion in total assets. OCC characterizes banks 

in its Large Bank Supervision program as the largest and most complex national (federally chartered) 

banks. One examination of a community bank cited a concern related to business-owned life 

insurance. The number of large bank examinations that cited concerns was not available.

SEC Has Applied Its 

Disclosure Requirements 

and Has Not Had InvestorProtection Concerns about 

Business-Owned Life 

Insurance

SEC officials said that the agency’s regulations for public companies do not 

specifically address business-owned life insurance; rather, SEC has relied 

on its broadly applicable disclosure requirements to identify any investor 

protection concerns. As discussed, SEC, whose mission is to protect 

investors and maintain the integrity of the securities markets, requires 

public companies to disclose material financial and other information so 

that investors can make informed decisions. SEC officials said that 

business-owned life insurance is unlikely to be a material item. However, 

they added that the agency would have an oversight concern if it became 

aware of a public company’s failure to disclose material purchases of or 

earnings from business-owned life insurance or if problems developed in 

accounting for these policies. For example, a senior SEC official said that 

SEC might become aware of a failure to disclose material information if it 

was examining a poorly performing business and found that its 

management had not disclosed that the business was using business-owned 

life insurance to sustain itself. SEC officials said that, to date, no such 

problems have arisen, and the agency has not had investor-protection 

concerns about public companies holding business-owned life insurance.

Regulator

Institutions with business-owned life 

insurance holdings greater than 40 percent of 

tier 1 capital

Institutions whose most recent examination 

cited concerns or made recommendations 

related to business-owned life insurancea

The Federal Reserve 9 4

FDICb 32 1

OCCb, c 15 1

OTS 2 0

Total 58 6
Page 28 GAO-04-303 Business-Owned Life Insurance

IRS Has Issued 

Requirements for the Tax 

Treatment of Policies and Is 

Studying Potential Concerns

IRS, whose mission includes administering the tax law, had some 

requirements related to the tax treatment of business-owned life insurance. 

The Internal Revenue Code defines life insurance for tax purposes, 

establishes its tax treatment, and limits the deductibility of interest on 

loans taken against policies. In addition, in September 2003, IRS and 

Treasury issued final regulations on the tax treatment of split-dollar life 

insurance policies—policies in which the employer and employee generally 

share costs and benefits as part of an executive compensation 

arrangement.39 Because none of IRS’s prior rulings regarding the taxation 

of split-dollar arrangements had directly addressed the types of 

arrangements that have been widely used in recent years, IRS and Treasury 

issued interim guidance in 2001 and 2002 that culminated in the final 

regulations. Under the final regulations, corporations cannot provide taxfree compensation to executives using split-dollar policies, and a business’s 

premium payments are treated as loans to an executive who owns the 

policy. If the employer owns the policy, the regulations treat the executive’s 

interest in the policy’s cash value and current life insurance protection as 

taxable economic benefits to the executive.

IRS officials said that the agency was studying some possible remaining 

issues related to business-owned life insurance that is held by highly 

leveraged financial institutions such as banks and thrifts. Various sources 

have reported that the limitation on the deductibility of policy loan interest 

adopted in 1996 curtailed new sales of leveraged business-owned life 

insurance policies. However, IRS officials expressed concern that this 

limitation had not eliminated the tax arbitrage opportunities available 

through business-owned life insurance and that, for this reason, highly 

leveraged financial institutions such as banks and thrifts might be 

borrowing to indirectly finance their policies. Borrowing to indirectly 

finance policies can occur when businesses pay the premiums on life 

insurance policies by increasing debt that is not directly linked to the 

policies and then deducting the interest they pay on that debt from their 

taxable income.40 Although the Internal Revenue Code limits the amount of 

39“Split-Dollar Life Insurance Arrangements,” IRS, Department of the Treasury, 68 Fed. Reg. 

54336 (Sept. 17, 2003).

40Congressional Budget Office, Budget Options (Washington, D.C.: March 2003). 

Congressional Research Service, The Library of Congress, Corporate-Owned Life 

Insurance: Tax Issues (Washington, D.C.: updated June 26, 2003). Congressional Research 

Service, The Library of Congress, Taxation of Life Insurance Products: Background and 

Issues (Washington, D.C.: July 18, 2003).
Page 29 GAO-04-303 Business-Owned Life Insurance

deductible interest that is linked directly to business-owned life insurance, 

establishing such a link is difficult because businesses may incur debt for 

many purposes. Borrowing to indirectly finance policies presents a tax 

advantage to businesses because they receive tax-deferred inside buildup 

from life insurance policies indirectly financed with debt on which the 

interest expense is tax-deductible. 

In addition, IRS officials said that the agency is concerned that banks may 

be using separate account policies to maintain excessive control over 

investments, which is inconsistent with the Internal Revenue Code 

treatment of life insurance. Internal Revenue Code provisions were 

intended to ensure that the primary motivation in purchasing life insurance 

would be the traditional economic protection provided by such policies, 

while discouraging the use of tax-preferred life insurance as primarily an 

investment vehicle. In separate account life insurance, an asset account is 

maintained independently from the insurer’s general account. Compared 

with a general account policy, which offers either a guaranteed rate of 

return or a rate that varies at the insurer’s discretion, a separate account 

policy permits the policy owner latitude in the choice of investments, 

particularly equities.41 Businesses may also purchase private placement 

policies, or separate account policies that allow policyholders to negotiate 

key terms of the policies—such as who will act as investment adviser—

with the insurance company. These policies also offer investment 

alternatives that traditional separate account policies do not, including 

privately traded investments in start-up businesses and private venture 

capital funds. Based on IRS revenue rulings, the agency decides on a caseby-case basis whether the purchaser of a policy has excessive control over 

separate account assets. These revenue rulings have identified factors to 

consider, such as whether the purchaser directs the account to make a 

particular investment, sells or purchases assets in the account, or 

communicates with the investment adviser about the selection or quality of 

specific investments, and whether the account’s investment strategies are 

broad enough to prevent the purchaser from making particular investment 

decisions by investing in a subaccount. IRS officials said that the agency 

was studying its concerns about indirectly financing policies through 

borrowing and about using separate account policies at five banks that IRS 

had identified through routine examinations. The officials said that IRS had 

not taken action against any of these banks. 

41OCC and OTS guidelines on business-owned life insurance limit banks and thrifts’ equity 

holdings in separate accounts.
Page 30 GAO-04-303 Business-Owned Life Insurance

State Laws Differ, and Four 

States with Limited 

Oversight of BusinessOwned Life Insurance Have 

Not Had Significant 

Concerns

Although NAIC has developed model legislative guidelines for businessowned life insurance, the states are not required to follow them. NAIC 

initially developed model guidelines for business-owned life insurance in 

1992 and revised them in 2002 (fig. 2). The 1992 guidelines suggested that 

states consider including in their laws provisions that recognize employers’ 

insurable interest in employees, including nonmanagement employees who 

could expect to receive benefits. The 2002 revision added a 

recommendation for states to consider requiring employee consent to be 

insured and prohibiting employers from retaliating against employees who 

refused to grant their consent. However, states have passed a variety of 

laws regulating insurable interest and consent requirements for businessowned life insurance (see app. II).

Figure 2: NAIC Model Guidelines on Business-Owned Life Insurance, December 2002 Revision

While some states have followed NAIC’s guidelines, state consent 

requirements still differ. Since NAIC revised its guidelines in 2002, several 

states have passed legislation requiring employers to obtain employees’ 

written consent before taking insurance on their lives (others already had 

such requirements). Also, while some states have consent provisions that 

specifically address business-owned life insurance, in some states consent 

provisions apply to life insurance policies in general. Compendiums of 

state laws prepared by NAIC and the American Council of Life Insurers and 

our review of selected state statutes indicated that, as of December 31, 

The law should recognize that employers have a lawful and substantial economic interest in the lives of key employees and in other employees 

who have a reasonable expectation of benefiting from an employee welfare benefit plan.

Employers should be required to notify eligible employees of their proposed participation in the plan, and the employees should be given an 

opportunity to refuse to participate. On a prospective basis, employers should obtain the written consent of each individual being insured. 

Consent would include an acknowledgement that the employer may maintain the life insurance coverage even after the insured individual's 

employment has terminated.

An employer shall not retaliate in any manner against a current or a retired employee for refusing consent to be insured.

For non-key or nonmanagerial employees, the amount of coverage should be reasonably related to the benefits provided to the employees.

With respect to employer provided pension and welfare benefit plans, the life insurance coverage purchased to finance the plans should only be 

allowed on the lives of those employees and retirees who, at the time their lives are first insured under the plan, would be eligible to participate in 

the plan.

NAIC suggests that states considering a legislative response to insurable interest concerns regarding employers and their employees consider 

including the following elements in their law:

Source: NAIC.
Page 31 GAO-04-303 Business-Owned Life Insurance

2003, 35 states had laws requiring written consent (either for life insurance 

in general or specifically for business-owned life insurance), and another 4 

states had consent requirements that were satisfied if an employee did not 

object to a notice of the employer’s intent to purchase a policy. However, at 

least 18 of these states exempted group life insurance policies from 

consent requirements. Additionally, 1 state required employers to notify 

employees when purchasing business-owned life insurance, but did not 

require employee consent. 

We spoke with insurance department officials from California, Illinois, New 

York, and Texas. The insurable interest and consent provisions of the four 

states differed, but all allowed some purchases of business-owned life 

insurance and three required some form of consent; two required the 

amount of coverage to be related to employee benefit costs (table 2). The 

insurance department officials told us that they conduct limited oversight 

to test compliance with their states’ insurable interest and consent laws. 

They said that their primary method of addressing this issue was through 

policy form reviews, or assessments of the proposed forms that insurers 

would provide to policyholders when selling policies in their states. For 

example, New York insurance department officials said that department 

officials review policy forms for compliance with the state’s requirements 

and that, for policies on non-key employees, the form must describe 

insured employees’ right to discontinue the coverage on their lives and 

must note the statutory limitations on the coverage amounts. Also, a 

submittal letter that insurers must provide to the department along with the 

policy form must explain how the insurer will verify that New York’s 

insurable interest requirements are satisfied and, for non-key employees, 

whether the employer or the insurer will prepare the required employee 

consent notices. In Illinois, insurance department officials said that they 

review policy forms to ensure that the forms include the state’s statutory 

requirements related to business-owned life insurance, but the forms need 

not detail procedures for obtaining consent or determining appropriate 

amounts of coverage. 
Page 32 GAO-04-303 Business-Owned Life Insurance

Table 2: State Insurable Interest and Consent Laws Applicable to Business-Owned Life Insurance in Selected States as of 

December 31, 2003

Source: GAO analysis of state statutes. 

a

The Texas Department of Insurance noted that, notwithstanding the statute’s language, based on its 

legislative history, the department has consistently maintained that employee consent is required.

NAIC staff said that state insurance regulators generally have the authority 

to review policies currently in force for compliance with any state 

requirements. But the officials from the four states we contacted said that 

their departments had not routinely verified that employees covered by the 

policies had consented to being insured or, where applicable, tested 

State

Employer and employer-sponsored trusts’ insurable 

interest in current and former employees

Requirements for notifying or obtaining consent of 

insured employees

California • An employer may insure the lives of directors and officers 

or administrative, executive, or professional employees 

exempt from California overtime compensation 

requirements.

• An employer-sponsored trust providing employee or 

retiree benefits may insure the lives of those for whom 

benefits are to be provided.

• Employee written consent is required.

• Policies purchased on nonexempt employees prior to 

January 1, 2004, will be void no later than January 1, 

2010, unless the employer meets certain exceptions, 

including disclosing in writing information about such 

policies to insured employees.

Illinois • An employer or employer-sponsored trust may insure the 

lives of directors and officers and management, 

nonmanagement, and retired employees.

• Coverage of nonmanagement and retired employees is 

limited to an amount commensurate with the employer’s 

projected unfunded employee benefit plan liabilities for 

nonmanagement and retired employees.

• The consent requirement is satisfied if an employee does 

not reject coverage within 30 days of receiving written 

notice of the coverage.

New York • Employers may insure the lives of employees in whom the 

employer has a lawful and substantial economic interest in 

having the life of the insured person continue.

• Employers may insure the lives of employees or retirees 

who participate in or are eligible to participate in an 

employee benefit plan upon satisfaction of eligibility 

criteria. In such cases, the total amount of coverage 

cannot exceed employee benefit costs incurred since date 

of coverage plus projected future employee benefit costs.

For all employees:

• Employee notification and written consent are required.

For employees insured under the insurable interest 

provision related to participation in an employee benefit 

plan:

• The notification must state that the insured can have 

coverage discontinued at any time.

• When employment terminates, employees must receive 

notice that they can have coverage discontinued. 

Notification is not required if the employee has a right to 

receive benefits being financed by the insurance 

coverage.

Texas • Employers may purchase a group life policy to insure the 

lives of officers, directors, employees, and retired 

employees in an amount necessary to provide funds to 

offset liabilities related to fringe benefits.

• An individual may consent in writing to the purchase of or 

application for an individual or group life insurance policy 

and designation of any entity as beneficiary of the policy or 

owner of the policy.

• Employee consent is not required for policies purchased 

to offset liabilities related to fringe benefits.a

• Any individual may consent to a business’s purchase of 

and designation as beneficiary of a policy on the 

individual’s life.
Page 33 GAO-04-303 Business-Owned Life Insurance

whether coverage amounts were appropriate.42 An official from California’s 

insurance department said that the department did not routinely review 

business-owned life insurance sales, but added that the department had 

recently received complaints about at least one insurer and multiple 

employers. The official noted that the department was investigating these 

complaints, including reviewing documentation for the policies in question, 

and that any policies that were found to violate state provisions could be 

voided. Officials in Illinois, New York, and Texas said that a pattern of 

consumer complaints about business-owned life insurance would cause 

their departments to investigate the insurance sales during market conduct 

examinations of insurers or refer the matter to their legal division for an 

enforcement action.43 However, the officials said that generally they had 

not received complaints about business-owned life insurance. In addition, 

NAIC staff told us that the organization maintains a national database of 

consumer complaints made to state insurance regulators and that businessowned life insurance had not been a significant source of complaints. As a 

result, NAIC had not developed a separate category for tracking such 

complaints. However, relying on complaints may not be an effective means 

of identifying violations of state law related to business-owned life 

insurance, because employees who are not aware of their state’s 

notification and consent requirements and whose employers have not 

provided the required notification or obtained the required consent, would 

not know that they have a basis for complaining to their state insurance 

regulators.

42The Texas Department of Insurance suggested that no readily available, cost-effective 

alternatives exist to test for compliance with business-owned life insurance consent 

requirements.

43New York insurance department officials said that other factors might also cause the 

department to investigate an insurer. For example, they said that the department would 

investigate, as part of its market conduct examinations, insurers that sell a significant 

amount of business-owned life insurance. Officials said that, although the insurance 

department has not systematically collected data on the amount of business-owned life 

insurance companies have sold, they might ask a company about the extent of such sales 

during a pre-examination meeting to help the department target its market conduct 

examination.
Page 34 GAO-04-303 Business-Owned Life Insurance

More Comprehensive 

Data Could Be Useful 

to Congress; Costs 

Would Be Incurred in 

Obtaining the Data 

More comprehensive data on the prevalence and use of business-owned life 

insurance could be useful to Congress in assessing the potential effects of 

legislative proposals that address the tax-favored treatment of this 

insurance. Data would be most useful if reported separately for business 

continuation and broad-based policies because legislative proposals that 

would further limit the tax-favored treatment of business-owned life 

insurance generally have treated the policies differently—they have applied 

primarily to broad-based policies. Data on business continuation versus 

broad-based insurance would be useful in understanding the proportion of 

the total business-owned life insurance market that might be affected by 

future legislative proposals. Useful data that are not available include the 

amount of tax-free income received from the death benefit payments on 

business continuation and broad-based policies—data that could help 

Congress better understand the potential effect of changes to the tax 

treatment of these policies on tax revenues.44

Other data on the prevalence and use of business-owned life insurance, 

further broken down or identified by business continuation and broadbased policies, might also be helpful to Congress in evaluating the potential 

effects of legislative proposals on businesses, their employees, and 

insurance companies. The cash surrender value of business-owned life 

insurance policies could help assess whether the value of assets invested in 

such policies is consistent with the behavior that Congress wishes to 

encourage through tax preferences. The annual premiums paid on new 

policies could be used to determine the demand for business-owned life 

insurance and the potential effect of proposed legislative changes on the 

market for business-owned life insurance. The number of businesses that 

hold business-owned life insurance policies could provide information on 

how many businesses might be affected by proposed legislative changes. 

Additional information on the size, type, and geographic location of 

businesses holding the insurance could be used to characterize the 

businesses that might be affected. Finally, although obtaining an 

unduplicated count of the total number of people covered by businessowned life insurance might be impractical, data on the number of each 

business’s employees insured under such policies could be used, for 

44The total amount of tax-free income that a business receives from a policy is the death 

benefit payment less premiums paid. A business would have recognized some of this 

payment as tax-deferred earnings throughout the life of the policy. However, as discussed, 

these earnings do not become tax-free unless the policy is held until the death of the 

insured.
Page 35 GAO-04-303 Business-Owned Life Insurance

example, to determine the average number or percentage of employees 

covered by businesses that reported owning policies.45 Although more 

costly to obtain, data collected over multiple periods could help identify 

trends that might provide additional insights into the effects of legislative 

proposals.

Businesses that hold business-owned life insurance or insurance 

companies that sold the policies could provide the data for Congress’s use, 

but both types of entities would incur administrative costs in extracting the 

required information from their records and summarizing it. We did not 

discuss these costs with businesses, however, we expect that they would 

maintain financial records and insurance policy statements from which the 

required data could be extracted. Also, some businesses already aggregate 

this information for use in completing their income taxes or Forms 10-K 

filed with IRS and SEC, respectively, suggesting that some businesses 

would not have difficulty providing the data. Nonetheless, businesses might 

differ in their willingness to voluntarily provide the data, depending at least 

in part on the cost and their perception of the benefits of doing so. While 

we did not independently determine the costs that insurers would incur in 

collecting the data, officials from several insurance companies told us that 

extensive effort would be required to identify policies as business-owned 

life insurance, as opposed to policies in which a business is the owner but 

not the beneficiary, and extract the data that we identified as being useful 

for decision making. These officials also told us that it would be difficult 

for them to distinguish between business continuation and broad-based 

policies. Consistent with these concerns, three life insurance industry trade 

associations recently supported proposed legislation that would require 

businesses that hold business-owned life insurance to report some 

information on their policies to IRS. While businesses might be able to 

provide data on the policies they own more easily than insurance 

companies could provide information on the policies they have sold, 

requiring insurance companies to report would substantially limit the 

number of reporting entities. About 1,200 companies sell life insurance, 

according to NAIC, while many more businesses purchase it.

45Obtaining an unduplicated count of the total number of employees covered by businessowned life insurance could be impractical because businesses can continue to hold policies 

on employees who have left their employment and, therefore, more than one business can 

have policies on the same person.
Page 36 GAO-04-303 Business-Owned Life Insurance

The organization collecting, analyzing, and reporting the data would also 

incur costs. SEC, Treasury, and NAIC are candidates for this role, because 

each already collects financial information from businesses that purchase 

business-owned life insurance, insurers, or both. One of the agencies or 

NAIC could collect the data by modifying existing reporting instruments, 

such as the SEC Form 10-K, applicable IRS tax forms, or insurance 

company annual reporting forms. Alternatively, the agencies or NAIC could 

collect the data through a survey. We did not determine the resources that 

would be required for the agencies or NAIC to modify their existing 

reporting instruments or conduct a survey. Beyond the costs, other factors 

could be considered in selecting one of these or another organization to 

lead the effort. Either SEC or Treasury might be able to combine data on 

business-owned life insurance with other data that businesses already 

report to them, such as business size, type, or location. SEC currently 

collects information only from publicly traded companies, whereas 

Treasury, through IRS, requires all businesses, including life insurance 

companies, to file tax returns. While taxpayer information is confidential 

and would not be publicly available except in the aggregate, Congress 

would likely need only aggregate information. Collecting business-owned 

life insurance data through NAIC, a membership organization of chief state 

insurance regulators, assumes the data would be collected from insurance 

companies and would involve the organization’s voluntary cooperation. 

Conclusions The use of life insurance, which receives tax-favored treatment, has 

expanded from its traditional coverage of a family’s principal wage earners 

and a business’s key employees to broad-based coverage of a business’s 

other employees. Although recent legislative proposals have sought to limit 

the tax-favored treatment of business-owned life insurance, comprehensive 

data on the prevalence and use of such insurance have not been available 

for use in assessing the impact of these proposed changes. Should 

Congress conclude that such data would facilitate its ongoing deliberations 

on the appropriate tax treatment of business-owned life insurance, 

decisions would be required on what data are needed, who should provide 

the data (insurance buyers or sellers), who should collect the data (SEC, 

Treasury, NAIC, or another organization), how to collect the data 

(additional reporting or a survey), what it would cost to collect the data, 

and whether the benefits of collecting additional data warrant the cost of 

doing so. Important data for understanding the tax and other implications 

of changes in the tax-favored treatment of business-owned life insurance 

would be the amount of tax-free income received from death benefit 

payments, reported separately for business continuation and broad-based 
Page 37 GAO-04-303 Business-Owned Life Insurance

policies. Additional data of value could include the cash surrender value of 

policies, the annual dollar amount of premiums paid on new policies, the 

number of businesses that hold business-owned life insurance, the 

characteristics of businesses that own the policies, and the number of 

employees insured under such policies.

Matter for 

Congressional 

Consideration

If Congress decides that it needs more comprehensive data on the 

prevalence and use of business-owned life insurance, such as the tax-free 

income from death benefit payments and/or other select data reported 

separately for business continuation and broad-based policies, Congress 

could, among other alternatives, obtain the data by

• assigning responsibility to SEC or Treasury to (1) require purchasers of 

business-owned life insurance or insurers to report the data in their 

financial statements or federal tax returns, respectively, or (2) conduct a 

survey of the purchasers or insurers to obtain the data; or 

• encouraging NAIC to (1) require insurers to report the data in the annual 

reports they file with NAIC or (2) conduct a survey of insurers to obtain 

the data.

Agency Comments and 

Our Evaluation

We received written comments on a draft of this report from Treasury, IRS, 

SEC, and NAIC that are reprinted in appendixes III–VI, respectively. 

Treasury commented that the report is well-researched and informative, 

but together with SEC expressed reservations about the matter for 

congressional consideration. Both agencies were reluctant to have a 

potential role in collecting data on business-owned life insurance, stating 

that having such a role would not be necessary to fulfill their regulatory 

missions. NAIC did not express such reservations, but said that it would 

like to evaluate the need for and utility of the data and favored using a 

survey as an initial step in the data gathering process. In addition, we 

received technical comments from Treasury, the federal bank regulators, 

SEC, and NAIC that we incorporated into the report where appropriate. 

In addressing their concern about collecting the data described in our 

matter for congressional consideration, SEC and Treasury commented that 

because they do not need the data to fulfill their regulatory missions, they 

do not believe it would be appropriate for them to collect the data. 

Specifically, SEC expressed concern about collecting data for purposes 
Page 38 GAO-04-303 Business-Owned Life Insurance

other than protecting investors. Similarly, Treasury expressed concern 

about collecting information not directly needed to calculate tax liabilities 

or enhance IRS’s ability to audit tax returns. However, as discussed in our 

report, Treasury provides OMB the estimate of forgone tax revenues 

resulting from the tax treatment of life insurance, and OMB reports this 

estimate in its budget documents. As we also report, this estimate is not 

complete because it does not reflect the forgone tax revenues on the 

additional income from death benefit payments in excess of the premiums 

paid and the accumulated tax-deferred earnings. Accordingly, Treasury 

might find that gathering additional data would allow the agency to provide 

OMB with a more complete and accurate estimate. NAIC reiterated that 

collecting the data described in our matter for congressional consideration 

would go beyond what is needed to support states’ regulation of insurers’ 

solvency. But NAIC did not explicitly express reservations about being 

charged with collecting the data should Congress request that it do so. We 

recognized in the report that none of the potential candidates that we 

identified for collecting additional data on business-owned life insurance 

needs the data to fulfill its missions and that the data would be used 

primarily for making tax policy decisions rather than for providing 

regulatory oversight. As discussed in the report, if Congress decides that it 

needs more comprehensive data on business-owned life insurance, among 

its alternatives would be to turn to SEC, Treasury, NAIC, or another entity 

to collect the data.

Addressing the issue of how to collect the data, Treasury commented that it 

would be costly to design and distribute a survey, that response rates might 

be low without a penalty for noncompliance, and that Treasury would not 

be the best candidate to conduct a survey because it is not a “statistical 

gathering agency.” Regarding the latter, Treasury said that a survey of 

insurance products could be better performed by other organizations or 

agencies. As discussed in the report, we agree that collecting the required 

data would involve an investment of resources, whether it is done through 

a survey or via existing reporting mechanisms. We also agree that obtaining 

an adequate survey response rate presents a challenge. However, according 

to professional literature, congressional action making the survey
Page 39 GAO-04-303 Business-Owned Life Insurance

mandatory should significantly improve the response rate.46 Also, 

according to this literature, government surveys that have employed 

response improvement methods continue to achieve acceptable response 

rates. Additionally, the surveyed entities may be more likely to respond if 

they believed that doing so would be in their interest. For example, they 

might conclude that congressional action would be more favorable to them 

if it was based on more complete data. Further, although Treasury is not a 

statistical gathering agency, it has chosen to conduct surveys to provide 

required information to Congress, as well as for other purposes, such as to 

study the growth of investment in foreign securities. Treasury has also 

contracted out surveys, as have other federal agencies. NAIC also 

commented that collecting the data could entail significant costs. NAIC 

said that it would like to evaluate the need for and utility of collecting the 

data and suggested that an initial study sampling the data described in our 

matter for congressional consideration might be a cost-effective way to 

assess the need for broader data collection. We agree that such a strategy 

could be one way of approaching the data collection effort.

We are sending copies of this report to the Chairmen of the Senate 

Committee on Finance, House Committee on Financial Services, Joint 

Committee on Taxation, and other interested congressional committees. 

We will send copies to the Chairman of the Board of Governors of the 

Federal Reserve, Secretary of the Treasury, Chairman of FDIC, 

Commissioner of Internal Revenue, Comptroller of the Currency, Director 

of OMB, Director of OTS, Chairman of SEC, Executive Vice President of 

NAIC, and other interested parties. We also will make copies available to 

46Several studies have found that mandatory reporting has a positive effect on survey 

response rates. S. Cole, G. Kusch, C.E. Hoy, and J. Berry, “Studies of Nonresponse in 

Industrial Surveys” (paper presented at the International Conference on Establishment 

Surveys, Buffalo, NY, June 1993). D. Dillman, E. Singer, J. Clark, and J. Treat, “Effects of 

Benefits Appeals, Mandatory Appeals, and Variations in Statements of Confidentiality on 

Completion Rates for Census Questionnaires,” Public Opinion Quarterly, vol. 60, no. 3 

(1996). C. Paxson, D. Dillman, and J. Tarnai, “Improving Response to Business Mail 

Surveys,” in Business Survey Methods, eds. B. G. Cox et al. (New York, NY: Wiley, 1995), 

303-316. E. O’Brien, “Respondent Role As A Factor In Establishment Survey Response,” in 

Proceedings of the Second International Conference on Establishment Surveys, ed. 

American Statistical Association (Alexandria, VA: 2000), 1462-1467. 
Page 40 GAO-04-303 Business-Owned Life Insurance

others upon request. In addition, the report will be available at no charge 

on the GAO Web site at http://www.gao.gov. 

If you have any further questions, please call me at (202) 512-8678, 

dagostinod@gao.gov, or Cecile Trop at (312) 220-7600, tropc@gao.gov. 

Additional GAO contacts and staff acknowledgments are listed in appendix 

VII.

Davi M. D’Agostino

Director, Financial Markets and

 Community Investment
Page 41 GAO-04-303 Business-Owned Life Insurance

Appendix I

Scope and Methodology ApApenednxidexiIs

To obtain information on the prevalence and use of business-owned life 

insurance, we analyzed the quarterly financial reports—the Call Report and 

Thrift Financial Report—that banks and thrifts filed with their respective 

regulators. We obtained the data from the Federal Deposit Insurance 

Corporation (FDIC), which compiles Call Report and Thrift Financial 

Report data collected by the Board of Governors of the Federal Reserve 

System (the Federal Reserve), FDIC, the Office of the Comptroller of the 

Currency (OCC), and the Office of Thrift Supervision (OTS). We also 

obtained additional Thrift Financial Report data from OTS. Because 

regulators only began collecting the information in a consistent format at 

the beginning of calendar year 2001, our analysis covered the eight quarters 

ending March 31, 2001, through December 31, 2002. Although we did not 

independently verify the accuracy of the data, we assessed its reliability by 

discussing the data system with bank regulatory officials and examining 

the data for missing or unreasonable values. We concluded that the data 

were reliable for purposes of this report. 

To obtain further information on the prevalence and use of business-owned 

life insurance, we reviewed the most recent annual Form 10-K financial 

reports that publicly traded companies had filed with the Securities and 

Exchange Commission (SEC) between January 2002 and September 2003. 

To identify information about insurance companies’ sales of such policies, 

we reviewed the Forms 10-K of 32 life insurance companies that were 

among the 50 largest such companies ranked by assets. We also searched 

for references on how businesses used such policies in the Forms 10-K that 

a random sample of 100 Fortune 1000 public companies filed with SEC. 

Although the examples that we identified were not necessarily 

representative of all businesses that own these policies, they illustrated 

some uses of business-owned life insurance. We also reviewed industry 

literature, including studies by life insurance industry consultants and 

brokers, and interviewed experts to identify other surveys related to 

business-owned life insurance sales and use. We reviewed surveys 

conducted by CAST Management Consultants, Inc. that estimated 2001 and 

2002 business-owned life insurance premiums and by Clark Consulting that 

reported on businesses’ use of business-owned life insurance in 2003. We 

did not fully assess the quality of these surveys, but we determined that 

despite some limitations, the surveys illustrated the amount of some recent 

sales and some businesses’ uses of business-owned life insurance. 

We also obtained information concerning the prevalence and use of 

business-owned life insurance from officials of relevant federal regulatory 

agencies: four federal bank regulators (the Federal Reserve, FDIC, OCC, 
Appendix I

Scope and Methodology

Page 42 GAO-04-303 Business-Owned Life Insurance

and OTS), SEC, and the Internal Revenue Service (IRS). In addition, we 

reviewed the Joint Committee on Taxation’s and the Office of Management 

and Budget’s reported estimates of forgone tax revenues attributable to 

business-owned life insurance and obtained information from officials of 

both entities about the development of these estimates. We also obtained 

information about the prevalence and use of business-owned life insurance 

from the National Association of Insurance Commissioners (NAIC), two 

life insurance trade associations (the American Council of Life Insurers and 

the Association for Advanced Life Underwriting), and four large banks that 

held business-owned life insurance. 

In an effort to better describe the prevalence and use of business-owned 

life insurance, we also considered the possibility of conducting a survey of 

life insurance companies, but did not do so. Although representatives of six 

life insurance companies cooperated in a survey pretest, and American 

Council of Life Insurers representatives said that they would encourage 

their members to participate in the survey itself, the results of the pretest 

led us to conclude that we would not be able to obtain sufficiently reliable 

data to warrant conducting the survey. The insurance company 

representatives told us that their companies do not have a business need to 

maintain the comprehensive data on business-owned life insurance that we 

needed for the survey. We did not verify the accuracy of these statements. 

Still, for the reasons the insurance company representatives cited, we were 

uncertain whether we would receive an acceptable response rate to a 

survey. Also, insurance companies’ requests for anonymity would have 

precluded us from determining the percentage of total life insurance sales 

the survey respondents represented. 

To describe federal and state regulatory requirements for and oversight of 

business-owned life insurance, we met with officials of federal and state 

agencies that have regulatory authority related to business-owned life 

insurance to discuss their requirements and oversight activities and 

reviewed agency documentation and applicable federal and state laws. 

Specifically, we discussed requirements and oversight with officials at each 

of the four federal bank regulators and reviewed their guidelines, 

regulations, and reporting forms and instructions. We also discussed these 

topics with officials at SEC and IRS and reviewed their regulations, 

reporting requirements, and applicable sections of the Internal Revenue 

Code. We also interviewed NAIC staff to gain a perspective on state 

approaches to regulating business-owned life insurance and to discuss the 

organization’s model guidelines for state laws concerning such policies. To 

understand more about how states oversee compliance with their statutes, 
Appendix I

Scope and Methodology

Page 43 GAO-04-303 Business-Owned Life Insurance

we obtained information from officials of insurance departments in 

California, Illinois, New York, and Texas. We selected these states because 

they represented different geographical regions of the United States and 

had differing insurable interest and consent provisions for business-owned 

life insurance; we did not select states whose provisions did not 

specifically address business-owned life insurance because we concluded 

that their insurance departments would not have specific oversight 

activities or requirements for business-owned life insurance. We did not 

conduct a comprehensive evaluation of the quality of federal and state 

regulators’ oversight activities. For example, we did not review records 

from federal examinations of banks and thrifts or state examinations of 

insurers. In addition, although we did not review every state statute that 

could affect business-owned life insurance, we reviewed each state’s 

statutes that related specifically to business-owned life insurance. Further, 

to better understand differences in state laws concerning insurable interest 

and consent requirements for business-owned life insurance, we analyzed 

compendiums of state statutes from NAIC and the American Council of Life 

Insurers. 

To address the potential usefulness of and costs associated with obtaining 

more comprehensive data on business-owned life insurance, we reviewed 

state and federal legislative proposals for changing the tax treatment of 

business-owned life insurance or addressing other public policy issues 

related to this insurance and determined the types of data that could be 

useful in considering these kinds of proposals. We also assessed the extent 

to which the information we obtained on the prevalence and use of 

business-owned life insurance provided a comprehensive basis for decision 

making. In addition, we reviewed IRS, SEC, and NAIC’s reporting forms and 

instructions to understand what role these organizations or Treasury might 

play if Congress wanted them to collect, analyze, and report more 

comprehensive information on business-owned life insurance. We also 

discussed with representatives of six insurance companies the challenges 

insurers might face in providing data, including what data they would be 

able to readily provide and what data would be difficult to provide. Finally, 

we discussed challenges that might be faced in collecting the data with 

Treasury (including IRS), SEC, and NAIC representatives. 

We conducted our work between February 2003 and December 2003, 

primarily in Washington, D.C., in accordance with generally accepted 

government auditing standards.
Page 44 GAO-04-303 Business-Owned Life Insurance

Appendix II

State Insurable Interest and Consent 

Provisions ApendxiI

Table 3 provides information on state insurable interest and notification 

and consent provisions applicable to purchases of business-owned life 

insurance by employers or employer-sponsored trusts. 

Table 3: State Insurable Interest and Consent Laws Applicable to Business-Owned Life Insurance as of December 31, 2003

State

Employer and employer-sponsored trusts’ 

insurable interest in current and former employees

Requirements for notifying or obtaining consent of 

insured employees

Alabama • A corporation or employer-sponsored trust 

established for the sole benefit of the corporation may 

insure the lives of directors, officers, employees, or 

any other person whose death might cause financial 

loss to the corporation.

• An employer-sponsored trust established to provide 

employee benefits may insure the lives of employees, 

retirees, or their dependents or beneficiaries for 

whom the benefits are to be provided.

• Consent of insured is required, but the requirement is 

not specific to business-owned policies and excludes 

group life insurance.

Alaska • For people not closely related, an insurable interest 

includes a lawful and substantial economic interest in 

having the life of the insured person continue.

• Written consent of insured is required, but the 

requirement is not specific to business-owned 

policies and excludes group life insurance.

Arizona • For people not closely related, an insurable interest 

includes a lawful and substantial economic interest in 

having the life of the insured person continue.

• Consent of insured is required, but the requirement is 

not specific to business-owned policies and excludes 

group life insurance.

Arkansas • An employer or trust providing employee benefits may 

insure the lives of key employees and employees for 

whom employee benefits are to be provided.

• Coverage of non-key and nonmanagement 

employees must be reasonably related to the benefits 

provided to the employee.

• Insurance purchased to finance pension and welfare 

benefit plans is only allowed on the lives of 

employees who have a reasonable expectation of 

receiving such benefits at the time their lives are first 

insured.

• Employee written consent is required.

California • An employer may insure the lives of directors and 

officers or administrative, executive, or professional 

employees exempt from California overtime 

compensation requirements.

• An employer-sponsored trust providing employee or 

retiree benefits may insure the lives of those for 

whom benefits are to be provided.

• Employee written consent is required.

• Policies purchased on nonexempt employees prior to 

January 1, 2004, will be void no later than January 1, 

2010, unless the employer meets certain exceptions, 

including disclosing in writing information about such 

policies to insured employees.

Colorado • No statutory definition of employer or employersponsored-trust insurable interest exists.• No statutory consent requirement exists.
Appendix II

State Insurable Interest and Consent 

Provisions

Page 45 GAO-04-303 Business-Owned Life Insurance

Connecticut • No statutory definition of employer or employersponsored-trust insurable interest exists.

• The trustee of any voluntary employee benefits 

association may insure the lives of employees or 

retired employees to provide benefits to those 

employees.

• No statutory consent requirement exists.

Delaware • An employer providing benefits to some or all 

employees or their dependents or beneficiaries may 

insure the life of any employee.

• An employer-sponsored trust established 

substantially for the employer or for the benefit of 

employees or their dependents or beneficiaries may 

insure the lives of such employees.

• Employee notification or consent is not required if the 

employer is located in Delaware and has at least 50 

employees. 

Florida • No statutory definition of employer or employersponsored-trust insurable interest exists.• No statutory consent requirement exists.

Georgia • A corporation may insure the lives of directors, 

officers, employees, or any other person whose death 

might cause financial loss to the corporation.

• An employer-sponsored trust providing benefits to 

employees, retirees, or their dependents or 

beneficiaries may insure the lives of employees for 

whom such benefits are to be provided.

• Employee written consent is required.

Hawaii • For people not closely related, an insurable interest 

includes a lawful and substantial economic interest in 

having the life of the insured person continue.

• Written consent of insured is required, but the 

requirement is not specific to business-owned 

policies and excludes group life insurance.

Idaho • For people not closely related, an insurable interest 

includes a lawful and substantial economic interest in 

having the life of the insured person continue.

• Written consent of insured is required, but the 

requirement is not specific to business-owned 

policies and excludes group life insurance.

Illinois • An employer or employer-sponsored trust may insure 

the lives of directors and officers and management, 

nonmanagement, and retired employees.

• Coverage of nonmanagement and retired employees 

is limited to an amount commensurate with the 

employer’s projected unfunded employee benefit plan 

liabilities for nonmanagement and retired employees.

• The consent requirement is satisfied if an employee 

does not reject coverage within 30 days of receiving 

written notice of the coverage.

Indiana • An employer or employer-sponsored trust may insure 

the lives of employees for whom they provide 

employee benefits. 

• The consent requirement is satisfied if an employee 

does not reject coverage within 30 days of receiving 

notice of the coverage.

Iowa • An employee or employer-sponsored trust may insure 

the lives of employees, retirees, officers, managers, 

directors, owners, shareholders, and members.

• Coverage of nonmanagement and non-key 

employees must be reasonably related to the benefits 

provided to the employees.

• Employee written consent is required.

(Continued From Previous Page)

State

Employer and employer-sponsored trusts’ 

insurable interest in current and former employees

Requirements for notifying or obtaining consent of 

insured employees
Appendix II

State Insurable Interest and Consent 

Provisions

Page 46 GAO-04-303 Business-Owned Life Insurance

Kansas • An employer or employer-sponsored trust for the 

benefit of employees may insure the lives of directors, 

employees, or retirees.

• Coverage of nonmanagement and retired employees 

is limited to an amount commensurate with the 

aggregate projected liabilities under all employee 

welfare benefit plans.

• The consent requirement is satisfied if an employee 

does not reject coverage within 30 days of receiving 

notice of the coverage.

Kentucky • A corporation that provides active or retired 

employees with retirement or other benefits, or a trust 

established by the corporation for its sole benefit, 

may insure the lives of active or retired employees 

who are covered by the retirement or other benefit 

plan.

• Written consent of insured is required, but the 

requirement is not specific to business-owned 

policies and excludes group life insurance.

Louisiana • For people not closely related, an insurable interest 

includes a lawful and substantial economic interest in 

having the life of the insured person continue.

• Written consent of insured is required, but the 

requirement is not specific to business-owned 

policies and excludes group life insurance.

Maine • A corporation or trust may insure the lives of 

employees, former employees, and retirees for the 

purpose of funding pre- and postretirement benefits, 

provided that the insured employees are selected by 

objective standards and that the proceeds are used 

for the sole purpose of funding the benefit programs 

covering at least a broad class of employees.

• Employee written consent is required.

Maryland • A private or public corporation or a trust established 

by such a corporation for the benefit of employees 

may insure the lives of key employees.

• A public corporation or a trust established by such a 

corporation may insure the lives of non-key 

employees who have been employed at least 12 

consecutive months, provided the amount of 

coverage on non-key employees is commensurate 

with employer-provided benefits.

• In general, consent of insured is required, but the 

requirement is not specific to business-owned 

policies and excludes group life insurance.

• Non-key employees of public corporations must 

consent in writing to be insured.

Massachusetts • A corporation or employer-sponsored trust 

established for the sole benefit of the corporation may 

insure the lives of directors, officers, employees, or 

any other person whose death might cause financial 

loss to the corporation.

• An employer-sponsored trust established to provide 

employee benefits may insure the lives of employees 

or retirees for whom the benefits are to be provided.

• Written consent of insured is required, but the 

requirement is not specific to business-owned 

policies and excludes group life insurance.

(Continued From Previous Page)

State

Employer and employer-sponsored trusts’ 

insurable interest in current and former employees

Requirements for notifying or obtaining consent of 

insured employees
Appendix II

State Insurable Interest and Consent 

Provisions

Page 47 GAO-04-303 Business-Owned Life Insurance

Michigan • An employer or a trust maintained for the purpose of 

providing for the cost of benefits under an employee 

benefit plan may insure the lives of directors, officers, 

and managers and nonmanagement and retired 

employees.

• Coverage of nonmanagement and retired employees 

is limited to an amount commensurate with the 

employer’s projected unfunded employee benefit plan 

liabilities for nonmanagement and retired employees.

• For business-owned life insurance purchased by an 

employer, employee written consent is required.

• For business-owned life insurance purchased by a 

trust maintained for the purpose of providing for the 

cost of benefits, written notice is required, and the 

trust may purchase insurance only if the employee 

does not object in writing to the coverage.

Minnesota • A corporation or employer-sponsored trust providing 

benefits to employees may insure the lives of 

employees for whom the benefits are to be provided.

• Employee written consent is required.

Mississippi • A corporation or trust may insure someone’s life if the 

corporation or trust has a lawful and substantial 

economic interest in having the life of the insured 

person continue.

• Written consent of insured is required, but the 

requirement is not specific to business-owned 

policies and excludes group life insurance.

Missouri • An employer or employer-sponsored trust for the 

benefit of employees may insure the lives of directors, 

employees, or retirees.

• Coverage of nonmanagement and retired employees 

is limited to an amount of aggregate projected death 

benefits commensurate with the aggregate projected 

liabilities to employees under all employee welfare 

benefit plans.

• Written notice is required, and the insurance may be 

purchased only if the employee does not object in 

writing within 30 days of the notice of coverage.

Montana • For people not closely related, an insurable interest 

includes a lawful and substantial economic interest in 

having the life of the insured person continue.

• Written consent of insured is required, but the 

requirement is not specific to business-owned 

policies and excludes group life insurance.

Nebraska • For people not closely related, an insurable interest 

exists when, because of a pecuniary relationship, the 

beneficiary expects some benefit in having the life of 

the insured person continue.

• Written consent of insured is required, but the 

requirement is not specific to business-owned 

policies and excludes group life insurance.

Nevada • For people not closely related, an insurable interest 

includes a lawful and substantial economic interest in 

having the life of the insured person continue.

• Written consent of insured is required, but the 

requirement is not specific to business-owned 

policies and excludes group life insurance.

New Hampshire • A business may insure a person’s life if the business 

expects pecuniary benefit or advantage in having the 

life of the insured person continue.

• Written consent of insured is required, but the 

requirement is not specific to business-owned 

policies.

New Jersey • A corporation may insure the lives of directors, 

officers, or employees whose death might cause 

financial loss to the corporation.

• A trust established and fully funded by a corporation 

to provide benefits to employees may insure the lives 

of employees for whom such benefits are to be 

provided.

• No statutory consent requirement exists.

New Mexico • For people not closely related, an insurable interest 

includes a lawful and substantial economic interest in 

having the life of the insured person continue.

• Written consent of insured is required, but the 

requirement is not specific to business-owned 

policies and excludes group life insurance.

(Continued From Previous Page)

State

Employer and employer-sponsored trusts’ 

insurable interest in current and former employees

Requirements for notifying or obtaining consent of 

insured employees
Appendix II

State Insurable Interest and Consent 

Provisions

Page 48 GAO-04-303 Business-Owned Life Insurance

New York • Employers may insure the lives of employees in which 

the employer has a lawful and substantial economic 

interest in having the life of the insured person 

continue.

• Employers may insure the lives of employees or 

retirees who participate in or are eligible to participate 

in an employee benefit plan upon satisfaction of 

eligibility criteria. In such cases, the total amount of 

coverage cannot exceed employee benefit costs 

incurred since date of coverage plus projected future 

employee benefit costs.

For all employees:

• Employee notification and written consent are 

required.

For employees insured under the insurable interest 

provision related to participation in an employee benefit 

plan:

• The notification must state that the insured can have 

coverage discontinued at any time.

• When employment terminates, employees must 

receive notice that they can have coverage 

discontinued. Notification is not required if the 

employee has a right to receive benefits being 

financed by the insurance coverage.

North Carolina • An employer or business trust may insure the life of 

any employee.

• A trust to provide pension benefits may insure the life 

of any person covered by the pension plan.

• No statutory consent requirement exists.

North Dakota • A corporation or employer-sponsored trust providing 

employee benefits may insure the lives of employees 

for whom the benefits are to be provided.

• Employee written consent is required.

Ohio • An employer or employer-sponsored trust for the 

benefit of employees may insure the lives of directors, 

employees, or retirees. 

• Coverage of nonmanagement and retired employees 

is limited to an amount of aggregate projected death 

benefits commensurate with the aggregate projected 

liabilities to employees under all employee benefit 

plans.

• Written notice and employee written consent are 

required.

Oklahoma • An employer or employer-sponsored trust for the 

benefit of employees may insure the lives of directors, 

employees, or retirees.

• Coverage of nonmanagement and retired employees 

is limited to an amount agreed to by the employee or, 

in the absence of an agreement, an amount of 

aggregate projected death benefits commensurate 

with the aggregate projected liabilities to employees 

under all employee welfare benefit plans.

• Written notice and employee written consent are 

required.

• Unless otherwise agreed, the employer must offer to 

sell the policy to the employee upon termination of 

employment.

Oregon • No statutory definition of employer or employersponsored-trust insurable interest exists.• Written consent of insured is required, but the 

requirement is not specific to business-owned 

policies and excludes group life insurance.

Pennsylvania • A corporation or a trust established to provide 

benefits to a corporation’s officers, directors, 

principals, partners, and employees may insure the 

lives of such people.

• Written notification and written consent of insured are 

required.

(Continued From Previous Page)

State

Employer and employer-sponsored trusts’ 

insurable interest in current and former employees

Requirements for notifying or obtaining consent of 

insured employees
Appendix II

State Insurable Interest and Consent 

Provisions

Page 49 GAO-04-303 Business-Owned Life Insurance

Rhode Island • An employer or employer-sponsored trust may insure 

the lives of key employees.

• An employer or employer-sponsored trust may insure 

the lives of other employees, former employees, and 

retirees for the sole purpose of funding the cost of 

preretirement and postretirement benefits.

• The amount of coverage on non-key employees is 

limited to an amount commensurate with employerprovided benefits to those employees.

• Consent of insured is required for policies benefiting 

tax-exempt charitable organizations, but the 

requirement does not address business-owned 

policies.

South Carolina • No statutory definition of employer or employersponsored-trust insurable interest exists.• No statutory consent requirement exists.

South Dakota • For people not closely related, an insurable interest 

includes a lawful and substantial economic interest in 

having the life of the insured person continue.

• Written consent of insured is required, but the 

requirement is not specific to business-owned 

policies and excludes group life insurance.

Tennessee • No statutory definition of employer or employersponsored-trust insurable interest exists.• No statutory consent requirement exists.

Texas • Employers may purchase a group life insurance 

policy to insure the lives of officers, directors, 

employees, and retired employees in an amount 

necessary to provide funds to offset liabilities related 

to fringe benefits.

• An individual may consent in writing to the purchase 

of or application for an individual or group life 

insurance policy and designation of any entity as the 

beneficiary of the policy or owner of the policy.

• Employee consent is not required for policies 

purchased to offset liabilities related to fringe 

benefits.a

• Any individual may consent to a business’s purchase 

of and designation as beneficiary of a policy on the 

individual’s life.

Utah • An employer or employer-sponsored-trust may insure 

the lives of directors, officers, managers, 

nonmanagement employees, and retirees.

• Coverage for nonmanagement and retired employees 

is limited to an amount commensurate with the 

employer’s unfunded employee benefit liabilities.

• Employee written consent is required.

Vermont • No statutory definition of employer or employersponsored-trust insurable interest exists.• No statutory consent requirement exists.

Virginia • A corporate employer or employee benefit trust may 

insure the lives of key employees and other 

employees who have been employed for 12 

consecutive months.

• Coverage on non-key employees is limited to an 

amount commensurate with employer-provided 

benefits to these employees.

• Written notice is required.

Washington • For people not closely related, an insurable interest 

includes a lawful and substantial economic interest in 

having the life of the insured person continue.

• Written consent of insured is required, but the 

requirement is not specific to business-owned 

policies and excludes group life insurance.

West Virginia • For people not closely related, an insurable interest 

includes a lawful and substantial economic interest in 

having the life of the insured person continue.

• Written consent of insured is required, but the 

requirement is not specific to business-owned 

policies and excludes group life insurance.

(Continued From Previous Page)

State

Employer and employer-sponsored trusts’ 

insurable interest in current and former employees

Requirements for notifying or obtaining consent of 

insured employees
Appendix II

State Insurable Interest and Consent 

Provisions

Page 50 GAO-04-303 Business-Owned Life Insurance

Source: GAO analysis of state statutes.

a

The Texas Department of Insurance noted that, notwithstanding the statute’s language, based on its 

legislative history, the department has consistently maintained that employee consent is required.

Wisconsin • No statutory definition of employer or employersponsored-trust insurable interest exists.• Written consent of insured is required, but the 

requirement is not specific to business-owned 

policies.

Wyoming • For people not closely related, an insurable interest 

includes a lawful and substantial economic interest in 

having the life of the insured person continue.

• Written consent of insured is required, but the 

requirement is not specific to business-owned 

policies and excludes group life insurance.

(Continued From Previous Page)

State

Employer and employer-sponsored trusts’ 

insurable interest in current and former employees

Requirements for notifying or obtaining consent of 

insured employees
Page 51 GAO-04-303 Business-Owned Life Insurance

Appendix III

Comments from the Department of the 

Treasury ApendxiI

Note: GAO comments 

supplementing those in 

the report text appear 

at the end of this 

appendix.

See comment 1.

Now on p. 29.
Appendix III

Comments from the Department of the 

Treasury

Page 52 GAO-04-303 Business-Owned Life Insurance

Now on p. 36.

Now on p. 36.
Appendix III

Comments from the Department of the 

Treasury

Page 53 GAO-04-303 Business-Owned Life Insurance

The Department of the Treasury (Treasury) commented on our matter for 

congressional consideration, which suggested that, among other 

alternatives, Congress could assign responsibility to Treasury for collecting 

data on business-owned life insurance. We discuss these comments in the 

Agency Comments and Our Evaluation section of this report. We also 

modified the report based on the technical comments that Treasury 

provided, as appropriate. In addition, discussed below is GAO’s detailed 

response to another comment from Treasury’s April 23, 2004, letter.

GAO Comments 1. Treasury commented that the report leaves the impression that interest 

not linked directly to business-owned life insurance is almost always 

deductible, noting that the Internal Revenue Code generally allocates a 

portion of the interest expense of a business to its unborrowed policy 

cash values. However, Treasury also noted that this provision does not 

apply to contracts that cover the life of a person who is an officer, 

director, or employee of the business. Our report addresses businessowned life insurance as permanent insurance that an employer 

purchases on the lives of employees, with the business as the 

beneficiary. Because the provision cited by Treasury does not apply to 

this type of insurance, we do not discuss it in the report.
Page 54 GAO-04-303 Business-Owned Life Insurance

Appendix IV

Comments from the Internal Revenue Service ApendxiIV
Page 55 GAO-04-303 Business-Owned Life Insurance

Appendix V

Comments from the Securities and Exchange 

Commission ApendxiV

Note: GAO comments 

supplementing those in 

the report text appear 

at the end of this 

appendix.

See comment 1.
Appendix V

Comments from the Securities and Exchange 

Commission

Page 56 GAO-04-303 Business-Owned Life Insurance

The Securities and Exchange Commission (SEC) commented on our matter 

for congressional consideration, which suggested that, among other 

alternatives, Congress could assign responsibility to SEC for collecting 

data on business-owned life insurance. We discuss these comments in the 

Agency Comments and Our Evaluation section of this report. We also 

modified the report based on the technical comments that SEC provided, 

as appropriate. In addition, discussed below is GAO’s detailed response to 

another comment from SEC’s April 13, 2004, letter.

GAO Comments 1. SEC commented that the efficacy of an information collection program 

through SEC filings would be constrained by the federal securities law’s 

limitations on those companies that are required to file information 

with SEC. Our report recognizes on page 36 that SEC only collects data 

from public companies. As Congress evaluates the need for additional 

data, it might determine that data from a subset of all companies would 

provide adequate information.
Page 57 GAO-04-303 Business-Owned Life Insurance

Appendix VI

Comments from the National Association of 

Insurance Commissioners ApendxiVI

NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS 

EXECUTIVE

HEADQUARTERS

2301 MCGEE STREET

SUITE 800

KANSAS CITY MO

64108-2662

VOICE 816-842-3600

FAX 816-783-8175

FEDERAL AND

INTERNATIONAL

 RELATIONS

HALL OF THE STATES

444 NORTHCAPITOL STNW

SUITE 701

WASHINGTON DC

20001-1509

VOICE 202-624-7790

FAX 202-624-8579

SECURITIES

VALUATION

OFFICE

1411 BROADWAY

9TH FLOOR

NEW YORK NY

10018-3402

VOICE 212-398-9000

FAX 212-382-4207

WORLD

WIDE WEB

www.naic.org

April 19, 2004 

Ms. Davi M. D’Agostino 

Director, Financial Markets and Community Investment 

U.S. General Accounting Office 

441 G Street, NW 

Washington, DC 20548 

Dear Ms. D’Agostino: 

Thank you for the opportunity to provide you with feedback on the GAO’s draft 

report entitled, Business-Owned Life Insurance: More Data Could Be Useful in 

Making Decisions About Its Tax Treatment. The NAIC appreciates the opportunity 

to respond to your findings in this report. We also appreciate the opportunity to 

have assisted during the development of the report by meeting with the GAO to 

provide background information. 

The NAIC has been interested in this issue for some time and has also reviewed the 

subject. During 2002, the NAIC appointed a working group, chaired by 

Commissioner Jim Poolman of North Dakota, to review the NAIC’s earlier 

guidance and to recommend an appropriate state response. The NAIC’s COLI 

Working Group reviewed the model guidelines mentioned in your report and 

recommended an additional provision that requires written affirmative consent 

prior to purchase of coverage on an employee. The changes to the model guidelines 

also acknowledged that coverage might continue after the person was no longer 

employed by that company and prohibited the employer from retaliating in any 

way against an employee who chose not to give that consent. The working group 

also considered requiring notification of the employee’s spouse and including a 

provision that would require employers to make notification to all existing 

employees where coverage was already in place. These provisions were not 

ultimately included because of the negative effect they would have on employers in 

relation to the benefit that would be provided. 

As mentioned in the report, the majority of states do define insurable interest in 

such a way as to allow employers to purchase life insurance coverage on some, if 

not all, employees. Many states also require getting consent prior to that purchase. 

The report also notes that in many cases the coverage is purchased specifically to 

Note: GAO comments 

supplementing those in 

the report text appear 

at the end of this 

appendix.
Appendix VI

Comments from the National Association of 

Insurance Commissioners

Page 58 GAO-04-303 Business-Owned Life Insurance

Ms. Davi M. D’Agostino 

Director, Financial Markets and Community Investment 

April 19, 2004 

Page 2 of 2 

fund employee benefits and some state laws require that the policies be segregated into a trust for 

that purpose. Page 5 of your report may mislead readers by specifying that four insurance 

regulators have issued guidelines applicable to business-owned life insurance. Readers may 

assume that the report is referring to the four states interviewed, or may be confused by the 

wording to believe that only four states have such requirements. A reading of the chart contained 

in Appendix II will clarify that, in fact, most states have guidelines. 

The report correctly states that insurance regulators have collected little data on business-owned 

life insurance because concerns about abuse or misuse of the policies have not been previously 

forthcoming. The GAO suggests that the NAIC might be a source of information about the extent 

of business-owned life insurance by adding the reporting of that information to the annual 

statement that insurers are required to file with the NAIC. As you are aware, the NAIC collects a 

large amount of data from the insurance industry, a large portion of which is included in the 

annual and quarterly financial filings submitted to the states to support solvency regulation. The 

current statutory filing requirements do not require the level of detail for business-owned life 

insurance, or any other specialty line of business, contemplated by the GAO in this report. We 

believe that what the GAO is suggesting by the collection of more detailed information on 

business-owned life insurance goes beyond that needed to support solvency regulation. We agree 

there may be a significant cost associated with the collection of this data, both from the reporting 

entity and collecting organization standpoint; however, the NAIC would like to better understand 

the type of information to be collected to further evaluate the need for and utility of this 

information. Perhaps instead of an ongoing data collection effort, a study sampling this data may 

be more cost effective in assessing the larger need for ongoing data collection. 

Thank you again for the opportunity to respond to the findings in your report. We hope these 

comment are helpful and that you will contact us if we can be of further assistance. 

Sincerely, 

Ernst N. Csiszar 

NAIC President 

Director, South Carolina Department of Insurance 

See comment 1.

Now on p. 4.
Appendix VI

Comments from the National Association of 

Insurance Commissioners

Page 59 GAO-04-303 Business-Owned Life Insurance

The National Association of Insurance Commissioners (NAIC) commented 

on our matter for congressional consideration, which suggested that, 

among other alternatives, Congress could encourage NAIC to collect data 

on business-owned life insurance. We discuss these comments in the 

Agency Comments and Our Evaluation section of this report. We also 

modified the report based on the technical comments that NAIC provided, 

as appropriate. In addition, discussed below is GAO’s detailed response to 

another comment from NAIC’s April 19, 2004, letter.

GAO Comments 1. NAIC commented that a statement on page 5 of our draft report may 

lead readers to believe that only four states have issued guidelines 

applicable to business-owned life insurance. We modified that 

statement to clarify that we are referring only to the four states we 

contacted. Although many other states have issued guidelines and 

requirements that are applicable to business-owned life insurance, we 

only discussed regulatory oversight of such policies with officials from 

the four states that we contacted.
Page 60 GAO-04-303 Business-Owned Life Insurance

Appendix VII

GAO Contacts and Staff Acknowledgments ApendxiVI

GAO Contacts Davi M. D’Agostino, (202) 512-8678

Cecile Trop, (312) 220-7600

Staff 

Acknowledgments

In addition to those individuals named above, Joseph Applebaum, Emily 

Chalmers, Rachel DeMarcus, Daniel Meyer, Marc Molino, Carl Ramirez, and 

Julianne Stephens made key contributions to this report.

(250121)
GAO’s Mission The General Accounting Office, the audit, evaluation and investigative arm of 

Congress, exists to support Congress in meeting its constitutional responsibilities 

and to help improve the performance and accountability of the federal government 

for the American people. GAO examines the use of public funds; evaluates federal 

programs and policies; and provides analyses, recommendations, and other 

assistance to help Congress make informed oversight, policy, and funding 

decisions. GAO’s commitment to good government is reflected in its core values of 

accountability, integrity, and reliability.

Obtaining Copies of 

GAO Reports and 

Testimony

The fastest and easiest way to obtain copies of GAO documents at no cost is 

through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and fulltext files of current reports and testimony and an expanding archive of older 

products. The Web site features a search engine to help you locate documents 

using key words and phrases. You can print these documents in their entirety, 

including charts and other graphics.

Each day, GAO issues a list of newly released reports, testimony, and 

correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site 

daily. The list contains links to the full-text document files. To have GAO e-mail this 

list to you every afternoon, go to www.gao.gov and select “Subscribe to 

e-mail alerts” under the “Order GAO Products” heading.

Order by Mail or Phone The first copy of each printed report is free. Additional copies are $2 each. A check 

or money order should be made out to the Superintendent of Documents. GAO 

also accepts VISA and Mastercard. Orders for 100 or more copies mailed to a single 

address are discounted 25 percent. Orders should be sent to:

U.S. General Accounting Office

441 G Street NW, Room LM

Washington, D.C. 20548

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061

To Report Fraud, 

Waste, and Abuse in 

Federal Programs

Contact:

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470

Public Affairs Jeff Nelligan, Managing Director, NelliganJ@gao.gov (202) 512-4800

U.S. General Accounting Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Service Requested

Presorted Standard

Postage & Fees Paid

GAO

Permit No. GI00