Potential Tax Reform Implications for COLI and BOLI

Mar 9, 2017

The election results from November 2016 have created a number of questions relative to the taxation of life insurance, and more specifically the taxation of bank-owned life insurance (BOLI), corporate owned life insurance (COLI) and insurance company-owned life insurance (ICOLI). Much of the discussion around tax law changes has been focused on various tax reform proposals.

BOLI, COLI, and ICOLI can be structured as a variable universal life insurance contract, a non-variable insurance contract, or a combination of the two.(1)
The Republicans have messaged the need for tax law changes for the past couple of years including:
  • Former Congressman and House Ways and Means Chairman Dave Camp’s 2014 Draft Tax Reform Proposal (Camp Proposal)
  • Current House Majority Leader Paul Ryan’s A Better Way Proposal (Ryan Blueprint)
  • President Donald Trump’s Tax Reform that Will Make America Great Again (Trump Plan)
Only the Camp Plan represents full tax reform as it seeks to overhaul much of the Internal Revenue Code of 1986. The Ryan Blueprint is less specific than the Camp Plan and focuses on why tax law changes are needed and a few overriding themes including lowering corporate tax rates. The Trump plan provides even less detail than the Ryan Blueprint and again focusses on overriding themes including the lowering corporate tax rate. Recently the Trump administration has indicated they will release a new plan in the coming weeks.
With Republican control of both the House and Senate as well as the Presidency, we feel like some form of tax law change is likely to occur during the next two years. Given the plans noted above, much of the work towards making those tax law changes has been completed.

Implications for BOLI, COLI and ICOLI

In order to pay for other tax cuts, the Camp Proposal would eliminate the exception in IRC Section 264(f) which allows BOLI/COLI/ICOLI earnings to grow tax deferred and death benefits to be received tax free. Under the Camp Proposal, earnings on most BOLI, COLI, and ICOLI policies would be subject to an interest expense disallowance, which can be particularly punitive to banks.
The Ryan Blueprint makes no mention of life insurance. Although the Trump plan makes no mention of BOLI, COLI, or ICOLI, the Plan would phase-out the tax exemption on life insurance for high-income earners, so it is possible BOLI/COLI/ICOLI earnings could be phased out as well. The Trump plan would use the earnings from such phase-out to pay for other tax cuts. 

Implications for Corporate Tax Rates

A key theme to each of the plans noted above is a reduction of corporate tax rates, with ultimate corporate tax rates lowering from 35% to 25%, 20% and 15% under the Camp Proposal, Ryan Blueprint and Trump Plan respectively.

Considerations for BOLI, COLI, and ICOLI Owners and Prospective Purchasers

We feel the likelihood of tax law changes directly impacting the taxation of BOLI/COLI/ICOLI is still remote. Each of President Clinton’s and President Obama’s budget proposals have included language that would repeal/change IRC Section 264(f) and subject BOLI/COLI/ICOLI earnings to interest expense disallowance, but only once during the Clinton Administration did that language even make its way into a Bill. Total ownership of BOLI now exceeds $170 billion and a majority of US banks of all sizes own BOLI. Its use as an employee benefits funding tool are well documented in both banking regulation (Interagency Statement on the Purchase and Risk Management of Life Insurance) and tax law (IRC Section 101(j)). In the unlikely event of a tax law change directly impacting the taxation of BOLI/COLI/ICOLI, we would expect existing policies to be grandfathered.
As lowering the corporate tax rate is a key goal of each plan, we believe some decrease is likely. Given the Republicans desire to present their plans as revenue neutral, we feel a reduction to a 25% corporate tax rate is much more likely than 20% or 15%. The amount of the decrease is dependent on the passage of revenue raises, such as the prosed Boarder Adjustment Tax in the Ryan Plan. Such revenue raisers are unpopular to some and will be difficult to pass.


BOLI, COLI, and ICOLI are purchased with the intent of long-term ownership. Any reduction in corporate tax rates may only be temporary until such time new tax law changes are made based on new leadership or revenue needs. BOLI, COLI, and ICOLI have been used for many decades for long term benefit funding, liability matching, executive benefits and other business reasons beyond any tax advantages.



(1) Variable life insurance policies have certain inherent risks, including the possible loss of principal.  Risks associated with variable life insurance policies include, but are not limited to, liquidity, market volatility, asset default and investor control tax risk. Additionally, variable life insurance policies’ fees and expenses include, but are not limited to, mortality costs, stable value charges, policy administration fees and asset management fees. Please refer to your Private Placement Memorandum, Stable Value Agreement and/or Life Insurance Policy for definitions of the terms and/or data included in this report and to better understand the risk and fees associated with these policies.

Note that the views expressed above are those of Newport Group and do not constitute legal, tax or accounting advice; readers are strongly urged to seek independent accounting, tax, and/or legal advice in applying this information. The information provided herein is based solely on our informal, general understanding of the relevant technical issues as well as the products and plans that may be involved.  This information is not intended nor should it be used as an opinion on accounting, tax, and/or legal issues. This release is a high-level summary of a complex subject that is intended for Newport Group’s clients and intermediary partners and should not be understood as providing a comprehensive discussion of all issues or requirements under the regulations or as a guide to compliance and is for informational purposes only. Newport Group Securities, Inc. ("NGS") is both a FINRA-registered broker-dealer and an SEC-registered investment adviser. All securities transactions are provided by the broker-dealer, while all investment advisory services are provided through the registered investment adviser. When offering variable insurance products, Newport Group Securities, Inc. acts solely in its capacity as a broker-dealer. Other insurance products may be offered by Newport Group, Inc. NGS is located at 300 Primera Boulevard, Suite 200, Lake Mary, FL 32746 an affiliated entity of Newport Group, Inc. No guarantee as to investment results. All investments in securities involve risks including possible loss of principal.

Resources and Publications

Unauthorized access is prohibited. This site is designed for U.S. residents only.
Newport Group, Inc. and its affiliates provide recordkeeping, plan administration, trust and custody, consulting, fiduciary consulting, insurance and brokerage services. Fiduciary consulting services are provided through Newport Group Securities, Inc., an SEC-registered investment adviser and FINRA-registered broker-dealer, and InterServ, LLC, an SEC-registered investment adviser. Newport Group Securities, Inc. and InterServ, LLC are affiliates of Newport Group, Inc. All securities transactions are provided through Newport Group Securities, Inc., in its role as broker-dealer. All fiduciary consulting services are provided through the registered investment adviser. when offering variable insurance products, Newport Group Securities, Inc. acts solely in its capacity as a broker-dealer.
Trust and custody services provided by Newport Trust Company, a New Hampshire state chartered trust company and wholly owned subsidiary of Newport Group, Inc.