A 3-Part Series by Matthew B. Schoen and James P. Van Etten.


All institutional purchasers and sponsors of life insurance should have enough knowledge about the mortality costs, benefits and risks associated with corporate owned and bank owned life insurance (COLI/BOLI) programs. The required knowledge includes an understanding of the differences between experience-rated mortality designs and non-experience rated designs, since failure to make an informed decision in this area can result in enormous, yet avoidable, exposures to excessive costs. It is also important to understand some of the legal, regulatory and accounting considerations that impact mortality risks. Finally, it is important to understand some of the common misconceptions about these programs that have been fostered by disinformation. This 3-part series of papers attempts to provide state of the art discussion to address these needs.

This first paper in the series, I. Effects of Experience Rating, addresses the consequences and advantages of experience rating and explains some of the factors that can lead to or limit excessive costs.

The second paper, II. Risk Transfer Considerations, addresses these considerations from a variety of perspectives. The discussion incorporates statements from taxing authorities, statements contained in statutory and GAAP accounting standards, notes on mathematical testing methods and the implications of catastrophic events. This paper includes an Appendix which offers a high level survey of significant court cases regarding risk transfer. The Appendix highlights four key cases that tangentially considered risk transfer in the course of examining whether the relevant policies had sufficient economic substance to make policy loan interest tax deductible.

The third paper in the series, III. Common COLI/BOLI Misconceptions, concludes with a discussion that debunks common misconceptions that have been used to criticize the purchase of COLI/BOLI programs. It discusses why employers have continued to purchase COLI/BOLI, and why the various criticisms of COLI/BOLI (both moral and financial) are misplaced.

Although many of the principles covered here apply to group term life purchases too, the series is directed to permanent life insurance products purchased on many lives.

In June of 2020, the Society of Actuaries’ Product Matters! published a first installment of a revised version of the first article titled Effects of Experience Rating on COLI/BOLI Programs

The Society of Actuaries installments can be read via the links above, or the original article may be downloaded here.