Impact of proposed regulations on reportable policy sales on COLI/BOLI marketplace

April 19, 2019


This memorandum is not intended to constitute tax or legal advice.

The Regulation

Comments are due May 9, 2019.


The Tax Cuts and Jobs Act of 2017 included language that modified the Transfer for Value rules related to certain life insurance contracts by subjecting them to new reportable policy sale requirements. This new provision has a narrow, but potentially significant implication for the COLI/BOLI marketplace that could affect the taxation of death benefits on some contracts owned by an acquired business or bank that owns COLI/BOLI. In the immediate aftermath of tax reform, AALU established with the congressional tax writers that this potential outcome was not intended. Ever since, AALU has engaged constructively with the Treasury Department and the tax writers on the Hill to address this situation.


The proposed regulations are responsive to the concerns raised by the life insurance industry with respect to the potential impact of the reportable policy sale rules on ordinary course transactions. The seven exceptions provided by the proposed rules should be sufficient to preserve the prior-law tax treatment of the death benefits with respect to transferred policies, other than policies transferred in certain transactions where more than 50 percent of the gross value of all assets transferred is life insurance. Six of the exceptions apply regardless of the nature of the entity; which would include transactions involving S corporations.

The two most significant exceptions are:

  1. Ordinary Course Transactions involving C Corporations. This exception provides that there is no “indirect transfer” of life insurance where (a) the acquirer becomes a beneficial owner of a C corporation that owns life insurance contracts and (b) life insurance contracts do not comprise more than 50 percent of the gross value of assets of such C corporation immediately before the acquisition.
  2. A Substantial Financial Relationship Exists where the acquirer/acquiree has the life insurance contract on the insured to provide funds to purchase assets or satisfy liabilities following the death of the insured.

For more information, particularly if you are looking at acquiring an entity that holds COLI/BOLI contracts, please contact <<Insert Advisor Contact Info Here>>.

This product was developed by the AALU staff, the Federal Policy Group, and the volunteer members of AALU’s COLI/BOLI Working Group.