Insurance deterrents

Sure, personal loans from public companies to their top execs are a huge no-no these days, but life insurance? Providing death benefit insurance, after all, has long been common practice. But that was before the Sarbanes-Oxley Corporate Responsibility Act, which bans "extensions of credit in the form of a personal loan" to employees. Legal experts say the law makes it risky for companies to provide "split-dollar" life insurance, arrangements where a company pays the premiums on a life-insurance policy. Why? Under split-dollar arrangements, the executive uses a portion of the cash built up tax-free in the policy to reimburse the company when he or she retires--a transaction that works, in effect, like an interest-free loan.

While the law doesn't expressly forbid split-dollar deals, companies have read the fine print and are backing away from initiating them. But existing loans present a Catch-22. Thanks to a grandfather clause, loans that took effect before July 30, 2002, technically can remain in effect as long as they're not "materially changed."

"But if the employer keeps paying premiums in, someone can say 'Aha, you are continuing to extend more credit all the time,' which violates the act," explains Tom Lauerman, a partner in the Washington, DC, law office of Foley & Lardner. "If they stop, is that a material change?" The solution? Err on the side of safety by using cash accumulated in the policy to pay current premiums or seeking a grace period from your insurer until the SEC makes a final call on the issue.

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