Unlocking Trapped Capital: How New Treasury Regulations Give CFOs a Rare Opportunity to Improve Legacy COLI & BOLI Performance

Every Chief Financial Officer periodically evaluates the balance sheet to ensure corporate assets are generating an appropriate return on capital. Cash is actively managed. Investment portfolios are reallocated. Debt structures are refinanced when market conditions change.

Yet one corporate asset is frequently overlooked: legacy Corporate-Owned Life Insurance (COLI) and Bank-Owned Life Insurance (BOLI). Many organizations purchased these policies years, or even decades, ago to finance executive benefit obligations, recover compensation costs, or offset long-term liabilities. While these assets continue to sit quietly on the balance sheet, many remain invested in legacy general account products that, after internal costs of insurance (COI), may now be producing annual net returns of less than 2%.

In today's capital markets, allowing millions to billions of dollars of corporate liquidity to remain in an underperforming asset can create a significant drag on Return on Assets (ROA), reduce long-term earnings potential, and increase the opportunity cost of idle capital.

Until recently, improving these assets often meant navigating substantial tax uncertainty. That changed on July 9, 2026, when the U.S. Department of the Treasury and the Internal Revenue Service issued final regulations (Treasury Reg-13830) that remove one of the largest obstacles preventing companies from modernizing legacy COLI and BOLI portfolios. For many organizations, this represents the most significant planning opportunity in years.

A Regulatory Change That Removes a Long-Standing Barrier

Historically, companies were reluctant to execute tax-free Section 1035 exchanges on COLI or BOLI policies covering retired, terminated, or otherwise non-active employees. The concern centered on the Internal Revenue Code's Transfer for Value Rule under Section 101(a). If a replacement policy were deemed a taxable transfer for valuable consideration, the corporation risked losing the policy's tax-free death benefit - a consequence few finance departments were willing to risk.

As a result, many institutional portfolios remained frozen in outdated policy designs despite years of declining competitiveness. The Treasury's final regulations eliminate this uncertainty. The regulations make clear that a properly structured Section 1035 exchange does not, by itself, create a taxable transfer or trigger the Transfer for Value Rule, even when the insured executive is no longer actively employed.

Importantly, the Treasury specifically acknowledged comments requesting clarification for policies covering former employees and confirmed that qualifying exchanges remain protected under the applicable tax exceptions. For CFOs, this removes years of regulatory ambiguity and opens the door to reevaluating legacy insurance assets that previously appeared untouchable.

Preserve COLI & BOLI Tax Efficiency While Improving Performance

Treasury Reg-13830 confirms that corporations may replace qualifying legacy life insurance policies without recognizing current taxable income, provided the transaction satisfies the requirements of Internal Revenue Code Section 1035.

Generally, this means:

• The exchange qualifies under Section 1035.

• The corporation receives no cash or other property ("boot") during the exchange.

• The replacement contract continues to qualify as life insurance under applicable law.

When these conditions are met, the replacement policy inherits the tax basis and tax attributes of the existing contract, allowing companies to modernize policy design without creating a taxable event or disrupting financial reporting. For finance executives, this means the focus can shift away from tax concerns and toward what matters most, optimizing capital already deployed on the balance sheet.

Modernizing Legacy COLI and BOLI Portfolios:

Opportunity to Improve Legacy COLI & BOLI Performance

The newly issued regulations provide more than tax clarity - they create an opportunity to improve the economic performance of an often-overlooked institutional asset.

Improve Long-Term Earnings Potential

Many legacy general account policies were designed in a very different interest rate environment. Today's institutional products may offer significantly improved long-term performance while maintaining the favorable tax treatment that made COLI and BOLI attractive in the first place.

For organizations with substantial policy cash values, even modest increases in annual returns can produce meaningful improvements in long-term balance sheet performance.

Reduce the Drag of Insurance Costs

The passage of the revised Section 7702 rules fundamentally changed the economics of permanent life insurance. Because modern policies require less death benefit relative to cash value, they generally experience substantially lower ongoing Costs of Insurance (COI). Lower insurance expenses allow a greater percentage of policy cash value to remain invested and compound over time, improving the portfolio's overall efficiency.

Many legacy policies issued before these changes simply cannot benefit from the new rules without being restructured.

Maintain Accounting Stability

For corporations and financial institutions that prioritize earnings consistency, investment volatility remains a legitimate concern. TRC Financial works with highly rated institutional insurance carriers offering products that incorporate Stable Value Wrap protection. These solutions are designed to minimize mark-to-market accounting volatility while providing the opportunity for higher long-term returns than many legacy fixed-interest contracts.

This allows organizations to pursue improved portfolio performance without introducing unnecessary earnings volatility.

Questions Every CFO Should Ask About Existing COLI or BOLI

Many organizations have not performed a comprehensive review of their institutional life insurance portfolio in years. A modern portfolio review should answer several important questions:

• What is the portfolio's actual net yield after insurance costs?

• How much annual COI is reducing investment performance?

• Are the existing policies still aligned with the company's executive benefit strategy?

• Could today's Section 7702 rules improve long-term policy economics?

• Does the new Treasury guidance create an opportunity to modernize the portfolio tax-free?

• Are there legacy policies that have become inefficient uses of corporate capital?

If these questions have not been evaluated recently, significant opportunities may exist.

One Important Consideration: State Insurable Interest Laws

While the Treasury regulations remove the primary federal tax concerns surrounding these exchanges, state insurance law continues to play an important role. Treasury Reg-13830 makes clear that replacement policies must still qualify as valid life insurance

contracts under applicable state law. Whether an employer retains an insurable interest

in a retired or terminated executive varies by jurisdiction.

Because these laws differ significantly across the country, every transaction should begin with a careful review of the applicable state's insurable interest requirements.

To simplify this process, TRC Financial has researched and mapped insurable interest

statutes across all 50 states, allowing corporations to quickly determine whether a

proposed exchange is permissible before investing substantial legal or administrative

resources.

Why Experience Matters

Institutional COLI and BOLI optimization involves far more than selecting a new insurance policy. Successful transactions require coordination among corporate finance teams, tax advisors, legal counsel, actuarial specialists, and insurance carriers.

TRC Financial has extensive experience advising corporations, banks, and privately held businesses on institutional life insurance strategies. Our process includes:

• Comprehensive portfolio diagnostics

• Yield and COI analysis

• Section 1035 exchange feasibility reviews

• State-specific insurable interest compliance

• Carrier and product evaluation

• Stable Value Wrap solutions for institutions seeking accounting stability

• Benefit funding optimization

Our objective is straightforward: help finance leaders maximize the value of an existing corporate asset while preserving its favorable tax treatment.

Has Your COLI or BOLI Portfolio Become a Legacy Asset?

Many institutional COLI and BOLI portfolios have quietly remained on corporate balance sheets for years without meaningful review. What was once an effective treasury asset may now be underperforming because of outdated product design, rising insurance costs, changing capital markets, and evolving tax law.

The Treasury's July 2026 regulations create a rare opportunity to revisit these assets without sacrificing the tax advantages that made them attractive in the first place. If your organization has not reviewed its COLI or BOLI portfolio within the past five years, now may be the ideal time.

TRC Financial can help your finance team evaluate current portfolio performance, quantify true net yield after insurance costs, assess eligibility under the new Treasury regulations, verify state-specific compliance, and identify opportunities to improve long-term balance sheet performance. There is a unique opportunity to improve legacy COLI & BOLI performance.

Schedule an institutional COLI/BOLI portfolio review with TRC Financial and discover whether your balance sheet contains trapped capital that can be improved for your organization.

This material and the opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual or entity. The tax and legal references attached herein are designed to provide accurate and authoritative information with regard to the subject matter covered and are provided with the understanding that neither TRC Financial, nor M Financial are engaged in rendering tax, legal, or actuarial services. If tax, legal, or actuarial advice is required, you should consult your accountant, attorney, or actuary. Neither TRC Financial, nor M Financial should replace those advisors.