Corporate-owned life insurance (COLI) is a type of life insurance policy that a company purchases on the life of one or more of its employees, usually senior executives or key personnel¹². The company pays the premiums and receives the death benefit if the insured employee dies¹². The employee's family or heirs do not receive any benefits from the policy³.
The purpose of COLI is to protect the company from the financial loss or disruption that may result from the death of a valuable employee¹². For example, the company may use the death benefit to cover the costs of hiring and training a replacement, compensating for lost revenue or productivity, or funding a buy-sell agreement with a deceased partner or owner¹²⁴.
COLI also has some tax advantages for the company. The premiums are not deductible, but the death benefit is generally received tax-free by the company¹². The cash value of the policy grows tax-deferred and can be accessed by the company through loans or withdrawals¹². The company can also use COLI to fund nonqualified deferred compensation plans for its employees, such as split-dollar plans or supplemental executive retirement plans (SERPs)¹²⁴.
However, COLI also has some drawbacks and limitations. The company must comply with certain rules and regulations to qualify for the tax benefits of COLI, such as obtaining the written consent of the insured employees, notifying them of the amount and terms of the policy, and reporting the coverage to the IRS¹²⁴. The company must also have an insurable interest in the insured employees, meaning that it would suffer a financial loss or hardship if they die³. The company may also face cash flow problems or liquidity issues if it has to pay large premiums or repay loans from the policy⁴. Furthermore, COLI may not be well received by some employees or the public, as it may seem unethical or exploitative for a company to profit from its employees' deaths³⁴.
(1) Everything You Should Know About Corporate-Owned Life Insurance. https://www.investopedia.com/articles/insurance/12/corporate-owned-life-insurance.asp. (2) What Is Company-Owned Life Insurance (COLI)? - Investopedia. https://www.investopedia.com/terms/c/coli.asp.
(3) Corporate-owned life insurance - Wikipedia. https://en.wikipedia.org/wiki/Corporate-owned_life_insurance.
(4) Corporate Ownership of Life Insurance (COLI) - Investopedia. https://www.investopedia.com/terms/c/corporate-ownership-of-life-insurance.asp. (5) What Is Corporate-Owned Life Insurance (COLI)? | U.S. News. https://www.usnews.com/insurance/glossary/corporate-owned-life-insurance.