Corporate Ownership of Life Insurance (COLI) Explained: How It Works, Benefits, and Drawbacks

Corporate ownership of life insurance (COLI), also referred to as corporate-owned life insurance, is a financial strategy wherein companies purchase life insurance policies on their employees, typically senior-level executives. In the event of the insured person’s death, the company receives the death benefit.

COLI has been a longstanding practice in the corporate world, primarily aimed at safeguarding the financial stability of companies in the event of the death of key personnel, such as top executives. These policies are often termed as key person insurance when applied to senior management. Companies may also extend this coverage to owners, officers, directors, and debtors.

Corporate-owned policies are distinct from group life insurance offered as part of employee benefit plans, as the company, rather than the employee or their family, is the beneficiary. This ownership enables companies to leverage the policy’s cash value by borrowing against it or making withdrawals. Additionally, COLI is commonly utilized to fund supplemental executive retirement plans (SERPs), offering deferred compensation to key executives.

One variant of COLI is bank-owned life insurance (BOLI), where banks purchase policies on key employees. Tax benefits play a significant role in the popularity of COLI. Death benefits are non-taxable, and investment earnings within the policy grow tax-free or tax-deferred. This tax advantage incentivizes companies to opt for COLI over alternative investment strategies.

While federal regulations govern the tax treatment of COLI, state regulations and Financial Accounting Standards Board guidelines also apply. Bank-owned policies are subject to additional oversight by regulatory bodies such as the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation.

Corporate ownership of life insurance can be structured as individual or group policies. Split-dollar life insurance is another variation, where the company pays premiums, and the insured person’s heirs may receive a portion of the death benefit.

However, the practice of obtaining life insurance policies on lower-level employees without their consent, known as “dead peasant insurance,” sparked controversy. In response, Congress enacted regulations in 2006, mandating employee notification and consent for such policies and limiting tax benefits.

While corporate-owned life insurance (COLI) is commonly associated with senior executives, companies may also purchase policies on other key personnel such as owners, officers, directors, and debtors.

Corporate-owned life insurance policies offer tax advantages, including tax-free death benefits and tax-deferred growth of investment earnings within the policy. These tax benefits make COLI an attractive option for companies seeking to protect their financial interests.

To comply with regulations, companies must inform employees about COLI policies, obtain written consent for coverage, and adhere to reporting requirements imposed by federal and state authorities. It’s essential for companies to stay updated on legislative changes and consult legal and financial experts for guidance.