Company-Owned Life Insurance (COLI)
What Is Company-Owned Life Insurance (COLI)?
Company-owned life insurance (COLI) is a life insurance policy that pays a benefit to the company assuming an insured employee bites the dust.
Understanding Company-Owned Life Insurance (COLI)
Company-owned life insurance (COLI), likewise alluded to as corporate-owned life insurance, is a policy taken out on at least one critical employees. The company pays the insurance premiums and receives the death benefit in the event that a covered employee passes on.
COLI policies are a way for a company to limit its tax burden, increase after-tax net income, finance employee benefits, and assist with covering the expenses associated with supplanting an insured employee upon that employee's death. COLI policies normally keep on covering employees up to the year after they leave the company.
COLI Requirements
Since certain companies utilized COLI policies to take advantage of tax provisos, the Internal Revenue Service (IRS) presently expects that they meet certain conditions to receive a tax-free death benefit. For instance, the company can purchase COLI policies for the top 35% of employees, positioned by their compensation. Furthermore, it must tell the employee recorded as a hard copy of the terms of the policy and get their written consent before purchasing.
History of COLI
COLI first appeared as a way for companies to guarantee against the death of a key employee, like a high level executive. Be that as it may, tax loopholes made COLI exceptionally interesting to many companies. Companies endeavoring to take advantage of those escape clauses started purchasing policies on lower-positioning employees without telling them and kept on paying premiums even after they left the company.
The practice arrived at its top during the 1980s while decreasing regulation incited a few companies to protect a majority of their employees, borrow against the cash value of the policies, and deduct the interest on the loans.
In the late 1980s and 1990s, Congress answered by passing laws that require employee consent and an "insurable interest" with respect to the company. This implied that companies needed to show the potential for loss due to an employee's death to legitimize the purchase of a COLI policy. Simultaneously, the IRS decreased the ability of a company to deduct interest payments while borrowing against the policies.
Companies would frequently claim that they spent the payouts on employee benefits; in any case, there was no requirement to do as such. The companies didn't even have to uncover how they spent the money.
In the first decade of the 2000s, large corporations paid huge number of dollars to settle lawsuits from family individuals from deceased employees who contended that the practice was unlawful. Later, Congress passed the COLI Best Practices Provision, as part of the Pension Protection Act of 2006, which presented conditions for tax-free benefits. Therefore, while COLI policies actually offer financial benefits to employers, they are subject to greater regulation.
Features
- Since companies utilized COLI policies to take advantage of tax provisos, the Internal Revenue Service currently expects that they meet certain conditions to receive a tax-free death benefit.
- Company-owned life insurance policies can assist with covering the expenses associated with supplanting an insured employee upon that individual's death.
- Company-owned life insurance (COLI) is a life insurance policy that pays a benefit to the company assuming an insured employee passes on.
FAQ
Could Company-Owned Life Insurance Proceeds Be Taxed?
Proceeds from company-owned life insurance policies are not taxable for the company assuming two conditions are met — notice must be given to the covered employee and that employee must give written consent for coverage before it's written. Too, organizations must report company-owned life insurance policies to the Internal Revenue Service (IRS) yearly through Form 8925.
Are Company-Owned Life Insurance Premiums Deductible?
Premiums paid for a company-owned life insurance policy are considered expenses and tax-deductible for the business — expecting the coverage is for executives or employees of the company.
What Is a Stock-Owned Insurance Company?
A stock company is owned by outside shareholders, while a mutual company is an insurance company that is owned by policyholders. For instance, one of the largest mutual life insurance companies is Northwestern Mutual, while Prudential is one of the largest stock insurance companies.
