Corporate Ownership of Life Insurance (COLI)

What Is Corporate Ownership of Life Insurance (COLI)?

Corporate ownership of life insurance (COLI), or corporate-owned life insurance, alludes to insurance policies taken out by companies on their employees, normally senior-level executives. The company is responsible for making the premium payments, and assuming the person bites the dust, the company, not the insured person's family or different heirs, receives the death benefit. Such policies came to be called "dead laborer insurance" after certain companies purchased life insurance on low-level workers without their insight.

How Corporate Ownership of Life Insurance (COLI) Works

Corporate ownership of life insurance has a long history in the business world, particularly for a company's top executives, whose deaths could have serious financial ramifications for the company. Many companies allude to corporate-owned policies for senior management as key man or key person insurance. Companies may likewise take out life insurance policies on their owners, officers, directors, and debt holders. At the point when contracts are taken out on lower-level employees, they are in some cases contemptuously alluded to as janitors insurance or dead worker insurance.

On the off chance that the purchaser of a corporate-owned policy is a bank, the policy is frequently alluded to as bank-owned life insurance (BOLI).

COLI is generally used to safeguard the financial interests of the company that gets it. Since the company possesses the policy, it can borrow money or make withdrawals against its cash value, too. Companies likewise use COLI arrangements as a method for funding supplemental executive retirement plans (SERPs), a type of deferred compensation arrangement for key executives.

COLI policies give a similar tax benefits to the owner that other life insurance products do: Death benefits are not taxable and investment earnings on the policy's cash value can develop tax-free or tax-deferred inside the policy.

"This tax treatment of COLI policies makes sense of a large portion of their utilization, since it is surely workable for a corporation to make a comparable investment without the confusion of a life insurance policy," the Congressional Research Service noted in a 2011 report. "Without the life insurance policy, in any case, such investments would be subject to customary taxation."

However the federal government is responsible for the tax laws connecting with corporate-owned life insurance, the policies are additionally subject to state regulation, as different forms of insurance, as well as to Financial Accounting Standards Board reporting rules. The Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation set rules in regards to bank-owned life insurance.

COLI might appear as either an individual or a group life insurance policy. Yet, it is separate and distinct from the group life insurance that companies frequently offer as part of an employee benefit plan in light of the fact that the beneficiary, in this case, is the company — not the employee or their family.

One more variation of COLI or BOLI contracts is parted dollar life insurance. In that case, the company or bank pays all or part of the premiums and the insured person's heirs might share some portion of the death benefit assuming they pass on.

Because of the debate over "dead worker insurance," Congress and the IRS fixed the rules on these policies in 2006.

The 'Dead Peasant Insurance' Controversy

During the 1990s, a few companies started guaranteeing their employee base unpredictably, rarely getting the employees' permission to do as such. That practice drew analysis for permitting companies to profit from the death of ordinary employees, whose families didn't receive anything. Then, in 2006, Congress and the Internal Revenue Service put limitations on how companies could control COLI and BOLI policies. For instance, Congress limited COLI's tax benefits to policies taken out on the company's most generously compensated 35% of employees. Among other key changes:

• Companies must now inform employees when they need to take out policies to safeguard them.
• Insured employees must consent to the arrangement recorded as a hard copy.
• Employers must likewise get written consent from the employee to proceed with the policy after the employee leaves the company.

Features

• Corporate ownership of life insurance (COLI) alludes to insurance got and owned by a company on its employees, ordinarily senior-level executives.
• Companies pay the premiums and receive the death benefit on the off chance that the employee passes on. The insured employee's heirs or family receive no benefits.
• Corporate-owned life insurance is some of the time alluded to as "dead worker insurance" in view of companies that took out policies on low-level employees without their insight or consent.
• A major explanation that companies purchase COLI is to profit from the tax benefits of life insurance.