Corporate Owned Life Insurance: A Comprehensive Guide

Corporate owned life insurance (COLI) is a life insurance policy purchased by a company on the life of one of its key employees or an owner of the business. It is also known as company-owned life insurance or corporate-endorsed life insurance. COLI is a valuable financial tool for business owners, providing not only a death benefit but also potential tax benefits and cash value accumulation. In this article, we will take a closer look at what COLI is, its benefits, and the potential drawbacks.

What is Corporate Owned Life Insurance?

Corporate owned life insurance is a policy that a company purchases on the life of one of its key employees or an owner of the business. The company is the owner and the beneficiary of the policy, while the employee or owner is the insured. The policy provides a death benefit that is paid to the company upon the death of the insured.

COLI policies typically have a higher coverage amount than individual life insurance policies, making them suitable for businesses with large liabilities or those that need to protect key employees. Such policies can cover the cost of replacing an employee or owner, should they pass away unexpectedly, and also provide funds for business continuity.

Types of Corporate Owned Life Insurance

There are two types of corporate owned life insurance:

• Key Person Insurance
• Executive Bonus Plans

Key Person Insurance

Key person insurance is a policy that a company purchases on the life of a key employee, whose skills, knowledge, and experience are vital to the success of the business. The company is the owner and beneficiary of the policy, while the key employee is the insured.

The policy provides a death benefit that is paid to the company upon the death of the key employee. The payout can be used to cover the cost of replacing the employee, pay off debts or cover other expenses that may arise due to the loss of the employee.

Executive Bonus Plans

Executive bonus plans are a way for a business to provide life insurance coverage to its key employees in a tax-efficient manner. The business pays the premiums for a personal life insurance policy on the key employee’s life, and the employee is the owner and beneficiary of the policy.

The employee receives the death benefit tax-free, and the premiums paid by the business are considered a deductible business expense. This type of policy is a good way to reward key employees and provide them with valuable life insurance coverage.

Benefits of Corporate Owned Life Insurance

There are several benefits of corporate owned life insurance, including:

Tax Benefits

One of the main benefits of COLI is the potential tax advantages. The premiums paid by the business are considered a deductible business expense, reducing the company’s taxable income. Additionally, the death benefit paid out to the company upon the death of the insured is generally tax-free.

Cash Value Accumulation

COLI policies have a cash value component, which accumulates over time. The cash value can be accessed by the company, either through surrendering the policy or taking out a policy loan. The cash value can be used to fund various business expenses or invested to generate additional income.

Protection for Key Employees

Corporate owned life insurance provides protection for key employees, whose skills and knowledge are critical to the success of the business. The policy can cover the cost of replacing the employee, should they pass away unexpectedly, and provide funds for business continuity.

Potential Drawbacks of Corporate Owned Life Insurance

While there are several benefits of corporate owned life insurance, there are also some potential drawbacks that must be considered, including:

Cash Value Erosion

COLI policies have fees and charges associated with them, which can erode the cash value of the policy over time. It is important to understand the fees and charges associated with the policy and how they will affect the cash value growth.

Complexity

Corporate owned life insurance policies can be complex and difficult to understand. It is important to work with an experienced insurance professional who can help you navigate the various options and ensure that you fully understand the policy and its benefits and drawbacks.

Regulatory Requirements

There are various regulatory requirements that must be followed when purchasing and maintaining a COLI policy, including filing annual reports and meeting certain disclosure requirements. It is important to stay current on these requirements to avoid any potential legal issues.

Frequently Asked Questions

Q: Who can be covered by a corporate owned life insurance policy?

A: Corporate owned life insurance policies can be purchased on the life of a key employee or owner of a business. The insured must have an insurable interest in the company and be an active employee or owner.

Q: Can the cash value of a COLI policy be accessed by the company?

A: Yes, the cash value of a COLI policy can be accessed by the company, either through surrendering the policy or taking out a policy loan. The cash value can be used to fund various business expenses or invested to generate additional income.

Q: Are there tax benefits associated with corporate owned life insurance?

A: Yes, there are potential tax benefits associated with COLI. The premiums paid by the business are considered a deductible business expense, reducing the company’s taxable income. Additionally, the death benefit paid out to the company upon the death of the insured is generally tax-free.

Q: What are the potential drawbacks of corporate owned life insurance?

A: There are several potential drawbacks of COLI, including cash value erosion, complexity, and regulatory requirements. It is important to work with an experienced insurance professional to fully understand the benefits and drawbacks of the policy.

Conclusion

Corporate owned life insurance is a valuable tool for business owners, providing protection for key employees, potential tax benefits, and cash value accumulation. However, it is important to fully understand the policy and its benefits and drawbacks before making a decision. Working with an experienced insurance professional can help you navigate the complex world of corporate owned life insurance and ensure that you make the right decision for your business.