What Is Corporate Ownership of Life Insurance (COLI)?
Corporate ownership of life insurance (COLI), or corporate-owned life insurance, refers to insurance policiestaken out by companies on their employees, typically senior-level executives.
The company is responsible for making the premium payments, and if the person dies, the company, not the insured person's family or other heirs, receives the death benefit. Such policies came to be called "dead peasant insurance" after some companies purchased life insurance on low-level workers without their knowledge.
Key Takeaways
- Corporate ownership of life insurance (COLI) refers to insurance obtained and owned by a company on its employees, typically senior-level executives.
- Companies pay the premiums and receive the death benefit if the employee dies. The insured employee's heirs or family do not receive any benefits.
- A major reason that companies purchase COLI is to profit from the tax advantages of life insurance.
- Corporate-owned life insurance is sometimes referred to as "dead peasant insurance" because of companies that took out policies on low-level employees without their knowledge or consent.
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 might have serious financial implications for the company. Many companies refer to corporate-owned policies for senior management as key man or key person insurance. Companies may also take out life insurance policies on their owners, officers, directors, and debtors. When policies are taken out on lower-level employees, they are sometimes derisively referred to as janitors insurance or dead peasant insurance.
If the purchaser of a corporate-owned policy is a bank, the policy is often referred to as bank-owned life insurance (BOLI).
COLI is generally used to protect the financial interests of the company that buys it. Because the company owns the policy, it can borrow money or make withdrawals against its cash value, as well. Companies also use COLI arrangements as a way to fund supplemental executive retirement plans(SERPs), a type of deferred compensation arrangement for key executives.
COLI policies provide the same 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 grow tax-free or tax-deferred within the policy.
"This tax treatment of COLI policies explains a large portion of their usage, because it is certainly possible for a corporation to make a similar investment without the complication of a life insurance policy," the Congressional Research Service noted in a 2011 report. "Without the life insurance policy, however, such investments would be subject to regular taxation."
Though the federal government is responsible for the tax laws relating to corporate-owned life insurance, the policies are also subject to state regulation, like other forms of insurance, as well as to Financial Accounting Standards Board reporting guidelines. 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 regarding bank-owned life insurance.
COLI may take the form of either an individual or a group life insurance policy. But it is separate and distinct from the group life insurance that companies often offer as part of an employee benefit plan because the beneficiary, in this case, is the company—not the employee or their family.
Another variation of COLI or BOLI policies is split-dollar life insurance. In that case, the company or bank pays all or part of the premiums and the insured person's heirs may share some portion of the death benefit if they die.
As a result of the controversy over "dead peasant insurance," Congress tightened the rules on these policies in 2006.
The 'Dead Peasant Insurance' Controversy
In the 1990s, some companies began insuring their employee base indiscriminately, rarely getting the employees' permission to do so. That practice drew criticism for allowing companies to profit from the death of ordinary employees, whose families received nothing. Then, in 2006, Congress placed limitations on how companies could administer COLI and BOLI policies. For example, Congress limited COLI’s tax advantages to policies taken out on the company's highest-paid 35% of employees. Among other key changes:
- Companies must now inform employees when they want to take out policies to insure them.
- Insured employees must agree to the arrangement in writing.
- Employers must also get written consent from the employee if they want to continue the policy after the employee leaves the company.
FAQs
Corporate ownership of life insurance (COLI) refers to insurance obtained and owned by a company on its employees, typically senior-level executives. Companies pay the premiums and receive the death benefit if the employee dies. The insured employee's heirs or family do not receive any benefits.
How does coli insurance work? ›
Corporate-owned life insurance (COLI) is a life insurance policy taken out by a company on the life of an employee, group of employees, owner, or debtor. The corporation owns the policy's cash value, pays the premiums, and is the beneficiary if the employee dies.
Are corporate-owned life insurance proceeds taxable? ›
How are corporate-owned life insurance proceeds taxed? Generally, death benefits from COLI are tax-free. However, there are specific requirements and regulations to ensure compliance.
What is the cash surrender value of corporate-owned life insurance? ›
Cash surrender value equals your policy's cash value, minus any surrender fees. Surrendering (cashing in) your policy is not always the best option. You can access policy cash in other ways, for example, with a policy loan.
How does boli work? ›
How Does BOLI Work? A bank purchases the life insurance with either a single premium, or a series of annual premiums, on a select group of key employees and/or bank directors. The bank is the owner and beneficiary, although many banks opt to share a portion of the insurance proceeds with the participants.
Is a corporation the owner and beneficiary of the key person life policy? ›
Under a key person life insurance policy, the business owns the policy, pays the premiums and is the beneficiary. If a key person dies, the business then collects a death benefit. That money can be used to help a business replace lost revenue as they search for a replacement.
What is the difference between Boli and coli insurance? ›
Q: What is Bank-Owned Life Insurance (BOLI) and Corporate-Owned Life Insurance (COLI)? A: BOLI and COLI are insurance policies purchased by banks and corporations, respectively. These policies provide death benefits and cash value accumulation and are used as financial assets by these institutions.
Are coli premiums tax-deductible? ›
Q: Are COLI premiums deductible by the purchasing company? A: No. COLI premiums paid, however, do result in an increase in the cash value of COLI which is a company asset.
What are 2% shareholder benefits for S Corp? ›
2% Shareholder Employee
Discounts, on premise athletic facilities, de minimis fringe, retirement planning services •Educational assistance programs – sometimes! Dependent care assistance programs – sometimes! Working condition fringe – sometimes!
Why would a company buy your life insurance policy? ›
Companies buy life insurance policies as an investment. They estimate how long you will live and then give you a payment that's less than your policy death benefit. The company looks to make a profit by collecting the death benefit after you pass away.
Term life insurance policies don't have a cash surrender value because they don't accumulate cash value. Only permanent life insurance policies have a cash surrender value. Whole life insurance: Cash value in a whole life policy accumulates at a rate guaranteed by your insurer.
What is the surrender value of a life insurance corporation? ›
According to the LIC brochure: Guaranteed Surrender Value = 30% X Total premiums paid. The first-year premiums and all the added premiums or premiums for accident benefits or the term rider are excluded from the same.
How is cash value life insurance taxed on surrender? ›
Just like policy loans and the surrender value, the IRS only taxes you on distributions you make above the amount you've paid into your cash value through premiums. That means if you have $20,000 of cash value and earned $1,000 of that in interest or investments, you could take out $19,000 tax-free.
What are the disadvantages of Boli? ›
4. Cons of Bank Owned Life Insurance
- 4.1 Regulatory Risks. ...
- 4.2 Illiquidity. ...
- 4.3 Interest Rate Sensitivity. ...
- 4.4 Costly Surrender Charges. ...
- 4.5 Alternative Investment Opportunities. ...
- 4.6 Policyholder Risks.
Company-owned life insurance (COLI), also referred to as corporate-owned life insurance, is a policy taken out on one or more critical employees. The company pays the insurance premiums and receives the death benefit if a covered employee dies.
Can anyone get Boli insurance? ›
BOLI is a life insurance policy purchased by a bank or bank holding company to insure the life of certain employees. Typically, the insured employee is an officer or other highly compensated employee, but a bank may purchase insurance for any employee.
How does Metlife pay out claims? ›
Each beneficiary needs to submit a claim form in order to get paid. We'll pay each beneficiary their proceeds separately as we receive the required claim documents from each of them. We don't require all beneficiaries to make a claim before making payment to each individual.
How does split dollar life insurance work? ›
Split-dollar life insurance is an agreement where two parties — an employer and an employee — agree to split the benefits, and sometimes the costs, of a life insurance policy. The employer pays the life insurance premium, in whole or in part, on a cash value life insurance policy purchased on the life of the employee.
How does a variable universal life policy work? ›
Variable universal life (VUL) insurance is a type of permanent life insurance policy that allows for the cash component to be invested to produce greater returns. VUL insurance policies are built like traditional universal life insurance policies but let you invest the cash value in the market via subaccounts.
How does cargo insurance work? ›
What is Cargo Insurance? Insurance that generally protects shipments from loss, damage or theft while in transit. This coverage is beyond basic claims insurance that may be provided and it will reimburse for the designated value of the goods if a covered event occurs while the freight is in transit.
