What Is Corporate Owned Life Insurance?
Corporate owned life insurance, also called COLI, is a life insurance policy for the corporation’s benefit. With a COLI policy, the corporation is a beneficiary (either solely or partially). The insured party is one or more members of the corporation. From funding non-qualified benefits plans with minimal tax obligation to creating trustworthy buy-sell agreements with business partners, there are several benefits to a COLI policy for corporations. The benefits depend largely on the purpose of the policy. Several more notable benefits include:
- Accumulate cash value with lower tax obligation
- Receive death benefits that are tax-free
- Receive withdrawals and loans that are tax-free
- Offset the expenses associated with non-qualified plans
When set up appropriately, this type of policy can provide extremely favorable tax advantages for corporations without violating the Employee Retirement Income Security Act of 1974 (“ERISA”).
Purposes For A Corporate Owned Life Insurance Policy
There are multiple purposes for a corporate owned life insurance policy. The most common use is to better fund employee benefits programs in a legal manner that also reduces tax obligations for corporations. In other cases, a policy can serve as a way of purchasing another key executive’s company shares in the event they pass away (or a similar transaction). Lastly, some corporations use COLI as a form of (tax-free) key person life insurance.
Non-Qualified Benefits Plans
Corporate owned life insurance plans are often used to help fund employer-sponsored (non-qualified) benefits plans. A non-qualified benefits plan is an employer-sponsored plan that provides benefits to the corporation’s employees at a later time (i.e., a retirement plan). When funded partially or entirely through a corporate owned life insurance plan, non-qualified plans are usually tax-deferred.
A buy-sell agreement, or cross-purchase agreement, is when one executive buys a life insurance policy for another key executive and pays the premium on the policy (and vice versa). In the event that one of the executives passes away, their family (or the party they choose) receives the life insurance proceeds; the other executive who paid the premium receives the beneficiary’s shares in the company as is agreed upon when starting the policy.
Corporate Owned Life Insurance VS. Group Life Insurance
Corporate owned life insurance is much different than group life insurance. The latter is specifically for employees. With COLI, although high-level employees may be listed as the insured party in some cases, the policy is typically used to mitigate financial risk for the corporation and/or fund employer-sponsored benefit programs rather than directly provide life insurance for all corporation employees.
Are You Considering A Corporate Owned Life Insurance Policy?
Here at Vector Financial Group, we assist our clients with all of their life insurance needs. From underwriting to ensuring your policy details match your corporation’s needs and personal needs, we are here to help. Call our associates today to discuss your needs and get your COLI policy started.