Corporate-owned life insurance (COLI)

Corporate-owned life insurance (COLI) belongs to the category of life insurance that an individual does not operate. Some life insurance policies are gifts employees enjoy at the workplace. They may allow porting with the coverage if it’s in the company policy. 

Aside from this Corporate-owned life insurance, there are many other types of life insurance coverage. However, it serves an individual, a group, or selected individuals in a company.

Whichever it is, life insurance offers more rounded coverage and provides many benefits. The corporate-owned type of life insurance is not an exception.

What is corporate-owned life insurance?

This is a type of life insurance bought and run by an organization or company on a vital employee(s) of a company. Like the key person coverage, corporate-owned life insurance covers a company if these vital employee(s) pass away and the company has to suffer financial loss. So the coverage pays the benefits to the company until the company replaces the employee.

While the insurance covers an employee, sometimes, the benefits from the policy do not go to the employee’s family if they pass away. Instead, the company becomes the beneficiary and receives the beneficiary payout because they are the ones paying the premiums and maintaining the coverage.

How corporate life insurance works

Companies look around their employees, select those they feel are valuable to the company, and take out an insurance policy on them. The invaluable employee may be one or more people holding different vital positions in the company. Often, these positions will be hard to fill should anything happen to the employee(s).

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Additionally, these employees may hold the position of managing director, company financial manager, company auditor, or other sensitive positions. Also, it may be the company’s owner holding down the company.

The company consults with the employee(s) and seeks their consent on buying the policy. If the employee gives permission, they will write it down for legal purposes before the insurance kicks off on them.

The company buys the insurance and begins to pay for the premiums while building up the benefits. Yearly, they will make a report to the Internal Revenue Service about the ongoing policy.

Furthermore, benefits from the Corporate Owned Life Insurance (COLI) policy go a long way for the company financially. Whenever the insured employee passes away, the benefit payout covers all the expenses the company may face before replacing the employee. These benefits can fund other employee benefits and take care of company taxes. However, a company-owned insurance benefit stays tax-free if the employee grants consent to the company and makes their duly reports to the IRS.

What corporate-owned life insurance is not

COLI is a type of life insurance policy but on the head of an employee or group of employees holding sensitive positions in the company.

That notwithstanding, COLI is not a group life insurance meant for the general employees of a company. The group term life insurance policy benefits employees and their family members, not the company. Also, the group life insurance may need the employees to forfeit part of their monthly salaries for the policy premium. If the employee passes away, the family members receive a lump sum from the insurance company through the employee’s company.

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Employees’ benefits differ from company-owned life insurance because the benefits do not go to the employee or family members. 

Moreover, some group life insurance or employee benefits can be portable. It means that once employees leave the company, they go with the insurance policy to their new job.

COLI is not portable; the policy only stays as long as the employee is in the company. Should the employee pass away, the policy may remain for one more year before it stops.

Advantages of Corporate owned life insurance

Companies benefit a lot from this policy which includes the following.

Tax reduction

Company life insurance premiums are always cheaper than individually bought life insurance premiums. Companies pay for this premium with after-tax money from the company proceeds. Having company insurance permits the company to enjoy reduced or lower rate tax.

Also, the lump sum of money that will be paid to the company in the passing of the insured employee does not come with tax. 

Cash value

Suppose the COLI is a permanent life insurance coverage. In that case, the policy will accumulate cash for the company aside from the beneficiary benefits, which also go to the company. The cash value remains tax-free, except the company decides to withdraw from it.

More so, it serves as another means of income for the company. Suppose the company decides to surrender the policy. In that case, the benefits from the policy may be used to invest some more or expand the growth of the business.

Disadvantages of corporate-owned life insurance

The primary disadvantage of COLI is to the employee. Most companies issue sensitive employee insurance, and all benefits return to the company. Also, because of the obligation, the employee may decide to still stick with the company and help them grow more while ignoring their personal growth.

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Again, say the insured employee passes away; it takes the company both time and money to find a replacement for that position. For example, the company may need to train the new employee for months before they can fit into the role. Other times the new employee may turn out to be unfit for the position even after going through training which will be a loss to the business.

Conclusion

In summary, COLI is a smart move on the company’s end. It cushions many financial burdens and allows the company to focus on growth. Other employees benefit from the proceeds of corporate-owned life insurance, which can be used in paying benefits.

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