DEFINITION of 'Company Owned Life Insurance - COLI'

A type of life insurance policy taken out by a company on the lives of employees whom the company considers to be of vital importance to its operations. Under this type of plan, the company in question pays the premium on the insurance but is also the plan's primary beneficiary.

BREAKING DOWN 'Company Owned Life Insurance - COLI'

There are a few reasons why a company would take a life insurance policy out on key employees. For one, the tax-free proceeds that are received after the death of a key person can be used to cover any costs that would arise when hiring that individual's replacement. The insurance policy can also be used to cover employee benefit liabilities.

However, the most notable benefit to a company that institutes a COLI policy comes from the benefit to after-tax net income. This benefit arises when the cash value of the policy becomes larger than the premiums paid. According to an industry survey conducted in 1999 and cited by New York Life Insurance Company, 68% of the Fortune 1000 companies use COLI programs.

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