What Is Corporate Ownership of Life Insurance (COLI)?
Corporate ownership of life insurance (COLI) or corporate-owned life insurance refers to the insurance obtained and owned by a company on its employees. These insurance policies are taken out by companies on their employees. By taking out policies, the companies are responsible for making the premium payments and receive the death benefits rather than the insured person's family or heirs.
- Corporate ownership of life insurance is insurance obtained and owned by a company on its employees.
- Companies pay the premiums and receive death benefits after the employee dies.
- The insured employee's heirs or family do not receive any benefits.
- COLI protects the interests of the company and hedges against things like the unexpected death of an employee, and also helps fund company benefits.
How Corporate Ownership of Life Insurance (COLI) Works
Corporate ownership of life insurance has a long history in the corporate world and is fairly common in the business world for company personnel including top executives. Many companies refer to corporate-owned policies for senior management as key man insurance. For other employees, policies are sometimes derisively referred to as janitor's insurance or dead peasant insurance. This is indicative of their lower status in the company. When the employer of a corporate-owned policy is a bank, the policy is referred to as Bank-Owned Life Insurance (BOLI).
COLI is generally used to protect the interests of the company and hedge against things like the unexpected death of an employee. Since the company is the beneficiary of the policy, it can decide whether and how to use its cash value and is able to borrow against or make withdrawals against it as well.
Policies may also be used to fund employee benefits. An important point to note is that these policies are separate and distinct from employee benefit plans, since the only beneficiary is the company—not the employee or their family. COLI policies provide the same benefits to the owner as other life insurance products. Death benefits are not taxable and investment earnings on insurance premiums can grow tax-free within the policy unless it is surrendered before the insured party's death.
New employees often ended signed a large volume of documents, which included agreements for life and health insurance coverage, or even applications for these services. Until 1984, corporations were able to leverage and deduct COLI policy premiums for tax benefits. Many companies that hired new employees in the 1990s began insuring their employee-base indiscriminately, rarely getting their written permission to do so.
But things changed after 2006, when the Internal Revenue Service (IRS) and Congress placed limitations and conditions on how companies could administer COLI and BOLI policies. Some of these include:
- Companies must inform employees when they decide to take out policies to insure them
- Insured employees must agree to the policies in writing
- Employers must get written consent from the employee to continue the policy after he or she leaves the company
New provisions, though, still allow companies to deduct COLI premiums from their earnings and profits even after the benefits are paid to an employee's family.
Employees must provide written consent allowing companies to take out COLI.
Criticism of Corporate Ownership of Life Insurance (COLI)
Both COLI and BOLI policies have drawn a lot of criticism as they are considered highly unethical. Prior to the changes made by the IRS and Congress, many companies took out policies without the consent or knowledge of their employees. This allowed them to profit from the death of ordinary employees, who received no direct benefit themselves.
Another criticism is that companies continue to profit even after an employee has left their position. Policies remain intact, as long as the company keeps up the premium payments, even when the employer-employee relationship ends. As noted above, the employee must now provide written consent allowing the employer to continue keeping the policy intact.