What is Corporate Ownership Of Life Insurance (COLI)
Corporate ownership of life insurance (COLI) or corporate-owned life insurance refers to insurance obtained and owned by a company on its employees, where it pays all of the premiums and receives all of the benefits. These insurance policies are taken out by companies on their employees, with death benefits payable to these companies, rather than to the insured person's family or heirs.
BREAKING DOWN Corporate Ownership Of Life Insurance (COLI)
COLI is generally used to protect a company from the costs arising from the unexpected death of an employee, as well as to fund employee benefits. Unlike "key man" insurance, which refers to company-owned insurance on directors and top executives, COLI may be taken out on any employee. For this reason, it is sometimes derisively referred to as "janitor's insurance" or "dead peasant insurance."
When the employer of a corporate-owned policy is a bank, the policy is referred to as Bank-Owned Life Insurance (BOLI).
COLI is separate and distinct from employee benefit plans, since the only beneficiary is the company, and not the employee or the employee's 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).
COLI/BOLI policies have drawn criticism from the media and other parties, which question the ethics of companies benefiting financially from the death of ordinary employees.
History of Corporate Ownership of Life Insurance
COLI is still commonly used in the business world for company personnel including top executives. Many companies refer to policies for senior management as key man insurance. But COLI has a long history in the corporate world.
New employees often ended up signing 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 the U.S. Congress placed limitations on how companies could administer COLI and BOLI policies. Companies are still able to deduct COLI premiums from their earnings and profits even after the benefits are paid to an employee's family.