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
In the 1990s, some companies started aggressively insuring a broad base of their employees, as part of general requirements for hiring new employees, but this was never done without the employee's written consent.
When they're first hired, new employees sign many documents, including life, health and welfare coverage agreements or applications for insurance. Up until 1984, certain premiums for life insurance were leveraged and deducted, in essence creating a transaction with the highest possible tax benefits. Today, when a COLI plan's death benefits are paid to an employees family directly, the company paying the premiums can still deduct them from corporate profits and earnings legally. In 2006, the U.S. Congress and the Internal Revenue Service (IRS) established guidelines and limits on the installation and administration of COLI and BOLI.
While COLI is still most common for senior executives of a firm (key man insurance), it is still used with general employees is still sometimes practiced, primarily, as a real economic transaction for Voluntary Employee Beneficiary Associations (VEBAs).