What Is Corporate Ownership of Life Insurance (COLI)?
Corporate ownership of life insurance (COLI), or corporate-owned life insurance, refers to insurance policies taken out by companies on their employees, typically senior-level executives. The company is responsible for making the premium payments, and if the person dies, the company, not the insured person's family or other heirs, receives the death benefit. Such policies came to called "dead peasant insurance" after some companies purchased life insurance on low-level workers without their knowledge.
- Corporate ownership of life insurance (COLI) refers to insurance obtained and owned by a company on its employees, typically senior-level executives.
- Companies pay the premiums and receive the death benefit if the employee dies. The insured employee's heirs or family do not receive any benefits.
- A major reason that companies purchase COLI is to profit from the tax advantages of life insurance.
- Corporate-owned life insurance is sometimes referred to as "dead peasant insurance" because of companies that took out policies on low-level employees without their knowledge or consent.
How Corporate Ownership of Life Insurance (COLI) Works
Corporate ownership of life insurance has a long history in the business world, particularly for a company's top executives, whose deaths might have serious financial implications for the company. Many companies refer to corporate-owned policies for senior management as key man or key person insurance. Companies may also take out life insurance policies on their owners, officers, directors, and debtors. When policies are taken out on lower-level employees, they are sometimes derisively referred to as janitor's insurance or dead peasant insurance.
If the purchaser of a corporate-owned policy is a bank, the policy is often referred to as bank-owned life insurance (BOLI).
COLI is generally used to protect the financial interests of the company that buys it. Since the company owns the policy, it can borrow money or make withdrawals against its cash value, as well. Companies also use COLI arrangements as a way to fund supplemental executive retirement plans (SERPs), a type of deferred compensation arrangement for key executives.
COLI policies provide the same tax benefits to the owner as other life insurance products: death benefits are not taxable and investment earnings on the policy's cash value can grow tax-free or tax-deferred within the policy.
"This tax treatment of COLI policies explains a large portion of their usage, because it is certainly possible for a corporation to make a similar investment without the complication of a life insurance policy," the Congressional Research Service noted in a 2011 report. "Without the life insurance policy, however, such investments would be subject to regular taxation."
While the federal government is responsible for the tax laws relating to corporate-owned life insurance, the policies are also subject to state regulation, like other forms of insurance, as well as to Financial Accounting Standards Board reporting guidelines. The Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation set rules regarding bank-owned life insurance.
COLI may take the form of either an individual or a group life insurance policy. But it is separate and distinct from the group life insurance that companies often offer as part of an employee benefit plan, since the beneficiary in this case is the company—not the employee or their family.
Another variation of COLI or BOLI policies is split-dollar life insurance. In that case, the company or bank pays all or part of the premiums and the insured person's heirs may share some portion of the death benefit if they die.
As a result of the controversy over "dead peasant insurance," Congress and the IRS tightened the rules on these policies in 2006.
The 'Dead Peasant Insurance' Controversy
In the 1990s, some companies began insuring their employee base indiscriminately, rarely getting the employees' permission to do so. That practice drew criticism for allowing companies to profit from the death of ordinary employees, whose families received nothing. Then, in 2006, Congress and the Internal Revenue Service placed limitations on how companies could administer COLI and BOLI policies. For example, Congress limited COLI’s tax advantages to policies taken out on the company's highest-paid 35% of employees. Among other key changes:
- Companies must now inform employees when they want to take out policies to insure them.
- Insured employees must agree to the arrangement in writing.
- Employers must also get written consent from the employee if they want to continue the policy after the employee leaves the company.