Corporate-owned life insurance (COLI) is a type of life insurance policy that a company purchases on the lives of key employees or executives. The company pays the premiums and is the beneficiary of the policy. In the event of the insured person’s death, the company receives the death benefit.
COLI can provide several benefits to a company, including tax advantages and a source of funds for various purposes. It is often used by businesses to fund executive benefits, such as supplemental retirement income, deferred compensation, or to cover the costs of employee benefits.
Here are 13 common questions and answers regarding corporate-owned life insurance:
1. Why would a company choose to purchase COLI?
Companies purchase COLI for various reasons. It can provide a tax-efficient way to accumulate cash value and generate income for future use. Additionally, it can help cover the costs associated with employee benefits and provide financial security for the business.
2. Who is typically insured under a COLI policy?
COLI policies are typically purchased on the lives of key employees or executives within a company. These individuals are usually vital to the organization’s success, and their death could have a significant financial impact on the business.
3. What are the tax advantages of COLI?
COLI policies offer tax advantages such as tax-deferred growth of cash value and tax-free death benefits. Additionally, the premiums paid by the company may be tax-deductible, subject to certain limitations.
4. Can COLI policies be used to fund employee benefits?
Yes, companies often use COLI policies to fund employee benefits such as retiree medical plans or pension obligations. The cash value accumulated in the policy can be accessed to cover these costs.
5. Can a company borrow against the cash value of a COLI policy?
Yes, companies can borrow against the cash value of a COLI policy. The policy’s cash value serves as collateral for the loan, providing the company with a potential source of funds for various purposes.
6. Are COLI policies transferable?
COLI policies are generally not transferable. They are owned by the company and remain in force as long as the premiums are paid. However, the company may change the insured person if necessary.
7. What happens if the insured person leaves the company?
If the insured person leaves the company, the company can choose to retain the policy and change the insured person to another key employee. Alternatively, the company may surrender the policy and access the cash value.
8. Can the insured person access the cash value of a COLI policy?
No, the insured person typically does not have access to the cash value of a COLI policy. The policy is owned by the company, and the cash value is intended to serve the company’s needs.
9. How is the death benefit of a COLI policy calculated?
The death benefit of a COLI policy is typically equal to the face amount of the policy. It is the amount that the company will receive upon the insured person’s death.
10. Are COLI policies subject to estate taxes?
The death benefit of a COLI policy is generally income tax-free. However, it may be subject to estate taxes if the company is the named beneficiary and the insured person has incidents of ownership in the policy.
11. What happens if the insured person lives beyond the policy’s term?
If the insured person lives beyond the policy’s term, the policy will expire, and the company will not receive a death benefit. However, the company may still have access to the cash value accumulated in the policy.
12. Can COLI policies be surrendered before the insured person’s death?
Yes, a company can choose to surrender a COLI policy at any time. By surrendering the policy, the company will receive the cash value, minus any surrender charges or fees.
13. How does COLI differ from personal life insurance policies?
COLI differs from personal life insurance policies in that it is owned and paid for by the company. The company is also the beneficiary of the policy, rather than an individual or their family members.
In conclusion, corporate-owned life insurance (COLI) is a valuable tool for companies to protect their financial interests and provide various benefits to key employees. It offers tax advantages, funding options for employee benefits, and a potential source of cash value for the company’s use. Understanding the ins and outs of COLI can help businesses make informed decisions about their insurance needs and financial planning.