Also referred to as company-owned life insurance, these policies are bought by a company and used to insure a high-ranking employee or group of employees inside an organization.
The business is the one who purchases the policy, pays the premiums on the plan, and is the named beneficiary of the policy.
The employee or employees are listed as the ones insured by the plan.
Below, we will discuss this more complicated type of life insurance in greater detail.
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Corporate-owned life insurance (COLI) is a specific kind of key person insurance (also known as key man insurance).
Corporate ownership of a life insurance policy on an employee is a more complex way of utilizing the lesser-known growth and tax advantages of a life insurance policy.
When these policies are used and structured properly, corporations can offer additional benefits while also anticipating a long-term return on investment.
Finally, if a key employee were to pass away while employed, the death benefit would, quite literally, buy the company time to replace him or her.
These plans often get confused with additional insurance coverage which companies own to protect employees and their families.
With those types of insurance policies, the insured person or their family is named as the beneficiary.
Since the company is the named beneficiary on a COLI policy, they not only have access to the policy’s associated cash value, but can also generally withdraw or borrow against said funds.
As would be expected, the company, as the entity covering premium payments, receives the full death benefit if the insured were to pass away.
However, in order to take advantage of a tax-free death benefit, the Internal Revenue Service (IRS) mandates the company must only take out a policy on the top 35% of eligible employees according to their level of pay.
Before purchasing coverage, the company must inform the employee or group of employees in writing of the COLI policy, its terms, and who will be the named total or partial beneficiary.
These specific requirements were put in place to keep companies from taking out policies on lower-level employees without their prior knowledge or consent.
There are several different reasons why a company would want to buy one of these plans for a key employee or group of essential employees.
One of the most common reasons to purchase this type of policy is to help offset costs if the insured was to unexpectedly pass away.
The more important the employee is to the fundamental operations of the organization, or the higher the individual’s seniority, the more difficult they will be to replace in a timely manner.
Therefore, the insurance policy can help cover the associated costs of finding a replacement, which can often add up to a lofty sum.
These types of policies are also often used to help offset the costs of expensive benefits packages to company employees.
And COLI policies are an ideal way to soften the blow taxes can put on an organization.
Another common reason is to provide a way for the company to earn an additional income, which adds up to be more than what they pay in insurance premiums.
These are only a few of the many reasons a business might consider purchasing a corporate-owned life insurance plan.
There are two main types of corporate-owned life insurance policies, both of which are similar to bank-owned life insurance policies:
- General accounts
- Separate accounts
Each of these policies operate differently, and both feature distinct sets of advantages and disadvantages to consider:
With a general account, the insurance company invests the cash value of the policies in the company’s general portfolio.
When choosing a general account, the insurance company takes on all of the risks for the investments.
With a separate account, professional brokers invest the policy’s cash value, typically utilizing a range of investment options.
In the case of a separate account, the policyholder is deemed responsible for the associated investment risks.
Each policy type involves various pros and cons you’ll need to weigh for yourself when determining the best fit for your specific organization.
There are several key factors any corporation should be aware of when dealing with these types of life insurance policies.
The first is the medical underwriting the insured person or group of people may have to go through to be accepted for the coverage.
Remember, when it comes to the nuts and bolts, this is still considered a life insurance plan at its core – mortality risk has to be accounted for.
The underwriting employees will have to go through largely depends on the number of employees needing to be insured through the policy.
If there are going to be fewer than 15 people insured by the policy, employees will need to undergo a traditional medical exam, similar to what most traditional insurance plans would expect.
If the group being insured consists of more than 15 people, the group may qualify for a simplified issue program. In other words, this means employees will only have to answer a few simple questions during the underwriting process.
Unlike some individual life insurance policies boasting efficient rates of issuance, COLI arrangements can take up to 2-3 months to finalize.
This is another reason why companies should carefully review both the financial strength and credibility of insurance providers they are interested in working with.
One of the most important things to note for anyone involved in these plans is that COLI does not replace any personal insurance you may already have.
As the employee, or person insured, COLI is not going to help your loved ones pay for any final expenses or debt you leave behind once you pass on.
With this in mind, you’ll still need to purchase a personal insurance policy or take advantage of the coverage plan offered through your employer so your family remains protected.
For many, life insurance is one of the most important investments you can consider. It is vital loved ones are given both the coverage and peace of mind they deserve.