As a consumer, there are several different types of life insurance you should be aware of. This is likely one you haven’t heard of.
These plans are much more complicated than a traditional life insurance policy purchased by a sole individual.
As a result, there can often be a cloud of confusion and lots of questions surrounding this form of coverage.
A specific kind of key man insurance, corporate ownership of life insurance 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.
Let’s now discuss corporate-owned life insurance in greater detail.
What is Corporate Owned Life Insurance (COLI)?
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 that 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 on the plan.
These plans often get confused with additional insurance coverage companies own to protect the employees and their families.
With those types of insurance policies, the insurance person or their family is named as the beneficiary. Since the company is the named beneficiary, they not only have a strong handle on the policy’s associated cash value, but can also generally withdraw or borrow against said funds.
This is the fundamental difference between the two life insurance plans – with a corporate-owned life insurance policy, the coverage to the company is only a secondary benefit of the coverage.
As would be expected, the company, as the entity covering premium payments, receives the full death benefit once the insured (or one of the insured) passes away. To collect the death benefit in a timely manner, the company utilizies Social Security information for proper claims filing.
However, in order to take advantage of a tax-free death benefit, the Internal Revenue Service (IRS) mandates that the company must only take out a policy on the top 33 percent of eligible employees according to their level of pay.
Before purchasing coverage, the company must inform the employee or group of employees of the COLI policy, its terms, and who will be the named total or partial beneficiary in the form of a written statement.
These specific requirements were put in place to keep companies from taking out policies on lower-level employees without their prior knowledge or consent.
Why Should Companies Consider COLI?
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 commons reasons to purchase this type of policy is to help offset costs if the insured was to unexpectedly pass away.
The more important the individual is to the fundamental operations of the organization, or the higher the individual’s seniority, the more difficult it will be to replace the individual.
Therefore, the insurance policy can help cover the associated costs of finding a replacement, which can often add up to a lofty sum.
Another common reason is to provide a way for the company to earn an additional income, which happens to be more than what they pay in insurance premiums.
These are only two of the many reasons a business might consider purchasing a corporate-owned life insurance plan.
Types of Corporate Owned Life Insurance Plans
There are two main types of corporate-owned life insurance policies, both of which are similar to bank owned life insurance policies:
- general accounts, and
- separate accounts
Each of these policies operates differently, and the policies both feature different sets of advantages and disadvantages to consider:
The first type of policy is referred to as a general account.
With a general account, the insurance company in a general portfolio invests the cash values of the policies. When choosing a general account, the insurance company takes on all of the risks for the investments.
The second type of policy is called a separate account.
With a separate account, professional brokers invest the cash value.
The main difference between these types of plans is that with a separate account, the account holder 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.
What the Insured Needs to Know
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 insurance 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.
The underwriting the employees will have to go through largely depends on the number of employees needing to be insured through the policy.
If there is going to be fewer than 15 people insured by the policy, the 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 will qualify for a guaranteed issue program. In other words, this means the 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.
Main Uses of COLI
These types of policies are often used to help offset the costs of expensive benefits packages to company employees. COLI policies are an ideal way to soften the blow taxes can put on an organization.
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.
Undoubtedly, it is quite easy to see how these plans can get confusing and complicated for those not familiar with them.
As would be expected, this complexity surrounding corporate-owned life insurance has often led to legal interpretation issues over the years with significant financial entities, such as the IRS.
Although some individuals may feel apprehensive about a company taking out a life insurance policy on them, the insured does not have to worry about any financial ties to the policy.
Also, the majority of entities purchasing COLI policies are some of the most reputable companies with strong track records to boot.