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Pros and Cons • Insurance Blog by Chris ™



I started Insurance Blog by Chris ™ because I have a passion for insurance. Here on the blog, our job is to educate and inform people about the best insurance for them. Since then, we have grown into national brands with a large team of researchers who help people understand all forms of insurance.

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Written by

Chris Huntley

Founder of Huntley Wealth & Insurance Services

Chris Huntley

Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she received her property and claims license in all 50 states. After several years, she expanded her insurance expertise and also received her license in health and AD&D insurance. She has worked for small health insurance companies …

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Reviewed by


Rachael Brennan

Licensed insurance agent

Rachael Brennan

UPDATED: March 28, 2022

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Here’s Scoop

  • COLI policies can help you insure your business against the death of a key employee or partner
  • COLI policies pay the death benefit to the company rather than to the employee or partner
  • The police can be confused with group coverage, but the beneficiary is the company instead of the employee

When most people think of business life insurance, they think of group insurance. But there is another type of life insurance called COLI, which is an abbreviation for company owned life insurance. And while the life insurance industry has many creative ways to use coverage, COLI insurance is gaining ground in the corporate insurance arena.

Group life insurance usually covers the employee, and the employee is allowed to decide who is the beneficiary of the coverage. In COLI, the company owns the insurance and would also receive the death benefit if the employee goes through while the COLI policy is in force.

The company, not the employee, pays the COLI premiums. You usually use this type of policy to insure the lives of senior executives or other employees whose death may have a significant financial impact on the business. If they die while the policy is in force, the company receives the death benefit.

Here we help you understand what a COLI is and then look at the pros and cons of business-owned life insurance.the coverage that has gained popularity with entrepreneurs in recent years.

What exactly is Corporate Life Insurance (COLI)?

COLI life insurance is a great way to protect your business. If a covered owner or key employee dies, the COLI policies provide a one-time payment to the company. This payment can help keep your business running, protect your employees’ jobs, or allow the company to buy out the deceased partner’s family.

COLI can provide critical means at the death of a key employee or business partner. It is important to note that the company may impose COLI policies on more than one of its employees or owners. The coverage allows you to insure the top 33% of your workforce.

COLI can be a cheaper alternative for companies that want to take out one or more life insurance policies for key people within the organization. And as long as the company follows the correct steps when placing the insurance, the death benefit will generally be 100% tax free. Please note, however, that premium payments are not tax-free.

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What are the benefits of company-owned life insurance?

When used properly, company-owned life insurance policies can significantly benefit a business. Some of the benefits of COLI include:

  • Protection for key people: If a key employee dies, the company can use the income from the insurance to compensate for the loss.
  • Property Planning: The tax-free death benefit from a COLI policy can help business’ property planning efforts by providing liquidity. These funds can also help with unforeseen tax burdens, expansion of the business or acquisition of employees. The estate plan will dictate the use of the death benefits in the event of a covered death.
  • You can customize COLI policies to suit yours business’ needs. COLI policies are not one size fits all. The number of insured and the amount of compensation can vary depending on the insurance.
  • The business can accumulate its risks by purchasing COLI insurance for the top 33% of staff. The ceiling is the maximum number of employees that the IRS says you can include on company-owned life insurance policies. In addition, the IRS requires you to complete Form 8925 for each covered employee each year.
  • The business can also borrow against the insurance’s cash value, which can provide liquidity in a time of need.

What are the rules for COLI?

COLI is an excellent option for a company that wants to reduce the consequences of losing a key employee or partner, but this policy has some caveats.

  • Companies can only impose COLI policies on the top 33% of their employees.
  • When you add an employee to a COLI, you must notify him in writing before the insurance company issues the insurance for them.
  • COLI’s death benefit is likely to remain tax-free if the covered employee gave written consent before the insurance was issued.
  • Another technical thing that potentially affects the beneficiary’s tax-free status is that the owner of the insurance (your company) and the beneficiary must be the same.
  • The business must also inform employees who are covered that the insurance income goes to the company rather than to the employee.

Employees are the lifeblood of a company

When a company is considering buying company-owned life insurance (COLI), the first question is why. The answer is simple: Employees are the lifeblood of a company. They are the ones who make things happen, and they are the most critical asset a company has.

If something happens to a key employee or partner, the business suffers a significant loss. COLI policies help the business to recover and move forward with the least possible financial disruption when the worst happens. Aside from the very real challenges of losing a close partner or key employee, COLI policies help the company return to focusing on what it needs and how to move forward.

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The tax benefits of company-owned life insurance

When it comes to business-owned life insurance tax treatment, COLI offers a couple of benefits that you may be interested in. For example, the death benefits paid are generally not subject to income tax.

In addition, COLI can build up cash value over time, depending on its structure. If the insurance has cash value, the business may borrow money tax-free against the insurance’s cash value. There is usually an annual interest fee on the cash value loan. You would usually pay the fee annually or, in some cases, debit it to the remaining cash value of the insurance.

What are the disadvantages of company-owned life insurance?

  • Business-owned life insurance is often more expensive than individual insurance.
  • If the company is the beneficiary of the insurance, it can create a conflict of interest with the employee.
  • COLI policies can be expensive to install and maintain.
  • If the policy is not properly structured, the company can pay more in property tax than if the policy was not in place.
  • If the company goes bankrupt, the insurance will often lapse, and any accumulated cash value will be absorbed by the bankruptcy.

Company-owned life insurance

COLI is a life insurance policy owned by the company rather than by the employee. Police officers in the amount of 1 million USD or more are typical. In this type of insurance, the death of the employee results in a death benefit to the company. The business can use the revenue for anything.

Companies also have some other options for providing life insurance coverage for their employees. Many offer group time insurance to all employees. Alternatively, the business can buy coverage for individual employees through an individual life insurance.

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The potential for litigation

Usually, the life policyholder is usually the policyholder’s spouse or children. But when a company owns the life insurance for an employee, the company is the beneficiary.

If something happens to the employee, the company takes in the death benefit. If the business can also make decisions about the employee’s care, this can create a conflict of interest.

Suppose, for example, that an employee is injured and that the company owns their life insurance. In that case, the business may be more inclined to make decisions about the employee’s care that benefit the business rather than the employee. Such conflicts are usually resolved in court. Allowing the employee to acknowledge and sign that they understand the coverage will provide leverage for jogging memories and avoiding court disputes if there are any disagreements.

Before deciding on a business-owned life insurance policy, carefully weigh the pros and cons

Whichever direction you choose, make sure you understand the coverage and how it will work for you. Business-owned life insurance can be a great way for employers to reduce their losses when a protected individual passes away. It’s also a great way to ensure the stability of your business should the worst happen to one of your best employees.


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