Corporate-Owned Life Insurance
Corporate-Owned Life Insurance
The death of a key employee in a business represents a terrible loss to the corporate family. It can also cause considerable financial loss particularly if the person was a significant owner in the business or was in a position that requires considerable time, effort, and expense to recruit a replacement for. Although it may seem callous to some, taking out a corporate owned life insurance policy on key employees is a good way to ensure that the company is able to recover financial from the unexpected death of highly trained and valued personnel. This type of insurance is also known as key man or key person insurance and is used by corporations and partnerships around the world.
Corporate owned life insurance (COLI) is an insurance policy that the corporation takes out on a specific person or, in some instances, a group of people. The company is named as the beneficiary and if the person dies while they are insured, the company receives the death benefit. Typically, this is a variable life insurance policy that allows the company to invest a portion of its premiums into investments accounts such stocks or bonds as well as to allow flexibility in the payment of its monthly premiums.
Due to abuses in the past, companies or partnerships that purchase corporate owned life insurance must adhere to several rules regarding its usage. The employee must be notified by the company in writing that the company plans on taking out a life insurance policy on them and the maximum amount they will be insured for. The employee must also give their written consent to be insured and told, in writing, that the company is the beneficiary of the benefits in the event of their death.
There are also a few specified exceptions. The employee had to have been an employee during the 12 month period prior to their death or the person was a director or highly compensated employee. The benefits received by the company can be excluded from their income as long as they adhere to these rules as well as at least one of the specified exceptions. COLI policies operate just like other types of insurance in that the company can borrow against the value of the policy and even surrender it for a return of the premiums paid. Any cash value accumulated is tax deferred until there is any distribution from the policy that calls for taxation
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