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  • Writer's pictureJay Judas

Tier One: Your Quick Guide to Corporate Owned Life Insurance


Jay Judas thinking about COLI

In the life insurance industry, the acronym “COLI” is a catch-all that can mean several types of corporate-owned life insurance aimed at benefiting both individuals as well as companies. These policies serve a variety of strategic purposes, from protecting against financial loss due to the untimely death of key personnel to funding executive benefit plans.


Adding to the complexity, in some situations, the policy is owned by the shareholder or employee and not the company.


At Life Insurance Strategies Group, we do not sell products and we spend much of our time helping our individual and corporate clients acquire life insurance for a variety of planning needs. The work often entails explaining the popular strategies where life insurance fits into a corporate setting or, as the industry likes to say, a COLI transaction.


Key Person Insurance


The Foundation:

Key Person Insurance is a fundamental type of COLI, designed to safeguard a company against the financial implications of losing an indispensable employee due to death. The insured individual could be a shareholder, an executive, a highly skilled technician, or anyone whose absence would pose a significant financial risk to the company's operations.


The Transaction:

Companies use Key Person Insurance to mitigate the risk of operational disruption, covering loss of revenue, and costs associated with finding and training a replacement. The death benefit provides a financial cushion that can be crucial for business continuity.


Buy-Sell Agreements


The Framework:

This type of COLI facilitates the smooth transition of ownership when a business owner dies, retires, or becomes incapacitated. Policies are structured around the business's succession plan, ensuring that funds are available to buy out the departing owner's interest.


The Transaction:

The proceeds from the policy fund the buyout, maintaining business stability and preventing financial strain or the need to sell the company. It ensures that the business continues running with minimal disruption, benefiting all stakeholders. There are several types of buy-sell structures which involve policies either being owned by the company, by the shareholders or by an LLC.


Executive Bonus Plans


The Blueprint:

Also known as Section 162 plans, Executive Bonus Plans generally involve selected executives owning life insurance policies to be used for future income. The company pays the premiums, which are considered a taxable bonus to the employee.


The Transaction:

This approach offers a dual advantage: it provides executives with valuable life insurance coverage and often with a cash value component they can access during their lifetime and serves as a tax-effective compensation strategy for the employer, enhancing executive retention and loyalty. The employer can also add restrictions to the Plan that restrict an executive’s access to a policy’s cash value until any number of criteria are met, including a vesting period.


Deferred Compensation Funding


The Strategy:

Deferred Compensation Funding involves the company purchasing life insurance policies to support commitments made under deferred compensation plans for employees. These nonqualified plans allow employees to defer a portion of their income to a future date, typically retirement, thereby potentially reducing their current income tax liability. In some situations, the company promises to pay a benefit to the executive in the future, regardless of whether the executive elects to defer any of their own income.


The Transaction:

The cash value of these COLI policies is used to accumulate funds to meet the future liabilities of the deferred compensation plan. Upon the employee’s retirement or another predetermined event, the policy's value helps fulfill the company's obligations under the plan.


Split-Dollar Life Insurance


The Concept:

Split-Dollar Life Insurance is a shared arrangement between the employer and employee, where life insurance policies are purchased collaboratively – sometimes the company owns the policy and sometimes the employee owns a policy. The premium, cash value, and death benefits are split according to the agreement.


The Transaction:

This setup provides a cost-effective way for employees to receive life insurance benefits, with the employer recouping its premium costs through the policy's death benefit. It's a strategic method for offering executive benefits and aligning the interests of the company with those of key employees.


The Key is Life Insurance


Many of the structures and plans mentioned are common planning strategies that operate most efficiently with cash value life insurance. Essentially, COLI represents a multifaceted tool for businesses, offering solutions for risk management, succession planning, employee benefits, and compensation strategies.


Understanding the various types of COLI policies and their corresponding transactions allows companies to make informed decisions, aligning their financial planning with strategic business objectives. As always, navigating the complexities of COLI requires careful consideration and, often, consultation with financial and legal professionals to ensure compliance and optimize benefits.

 

At Life Insurance Strategies Group, we do not sell products. We help our individual and institutional clients make decisions involving complex life insurance transactions.

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