Corporate-owned life insurance (COLI)

Corporate-owned life insurance is a policy owned by an employer, paid for by the employer and payable to the employer on the death of an insured employee. Companies use it to cover key people, fund nonqualified deferred compensation and executive benefit plans, and offset the cost of employee benefits. Banks use the same structure under the name BOLI.

The tax benefit is the draw: death benefits are generally income-tax-free to the beneficiary, and cash value grows tax-deferred. Congress limited that in 2006. Under IRC section 101(j), the employer's tax-free recovery for employer-owned contracts issued after August 17, 2006 is capped at the premiums it paid, unless an exception applies and the notice-and-consent rules were met. The employee must be told in writing, before the policy is issued, that the employer intends to insure them and the maximum face amount, must consent in writing, and must be told the employer will be a beneficiary. Exceptions include insured employees who worked for the company in the 12 months before death, directors and highly compensated employees, and benefits paid to family or used to buy out the insured's stake.

Missing consent forms is the classic failure and cannot be fixed after issue. The employer also files Form 8925 each year with its tax return. The guide on Employer-owned life insurance: notice and consent rules under IRC 101 covers the compliance steps, and COLI and BOLI explained: corporate and bank-owned life insurance covers uses and risks. See key person insurance for the most common application.