COLI and BOLI explained: corporate and bank-owned life insurance

COLI (corporate-owned life insurance) and BOLI (bank-owned life insurance) are life insurance policies that a business owns, pays for and is the beneficiary of, on the lives of its employees, officers or directors. Companies use them to fund benefit obligations, protect against the loss of key people and offset the cost of employee benefits. The tax advantages are real but conditional: IRC 101(j), 264 and the insurable-interest requirement all apply.

What the terms mean

COLI is the general term for an employer-owned policy, whether it covers one executive for key person insurance or many employees to finance benefits. BOLI is the same concept applied to banks and thrifts, which are regulated by their banking agencies and have specific supervisory expectations. The policies are usually permanent products, whole life, universal life or variable universal life, with cash values that accumulate on a tax-deferred basis.

Three types of design show up:

• General account: the insurer guarantees the cash value and credits interest based on its general portfolio. The policyholder takes the insurer's credit risk.
• Separate account: the assets are held apart from the insurer's general assets and the policyholder takes investment risk (and gets the investment results).
• Hybrid separate account: a separate-account design with a stable-value wrapper. Not every carrier offers it.

The mix depends on the carrier's products and the purchaser's risk appetite. Do not choose on a sales illustration alone.

Why companies buy it

Typical purposes are:

1. Key person protection: to replace lost earnings or cover recruiting costs (see key person insurance: protecting the business from a loss of talent).
2. Funding nonqualified plans: executive deferred compensation and supplemental retirement plans (see nonqualified deferred compensation and corporate-owned life insurance).
3. Buy-sell funding: though buy-sell policies have their own structures, see Funding a buy-sell agreement with life insurance after Connelly.
4. Benefit cost recovery: employers use broad-based COLI on many employees to offset future benefit costs, the use that led Congress to enact IRC 101(j) in 2006.
5. Loan collateral: a lender may require a policy on a principal and take a collateral assignment of life insurance for business loans.

Insurable interest

State insurance law requires the employer to have an insurable interest in the life covered when the policy is issued. State statutes differ on whether interest in a rank-and-file employee suffices and whether the employee's consent is required. Some states require consent beyond what federal law does. State law as well as IRC 101(j) must be checked, and counsel in the employer's state should confirm it.

Tax rules that decide whether it works

Death benefit. Generally income-tax-free under IRC 101(a). Under IRC 101(j), however, the tax-free amount for an employer-owned life insurance contract issued after August 17, 2006 is limited to the premiums and other amounts the employer paid, unless an exception applies and the notice and consent requirements were met. Notice and consent must be completed before the policy is issued: the employee must be told in writing that the employer intends to insure the life and of the maximum face amount, must consent in writing to the coverage and its continuation after employment ends, and must be told the employer will be a beneficiary. The exceptions cover insureds who were employees in the 12 months before death, or were directors, highly compensated employees or highly compensated individuals when the policy was issued, and cases where proceeds go to the family, a beneficiary, or are used to buy the insured's equity interest. The details are in Employer-owned life insurance: notice and consent rules under IRC 101, which also explains Form 8925, filed with the employer's tax return each year, as required by IRC 6039I.

Premiums. Not deductible when the employer is directly or indirectly a beneficiary (IRC 264(a)(1)).

Cash value growth. Tax-deferred inside a policy that meets the IRC 7702 definition. A policy that fails the modified endowment contract tests of IRC 7702A is taxed differently on loans and withdrawals.

Interest on borrowing. IRC 264(a)(2)-(4) limits interest deductions on debt used to buy or carry life insurance, with a $50,000 per-insured exception for key persons (officers or 20% owners). IRC 264(f) disallows a pro rata share of a business's other interest deductions attributable to unborrowed policy cash values, with an exception for policies covering only a 20% owner, officer, director or employee. That is why large broad-based programs are treated differently from small key person policies.

Transfer for value. If a policy is sold to a third party for value, IRC 101(a)(2) can limit the tax-free death benefit. Transfers to the insured, a partner of the insured, a partnership in which the insured is a partner, or a corporation in which the insured is a shareholder or officer are exceptions.

BOLI and the banking regulators

Banks hold BOLI under their regulators' rules. In December 2004 the OCC, the Federal Reserve, the FDIC and the former Office of Thrift Supervision issued an interagency statement, published as OCC Bulletin 2004-56, on the purchase and risk management of BOLI. It says national banks may hold BOLI under 12 U.S.C. 24 (Seventh) for recognized purposes such as employee benefit plans and key person coverage, and not for speculation. It calls for pre-purchase analysis of the insurer's credit and product design, concentration limits per carrier and in total, and informed employee consent. Where aggregate cash surrender value exceeds 25% of capital, it expects approval by the board or a board committee. The OCC's page notes that references to reputation risk were removed in March 2025 and points to OCC Bulletin 2025-4. If a bank is considering BOLI, its examiner and counsel set the actual limits.

Underwriting COLI

Underwriters require a business reason, the amount of coverage in relation to the plan being funded, and the insured's medical history. For broad programs, underwriters often use guaranteed-issue or simplified-issue approaches within limits. The employer should keep the written notice and consent forms in a permanent file. See how insurers underwrite business life insurance.

Hypothetical example

Say a regional bank with 400 employees wants to offset the cost of an executive retirement plan covering its 12 senior officers. It buys policies on those officers only, owned by the bank, with each officer giving written consent before issue. The bank files Form 8925 annually and its board approved a carrier concentration limit. When one officer dies while employed, the death benefit is generally tax-free because of the employment exception and the compliance with notice and consent. The facts are invented.

Compliance checklist

• Obtain the written notice and signed consent before the policy is issued.
• Record the maximum face amount in the notice.
• File Form 8925 each year the employer owns EOLI.
• Document the business purpose and insurable interest.
• Review interest-deduction exposure with the CPA.
• Review carrier credit quality annually.

Key takeaways

• COLI and BOLI are employer-owned permanent life policies used for key person coverage and benefit funding.
• IRC 101(j) limits the tax-free death benefit unless notice and consent were completed before issue and an exception applies.
• Premiums are not deductible, and interest deductions are restricted under IRC 264.
• Banks follow additional interagency supervisory guidance on BOLI.
• Keep records of consent and file Form 8925 annually.