Corporate-Owned Life Insurance (COLI) - Why Have It?
Adrian C. Spitters FCSI?, CFP?, CEA? President, Author, Private Wealth Advisor
I Execute Tax-Efficient Investment Portfolio Solutions So That Your Business, Family, And Estate Assets Are De-Risked And Protected Against Financial Risk, Economic Threats, Inflation And Higher Taxes.
Guest Contributor: Peter J. Merrick, TEP
Corporate-Owned Life Insurance (COLI) - Why Have It? Life insurance safeguards hundreds of millions globally, not limited to individuals but extending to corporations. Corporate-owned life insurance (COLI) is a nuanced realm within this domain. Unlike group policies benefiting employees, COLI involves corporations as policyholders, with employees or stakeholders as the insured parties.
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COLI serves diverse purposes, often funding nonqualified plans like split-dollar life insurance. Such policies enable firms to recoup premiums by designating themselves as beneficiaries for premiums paid. Key person insurance secures death benefits for companies if key employees pass away, while buy-sell agreements finance business owner buyouts. COLI aids recovery of employee benefit funding costs too.
Originating from 19th century Russia's "dead peasant" insurance, COLI's history spans over a century. It found use in exploiting tax arbitrage within the Internal Revenue Code. Firms borrowed from policy cash values, paying deductible interest, circumventing income inclusion. The IRS later capped this loophole at $50,000 per policy. By the 1980s, corporations targeted low-tier staff, using COLI for tax deductions surpassing premiums. The IRS countered such practices in the 1990s, leading to favorable rulings.
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Taxation complexities surround COLI, varying by state. While individual and group life policy death benefits are tax-free, corporate-owned policies encounter exceptions. To prevent corporate tax evasion, COLI policies must adhere to criteria:
1. Purchased for the top third of highly compensated employees.
2. Insured employees receive written notifications of intent and coverage amount.
3. Notifications also extend to company beneficiaries.
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4. Exceptions exist for recently employed individuals and directors/highly-compensated employees, enjoying tax-free benefits.
Cash value growth within corporate COLI is tax-deferred, mirroring individual policies. Litigation previously disputed tax-free benefits for policyholders' families, but IRS eventually allowed tax-free payouts.
Remember: corporate-owned life insurance serves multifaceted corporate goals, governed by intricate regulations and taxation. For comprehensive insights, consult a skilled professional that understands the intricacies of COLI implementations.
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