What Is Corporate Owned Life Insurance (COLI)?

Corporate owned life insurance, usually shortened to COLI, is a life insurance policy a company owns on the life of an owner, an executive, or another employee whose loss would cost the business real money. The company applies for the policy, pays the premium with after-tax dollars, and is named as the beneficiary. The employee is the insured, and never the owner. Two things follow from that arrangement. The cash value becomes an asset the company carries on its books, and the death benefit is generally received income tax free by the company, as long as the notice and consent rules under Section 101(j) were handled before the policy was issued.

What Corporate Owned Life Insurance Actually Is

Strip away the acronym and COLI is a normal life insurance policy with an unusual owner. Instead of a person applying on their own life, a business applies on someone else's. The business signs the application, writes the checks, and collects the proceeds.

The business has to show insurable interest, which means it has to be able to explain why the death of this particular person would hurt the company financially. That is easy to show for a majority owner, a top producer, a plant manager who holds the operating knowledge, or an executive the company has promised future money to. It is harder to show for a rank-and-file employee, and carriers ask.

The policy is usually permanent coverage, most often participating whole life insurance or a universal life design, because the cash value is half the reason the company is doing this. Term can fund a pure key person need for less, but it builds no asset and expires.

Who Signs What

Three roles have to be filled correctly, and mixing them up is the most common error we see in an existing arrangement:

• Owner: the business entity, named exactly as it appears on the operating agreement or corporate records.
• Insured: the individual employee, who signs a consent form before the policy is issued.
• Beneficiary: the business, in almost every case. A beneficiary that does not match the owner is a classic review finding and can create tax problems that were never intended.

The Two Jobs COLI Does at Once

A term policy on a key employee does one job. It pays if that person dies during the term. A permanent policy owned by the company does that job and a second one alongside it, which is why owners tend to find the conversation more interesting than they expect.

Job One: An Asset the Company Controls Now

Premiums paid into a permanent policy build cash value that belongs to the company. The company can generally borrow against it or withdraw from it, without a lender's approval and without a covenant test, because the collateral is already inside the contract. Businesses use that access for payroll gaps, equipment, a down cycle, or an opportunity that shows up on short notice. This is the same mechanic that sits underneath the private financing strategies families use, applied at the entity level.

Access is not free money. A policy loan accrues interest and, if it is never repaid, reduces the death benefit that eventually pays out. The cash value also has to be real and available, which depends entirely on how the policy was designed at issue.

Job Two: A Payment on the Worst Day

If the insured dies, the death benefit is paid to the company. That money does what nothing else in the business can do on that timeline. It replaces lost profit, funds the search and training for a replacement, steadies the bank and the customers, and, where an agreement calls for it, buys back a departing owner's interest.

Why the Cash Value Sits on the Balance Sheet

This is the part accountants care about and owners rarely hear explained. Under general accounting practice, an asset is something the company controls. The cash surrender value of a company-owned policy meets that test, because the company can surrender the contract or borrow against it whenever it chooses. So it is generally carried as an asset on the balance sheet and adjusted each year as it changes.

The future death benefit does not meet the test. Nobody controls when it arrives, so it is not carried as an asset. It shows up only when the insured dies, at which point the cash surrender value comes off the books and the balance of the proceeds is generally recorded as a gain.

So money the company would otherwise park in a low-yield account can sit inside an asset that grows on a contractual schedule, stays accessible, and carries a death benefit on top. Your CPA confirms the treatment for your entity, since presentation varies with how the books are kept.

Section 101(j) Comes Before the Policy, Not After

Here is the rule that decides whether the whole arrangement works. Death benefits are generally income tax free, but employer-owned life insurance issued after August 17, 2006 is treated differently. Unless the policy fits a statutory exception and the notice and consent steps were completed, proceeds above the premiums the company paid can be taxable to the business.

The notice and consent has to happen before the policy is issued. There is no fixing it afterward. Before issue, the employee has to be told in writing that the company intends to insure their life and the maximum face amount contemplated, has to give written consent to the coverage and to it continuing after employment ends, and has to be told in writing that the company will be a beneficiary of the proceeds.

The company then reports the contract to the IRS each year for as long as it is in force. The reporting form and its instructions are published on the IRS site, and the primary rule is worth reading first hand rather than from a brochure, according to the IRS.

The statutory exceptions generally turn on who the insured is, such as a director or a highly compensated individual, or on where the money goes, such as proceeds paid to the insured's family or estate or used to buy an equity interest from them. Which exception applies to a given policy is a question for the attorney drafting the arrangement, not something to assume from an article.

What COLI Does Not Do

Three limits are worth knowing before the first meeting.

• The premium is generally not deductible. IRC 264 denies a deduction where the business is directly or indirectly a beneficiary. Any material that implies a company writes off COLI premiums is describing something else. A Section 162 executive bonus arrangement is generally deductible, but only because the executive owns that policy and takes the bonus into income, which makes it a different structure with different rules.
• It does not replace the legal documents. Insurance funds an obligation. It does not create one. A company with policies in place and no current buy-sell agreement funding plan has money without instructions.
• It is not automatically the right answer for every owner. A pass-through owner looking mainly at their own retirement is often better served by a plan design that gets money out of the company efficiently, with COLI handling the risk and continuity side.

Where COLI Fits

The pattern we see most often is not an owner shopping for a product. It is an owner with a specific exposure who did not know insurance solved it.

• Key person risk. One person whose absence would move the revenue line. Sizing that number is its own exercise, covered in our piece on key person insurance.
• An entity redemption buy-sell. The company owns a policy on each owner and buys the interest back at death. Since the 2024 Connelly decision, this design deserves an attorney's review for owners whose estates may be taxable. That case turned on a redemption obligation, and does not change how ordinary key person coverage works.
• Deferred compensation. A promise to pay an executive later is unsecured and unfunded by design. The company may hold a policy as the informal reserve behind it, keeping full ownership and control of the asset.
• Loan collateral. Lenders and the SBA often want coverage assigned on the owner. A permanent policy satisfies that and keeps building value after the note is retired.

In every one of these, the attorney drafts, the CPA confirms the tax treatment for your entity, and we design and place the coverage. That division of labor is the point, and it is how we work on business owner strategies. If you want to walk through which exposure your company actually has, book a time to talk it through and we will start with the problem rather than the product.