Simple Answers About Funding Executive Benefits With COLI
Answering the questions, “What is COLI?” and “How does corporation owned life insurance work?”
COLI, which stands for corporate owned life insurance, is one option an organization may choose for informally funding its nonqualified deferred compensation plans or underwriting the costs of other types of executive benefits. A COLI policy can also be used to help cover the company’s cost of replacing key employees upon their death or can be considered a desirable benefit for executives who value having such a policy in place to provide for their loved ones.
With corporate owned life insurance, the company purchases and owns life insurance on one or more key employees. As the policyholder, the company is responsible to pay the insurance premiums. Because it is institutionally priced life insurance, COLI typically positions the policyholder to leverage group pricing based on the size of the policy and statistically lower risk associated with the group being insured.
Why Companies Use COLI to Fund Executive Benefits
COLI is designed for use with highly compensated employees. As a strategy for offsetting an organization’s cost of executive benefits, COLI is generally tax-efficient, but it is regulated by the Pension Protection Act of 2006.
COLI receives favorable accounting and Profit and Loss (P&L) treatment relative to taxable investments and can reduce taxes on invested assets; increasing returns and enhancing shareholder value. Short-term, COLI can reduce P& L volatility and match plan balance sheet liabilities. Long term, COLI can increase benefit security and reduce overall plan costs, delivering more value to plan participants.
With a COLI policy, death benefits are tax-free to the beneficiary[i], which is typically the employer but can be a family member of the employee (or another selected person determined by the insured employee) and may also be shared between the employer and the selected beneficiary.
The policy’s cash value can be accessed to pay plan participant benefits. The option to access COLI cash values via tax-free loans and withdrawals can provide unique cash flow flexibility for an organization as the plan provider.[ii] And increases in a policy’s cash surrender value generally accumulate on a tax-deferred basis.[iii]
What Should Companies Consider When Funding Executive Benefits with COLI?
Organizations considering the use of corporate owned life insurance will want to factor in the cost of the insurance and the policy fees, potential market risks, and that the insurance policy’s value may not correlate exactly with the plan participant’s benefit account balances. Additionally, the insured employee must provide consent to be insured.
Although this overview addresses many of the basics of funding executive benefits with COLI, each organization’s situation has unique needs and considerations. To learn more about how your company, or your client’s company, might utilize corporate owned life insurance as all or part of its executive benefits solution, attracting and retaining key talent, contact any member of the OneDigital executive benefits team.
[i] Subject to qualification under US Code §101 and US Code §7702
[ii] Subject to qualification under US Code §72, and under US Code §7702A and US Code §7702(f)(7)
[iii] Subject to qualification under US Code §72 and under US Code §817(h)
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