Corporate-Owned Life Insurance (COLI): Insurance and Tax Issues Page: 4 of 15
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Corporate-Owned Life Insurance coliI): Insurance and Tax Issues
Life insurance policies taken out by and payable to companies on their employees, directors,
officers, owners, and debtors are commonly known as corporate-owned life insurance (COLI)
policies. (COLI is also known as company-owned life insurance.) Such policies enjoy the same
two basic preferences under the tax laws as other life insurance. First, death benefits paid under
life insurance policies are not taxable income to the beneficiaries of the policies. Second,
increases in the value of the policies over and above the premiums paid that result from
investment earnings on such premiums are not taxable unless the policy is surrendered prior to
the death of the insured. This second preference is generally referred to as the "tax-free inside
buildup" of life insurance. Therefore, the corporation enjoys either tax-deferred growth or tax-
free growth of funds invested in COLI plans. This tax treatment of COLI policies explains a large
portion of their usage, because it is certainly possible for a corporation to make a similar
investment without the complication of a life insurance policy. Without the life insurance policy,
however, such investments would be subject to regular taxation.
In addition, under certain circumstances, companies have deducted the interest expense for loans
from COLI policies from their taxes. Some companies have then used the loan proceeds to pay
for the premiums of the life insurance policies, further enhancing the advantages of COLI-related
transactions. Congress has increasingly restricted the instances in which this interest is allowed to
be tax deductible. The payment of premiums by the company, on the other hand, is not tax
Although the federal tax preferences for life insurance have been passed by Congress, the ability
of firms, as well as individuals, to purchase such insurance in the first place is regulated by the
states. Because of this, the state and federal governments effectively have a joint role in the
regulation of life insurance policies for tax purposes. The most basic requirement that states have
instituted for purchasers of life insurance is that a policyholder must be able to demonstrate "an
insurable interest" in the insured.' Companies have typically justified an insurable interest in
employees, officers, directors, and owners based on the potential financial costs associated with
the death of those individuals. Some states require the insurable interest to be established only at
the time the insurance is purchased; therefore, companies may continue to hold life insurance
policies and enjoy the tax advantages of COLI policies covering insureds no longer employed by
Background on COLI
COLI can be acquired on an individual or group basis, and the employer generally becomes the
applicant, owner, premium payer, and beneficiary of the policy. Because the corporation pays all
of the premiums and receives all of the benefits, neither the individuals actually insured nor their
heirs receive any of the death benefits. Thus, COLI is not an employee benefit and should not be
confused with group life insurance benefits that employers provide to their employees. COLI can
take many forms. Traditionally, narrow-based programs known as "key man insurance" have been
used by corporations to insure the lives of their top executives and to protect themselves against
the death of those key employees who are especially difficult or costly to replace. Other related
1 An insurable interest is an interest that might be damaged by the death of the insured individual.
Congressional Research Service
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Corporate-Owned Life Insurance (COLI): Insurance and Tax Issues, report, January 21, 2011; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc810193/m1/4/: accessed November 17, 2018), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.