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Everything You Should Know About Corporate-Owned Life Insurance

By MARK P. CUSSEN, an article from Investopedia

Life insurance provides financial protection for millions of people in America and around the world. Not all life policies are purchased by individuals; many companies and other institutions also use life insurance for various purposes, such as to provide liquidity. But the rules that pertain to corporate ownership of life insurance are somewhat more complex than for individual or group policies. This article examines the history, purpose and taxation of corporate-owned life insurance (COLI) in America.

SEE: How Much Life Insurance Should You Carry?

Nature and Purpose of COLIAs the name states, COLI refers to life insurance that is purchased by a corporation for its own use. The corporation is either the total or partial beneficiary on the policy, and an employee or group of employees, owner or debtor is listed as the insured(s). Fundamentally, COLI differs from group life insurance policies that are typically offered to most or all of the employees in a company, because this type of insurance is designed to protect the employees and their families and not the company itself. COLI can be structured in many different ways to accomplish many different objectives. One of the most common is to fund certain types of nonqualified plans, such as a split-dollar life insurance policy that allows the company to recoup its premium outlay into the policy by naming itself as the beneficiary for the amount of premium paid, with the remainder going to the employee who is the insured on the policy. Other forms of COLI include key person life insurance that pays the company a death benefit upon the death of a key employee, and buy-sell agreements that fund the buyout of a deceased partner or owner of a business. https://tpc.googlesyndication.com/safeframe/1-0-37/html/container.htmlIn many cases, the death benefit is used to buy some or all of the shares of company stock owned by the deceased (such as with a closely-held business). COLI is also frequently used as a means of recovering the cost of funding various types of employee benefits.

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