Corporate-Owned Life Insurance (COLI): How It Works and Why Companies Use It

Corporate-owned life insurance, often called COLI, is life insurance a company buys on the lives of certain employees, where the company owns the policy, pays the premiums, and is the beneficiary. It’s widely used by businesses to fund executive benefits, protect against the loss of key people, and manage long-term financial obligations.

This guide explains how COLI works, common uses, the tax and legal rules that apply, and how it differs from life insurance companies provide to employees as a benefit. It’s educational only. Businesses should work with tax, legal, and benefits advisors before buying.

How corporate-owned life insurance works

A company identifies a group of eligible employees, such as executives or other highly compensated people, and buys life insurance on each of them, usually permanent coverage that builds cash value. The company pays the premiums and is the beneficiary. Over time, the policies’ cash value appears as an asset on the company’s books. When an insured employee dies, the company receives the death benefit, which can be used to fund benefit obligations, recover costs, or support operations.

Common uses of COLI

• Funding nonqualified deferred compensation. Many companies offer executives plans that let them defer salary or bonuses beyond qualified plan limits. COLI can help the company finance those future payments.
• Supplemental executive retirement plans. COLI cash value and death benefits can help offset the cost of promised retirement benefits.
• Key person protection. Coverage on an executive or founder helps the business absorb the financial impact of losing that person.
• Buy-sell funding. In closely held businesses, entity-owned coverage can fund the purchase of a deceased owner’s shares.
• Offsetting employee benefit costs. Some companies use COLI as a long-term asset to help pay for retiree benefits.

COLI vs. other business life insurance

For more on how these arrangements are taxed, see is life insurance a business expense?

Tax treatment of COLI

• Premiums are generally not deductible, because the company is the beneficiary.
• Cash value generally grows tax-deferred while the policy is in force.
• Death benefits can be received free of income tax, but for employer-owned policies, that treatment generally depends on meeting federal notice-and-consent requirements and the insured fitting within certain categories, such as being a director, highly compensated employee, or recent employee.
• Policy loans and surrenders can have tax consequences, and interest deductions on loans against COLI are restricted.

Notice, consent, and reporting rules

Federal rules adopted in 2006 tightened how employer-owned life insurance works, after concerns about companies insuring rank-and-file employees without their knowledge. To preserve tax-free treatment of the death benefit, a company generally must, before the policy is issued:

• Notify the employee in writing that the company intends to insure their life and the maximum amount of coverage
• Tell the employee that the company will be the beneficiary
• Obtain the employee’s written consent, including consent for coverage to continue after they leave

Companies that own these policies must also file IRS Form 8925 each year to report the number of employees covered and whether valid consent was obtained. Failing to follow these rules can make much of the death benefit taxable.

Which policies are used for COLI?

Companies generally choose permanent policies, because COLI is a long-term arrangement and cash value is part of its purpose. Common choices include whole life, universal life, and variable universal life. Some large employers buy policies designed specifically for institutional markets, with lower expenses and features tailored to corporate accounting. Term coverage may be used for shorter-term key person needs. See features of permanent life insurance.

Benefits of COLI for businesses

• Provides a tax-advantaged way to accumulate assets for future benefit obligations
• Can help attract and retain executives with competitive nonqualified benefits
• Protects the company against the financial impact of losing key people
• Creates a balance sheet asset through cash surrender value
• Offers flexibility in how proceeds are used

Risks and considerations

• Compliance requirements. Missing notice-and-consent or reporting steps can make death benefits taxable.
• Long-term commitment. Surrendering policies early can trigger surrender charges and taxable gains.
• Insurer strength. Policies held for decades depend on the insurer’s financial strength.
• Performance risk. Universal life and variable policies depend on interest crediting or investment returns.
• Employee relations. Transparency with insured employees helps avoid misunderstandings.

Is COLI right for your business?

COLI is most common among larger companies with significant executive benefit obligations, though closely held businesses also use entity-owned coverage for key person and buy-sell needs. If you’re considering it, involve your CPA, benefits attorney, and an experienced life insurance professional to design the program, document consent, and handle reporting.

A brief history of COLI

Companies have used life insurance on key people for generations. In the 1980s and 1990s, some large employers expanded COLI to insure broad groups of rank-and-file workers, sometimes without their knowledge, a practice critics nicknamed “janitors insurance.” Lawsuits and public criticism followed, and Congress tightened the rules. Today’s framework, including the notice-and-consent and reporting requirements, limits tax-free treatment to policies on certain categories of employees who have agreed to be insured. Modern COLI programs focus mainly on executives and other highly compensated employees.

Example: COLI funding a deferred compensation plan

Here’s a hypothetical example. A mid-sized manufacturer offers 15 senior executives a nonqualified deferred compensation plan. The company buys permanent life insurance on each participating executive, after giving written notice and obtaining consent. The policies’ cash value builds over time and is held as a company asset. When executives retire, the company pays their deferred compensation from general funds, and it can access policy values or use death benefits received over time to recover those costs. The executives’ benefits come from the plan, not directly from the policies.

How COLI shows up on financial statements

Companies generally report the cash surrender value of COLI policies as an asset on the balance sheet. Increases in cash value typically flow through income, and death benefits received above the recorded cash value are recognized as gains. Accounting and tax treatment can be complex, so finance teams usually work with auditors and advisors when setting up and reporting COLI programs.

Steps to set up a COLI program

1. Define the purpose. Decide whether the program will fund benefits, protect against key losses, or both.

2. Identify eligible employees. Confirm that each insured fits a category that preserves tax-free treatment.

3. Choose policy design and carriers. Compare financial strength, costs, and features.

4. Complete notice and consent. Provide written notice and collect signed consent before policies are issued.

5. Set up reporting. Plan for annual Form 8925 filing and recordkeeping.

6. Review periodically. Monitor policy performance, funding, and changes in employee status.

What employees should know about COLI

If your employer asks for your consent to be insured under a COLI program, it’s reasonable to ask questions. Find out the maximum coverage amount, whether coverage continues after you leave, and whether the arrangement affects any of your own benefits. In most COLI programs, the company is the sole beneficiary, so the policy doesn’t replace your personal life insurance. Your family still needs its own protection. Some employers pair COLI with benefits that do pay employees’ families, such as split-dollar arrangements or executive bonus plans, so ask how your benefits are structured. For personal coverage, see individual life insurance.

COLI for small and closely held businesses

You don’t have to be a large corporation to use entity-owned life insurance. Small businesses often own policies on owners or key employees to fund buy-sell agreements, repay business loans, or provide cash if a critical person dies. The same basic principles apply: the business owns the policy and is the beneficiary, premiums generally aren’t deductible, and notice-and-consent and reporting rules usually apply when the insured is an employee. Coordinate with your CPA to make sure the paperwork is in order.

Questions to ask before buying COLI

• What business purpose will the coverage serve, and how will proceeds be used?
• Which employees qualify, and how will consent be documented?
• What policy type and funding level fit our goals and cash flow?
• How will the policies be reported for tax and accounting purposes?
• What happens to coverage when an insured employee leaves?

Bank-owned life insurance (BOLI)

Bank-owned life insurance is a form of COLI purchased by banks, usually on officers and other key employees. Banks use BOLI to help offset the cost of employee benefits, and bank regulators provide guidance on how much BOLI a bank may hold and how it should be managed. BOLI follows the same general notice-and-consent principles as other employer-owned policies.

The bottom line

Corporate-owned life insurance can be a powerful tool for funding executive benefits and protecting a business against the loss of key people. Its tax advantages depend on careful compliance with notice, consent, and reporting rules. Work with experienced advisors to design the program, choose financially strong insurers, and keep records in order.

Corporate-owned life insurance FAQs

What is corporate-owned life insurance?

It’s life insurance a company buys on certain employees, where the company owns the policy, pays the premiums, and is the beneficiary.

Why do companies buy COLI?

To fund executive benefits such as deferred compensation, protect against the loss of key employees, fund buy-sell agreements, and build a tax-advantaged asset.

Do employees have to consent to COLI?

Generally, yes. To keep the death benefit tax-free, employers must give written notice and get the employee’s written consent before the policy is issued.

Is COLI the same as group life insurance?

No. Group life insurance pays employees’ families. COLI pays the company.

Are COLI death benefits taxable?

They can be received tax-free if federal notice-and-consent rules are met and the employee falls within eligible categories. Otherwise, part of the benefit may be taxable.

This article is for general educational purposes and isn’t tax or legal advice. Consult qualified professionals about your business’s situation.