You've probably heard the term corporate-owned life insurance somewhere — from an advisor, in a headline about a lawsuit, maybe from your own accountant — and you're not sure if it's a legitimate financial tool or something to be suspicious of.
That was exactly where Jack started, too. Jack owns a specialty manufacturing company he built over twenty years. His VP of Operations has been with him for fifteen of them, and without her, Jack knows the business would take a real hit — lost knowledge, lost client relationships, a scramble to find and train a replacement. To keep her, Jack promised her a lump-sum payout when she retires, on top of her regular compensation. It's the right move for the business. It's also a promise that will cost real money someday, and Jack doesn't want to lock up capital today to cover something that might not come due for another fifteen years. His accountant suggested corporate-owned life insurance as the way to fund it.
Every promise a business makes to a key employee is a liability the moment it's made — whether or not the cash to cover it exists yet. COLI is one way to back that kind of promise, and it rests on the same cash-value mechanics that show up throughout permanent life insurance generally; the hub guide on how life insurance cash value works covers those fundamentals in full. But for Jack, the real question was never whether he could afford the promise today. It was whether he was insurable enough, right now, to guarantee he could keep it later, even if "later" arrived early.
I know what you're thinking: isn't this the thing that got Walmart and Winn-Dixie sued? Isn't this just a tax shelter with better paperwork?
You're not wrong to wonder. Programs built purely to generate a tax deduction — with no real obligation sitting underneath them — got taken apart by courts and by Congress both. But that's exactly the tell: what sank those programs wasn't the insurance. It was the absence of a real promise behind it. Jack's policy exists because he already owes his VP something. The obligation came first.
Corporate-owned life insurance is exactly what the name says: a policy the company owns, not the employee. The company is the applicant, the premium payer, and the beneficiary. The employee — often called the "insured" — has no ownership rights in the policy and no claim on the proceeds, beyond having been notified and having consented to the coverage.
That's a meaningful difference from the group life insurance benefit most employees already have through work. With ordinary group life, the employee names their own beneficiary, and the payout goes to their family. With COLI, the company names itself as beneficiary, and the payout goes to the company. The two are structured for completely different purposes and shouldn't be confused with each other.
Once the company owns the policy, its cash value accumulates tax-deferred, and it's carried as an asset on the company's own financial statements — generally categorized under investments in insurance contracts (accounting guidance here falls under FASB ASC 325-30). The company can typically access that cash value through policy loans or withdrawals if it needs liquidity, and when the insured person eventually dies, the death benefit comes back to the company.
That "generally income-tax-free" carries a real condition attached to it. Under 26 U.S. Code §101, life insurance death benefits are excluded from taxable income — but for employer-owned policies issued after August 17, 2006, that exclusion depends on the company having given the employee written notice and gotten their written consent before the policy was issued. Miss that step, and the death benefit loses its tax-free treatment. Policies purchased before that date aren't subject to the requirement, which is part of why older COLI programs and newer ones can look different on paper.
That balance sheet asset isn't locked away until someone dies, either. If the company needs liquidity for something unrelated to the promise this policy is funding, it can generally borrow against the cash value — the loan doesn't reduce the cash value on the books, it places a lien against it, so the asset keeps compounding while the net position temporarily shrinks. That flexibility is part of why companies use permanent life insurance for this instead of a restricted side fund: the money isn't trapped.
A hypothetical, for illustration only: say Jack's company insures his VP with a $750,000 permanent policy, running about $18,000 a year in premium. If she stays until retirement, the policy's cash value has spent fifteen years growing tax-deferred, giving the company an asset it can draw against to help fund the payout it promised her. If she dies unexpectedly in year two, the company isn't stuck having only set aside two years' worth of savings — the full death benefit is there immediately. That's the specific thing insurance does that a side cash reserve can't: other assets accumulate, insurance responds. (Actual premiums, cash value growth, and policy design vary by age, health, carrier, and the specific policy — this is illustrative only, not a projection.)
The most common reason companies buy COLI isn't the one people assume. According to GAO testimony before the U.S. Senate Committee on Finance, a 2002 survey of Fortune 1000 companies found that 65% of those funding nonqualified deferred compensation plans, and 68% of those funding supplemental executive retirement plans (SERPs), did so using business-owned life insurance. Funding a promise the company has already made to a key employee — not simply protecting against their loss — is the primary driver.
That's the exact use case in Jack's situation, and it's also the demand side of a different question: how does a company actually structure and fund a SERP promise in the first place? That mechanic gets its own full treatment in how SERPs are funded with BOLI, COLI, and informal financing.
One thing worth being direct about: none of that cash value or death benefit belongs to the employee, even though it's their life the policy is written on. Jack's VP has no legal claim on his COLI policy or a single dollar inside it. What she actually has is Jack's word — a deferred comp agreement, a promise on paper. COLI is how Jack backs that promise financially; it isn't what makes the promise enforceable. If an executive wants more than a handshake and a policy they can't see, that's a different tool — a rabbi trust wrapped around the promise itself, trading a specific kind of protection for a specific kind of cost.
Beyond deferred comp and SERP funding, companies also use COLI to offset the future cost of postretirement benefit obligations they're already required to book as liabilities on their financial statements, and — the original, narrower use before the practice expanded — to protect against the financial impact of losing a specific key person whose knowledge or relationships the business genuinely depends on. That last use, key-person protection, is common enough and different enough in its own mechanics that it deserves a full article of its own rather than a paragraph here.
For businesses whose risk-financing needs go well beyond a single funding obligation — covering property, liability, and benefit funding together under one structure — some house strategies like this inside a captive insurance company they own themselves. That's a related but distinct decision from buying a COLI policy on its own; see what captive insurance is and how it works if that's the scale you're operating at.
COLI is one of four related strategies that all use permanent life insurance to solve a corporate or executive-benefit problem, and the differences between them come down to who owns the policy and who ends up with the money.
If the goal is rewarding one executive directly, Section 162 or split-dollar fit better. If the goal is the company having its own asset to fund an obligation it already carries — which is what Jack needed — COLI is the structure built for that.
COLI tends to fit a specific pattern: a real obligation or a real risk that already exists, with the policy funding it rather than creating an excuse for it.
It's usually a good fit when:
It's a weaker fit when:
That second question is worth sitting with. If you want to understand exactly what your employees are legally entitled to know before you insure them — and what happens if that step gets treated as a formality instead of a real disclosure — see does my employer have life insurance on me? Your rights under corporate-owned life insurance. It's worth reading before you're the one fielding that question from an employee.
Those headlines you half-remembered were never really about the insurance. They were about promises that were never made in the first place — companies collecting on employees' policies to fund nothing but a deduction. Jack's VP is retiring in fifteen years either way. The only real question was whether he'd be ready for it.
Jack is a composite built from business owners I've worked with over the years, not any single client — but the shape of that promise, and the discomfort of not knowing how to fund it, is real for almost everyone who's made one. This article is general education, not a recommendation for your specific business; the right structure depends on your obligations, your entity type, your carrier, and your state, and I'd encourage you to work through the specifics with your own CPA and legal counsel before buying anything.
The actual structuring work — plan documentation, notice-and-consent, coordinating on the accounting treatment — isn't something I handle alone, and I wouldn't want you to think it is. I bring in my team for that part: the specialists who do this for a living, working alongside whatever CPA or counsel you already have in place. If you'd like to talk through your own situation, reach out — on that call, my team can walk through examples of businesses in situations similar to yours, so you can see what a structure like this could actually look like for you. You can find my background and how to reach me at my author profile.
That was exactly where Jack started, too. Jack owns a specialty manufacturing company he built over twenty years. His VP of Operations has been with him for fifteen of them, and without her, Jack knows the business would take a real hit — lost knowledge, lost client relationships, a scramble to find and train a replacement. To keep her, Jack promised her a lump-sum payout when she retires, on top of her regular compensation. It's the right move for the business. It's also a promise that will cost real money someday, and Jack doesn't want to lock up capital today to cover something that might not come due for another fifteen years. His accountant suggested corporate-owned life insurance as the way to fund it.
The short answer: Corporate-owned life insurance (COLI) is a life insurance policy a company buys on the life of an employee — usually an owner, executive, or other key person — where the company itself is both the owner and the beneficiary. The company pays the premiums, the policy's cash value grows tax-deferred as a balance sheet asset, and the death benefit is paid to the company, not the employee's family, generally free of income tax if the required notice-and-consent steps were followed. It's most commonly used to informally fund deferred compensation promises, offset future benefit costs, or protect the business against the financial impact of losing a key person.
Every promise a business makes to a key employee is a liability the moment it's made — whether or not the cash to cover it exists yet. COLI is one way to back that kind of promise, and it rests on the same cash-value mechanics that show up throughout permanent life insurance generally; the hub guide on how life insurance cash value works covers those fundamentals in full. But for Jack, the real question was never whether he could afford the promise today. It was whether he was insurable enough, right now, to guarantee he could keep it later, even if "later" arrived early.
I know what you're thinking: isn't this the thing that got Walmart and Winn-Dixie sued? Isn't this just a tax shelter with better paperwork?
You're not wrong to wonder. Programs built purely to generate a tax deduction — with no real obligation sitting underneath them — got taken apart by courts and by Congress both. But that's exactly the tell: what sank those programs wasn't the insurance. It was the absence of a real promise behind it. Jack's policy exists because he already owes his VP something. The obligation came first.
What Is Corporate-Owned Life Insurance (COLI)?
Corporate-owned life insurance is exactly what the name says: a policy the company owns, not the employee. The company is the applicant, the premium payer, and the beneficiary. The employee — often called the "insured" — has no ownership rights in the policy and no claim on the proceeds, beyond having been notified and having consented to the coverage.
That's a meaningful difference from the group life insurance benefit most employees already have through work. With ordinary group life, the employee names their own beneficiary, and the payout goes to their family. With COLI, the company names itself as beneficiary, and the payout goes to the company. The two are structured for completely different purposes and shouldn't be confused with each other.
How the Cash Value Ends Up on the Company's Balance Sheet
Once the company owns the policy, its cash value accumulates tax-deferred, and it's carried as an asset on the company's own financial statements — generally categorized under investments in insurance contracts (accounting guidance here falls under FASB ASC 325-30). The company can typically access that cash value through policy loans or withdrawals if it needs liquidity, and when the insured person eventually dies, the death benefit comes back to the company.
*Conditioned on meeting the notice-and-consent requirements below.
That "generally income-tax-free" carries a real condition attached to it. Under 26 U.S. Code §101, life insurance death benefits are excluded from taxable income — but for employer-owned policies issued after August 17, 2006, that exclusion depends on the company having given the employee written notice and gotten their written consent before the policy was issued. Miss that step, and the death benefit loses its tax-free treatment. Policies purchased before that date aren't subject to the requirement, which is part of why older COLI programs and newer ones can look different on paper.
That balance sheet asset isn't locked away until someone dies, either. If the company needs liquidity for something unrelated to the promise this policy is funding, it can generally borrow against the cash value — the loan doesn't reduce the cash value on the books, it places a lien against it, so the asset keeps compounding while the net position temporarily shrinks. That flexibility is part of why companies use permanent life insurance for this instead of a restricted side fund: the money isn't trapped.
A hypothetical, for illustration only: say Jack's company insures his VP with a $750,000 permanent policy, running about $18,000 a year in premium. If she stays until retirement, the policy's cash value has spent fifteen years growing tax-deferred, giving the company an asset it can draw against to help fund the payout it promised her. If she dies unexpectedly in year two, the company isn't stuck having only set aside two years' worth of savings — the full death benefit is there immediately. That's the specific thing insurance does that a side cash reserve can't: other assets accumulate, insurance responds. (Actual premiums, cash value growth, and policy design vary by age, health, carrier, and the specific policy — this is illustrative only, not a projection.)
What Businesses Actually Use COLI For
The most common reason companies buy COLI isn't the one people assume. According to GAO testimony before the U.S. Senate Committee on Finance, a 2002 survey of Fortune 1000 companies found that 65% of those funding nonqualified deferred compensation plans, and 68% of those funding supplemental executive retirement plans (SERPs), did so using business-owned life insurance. Funding a promise the company has already made to a key employee — not simply protecting against their loss — is the primary driver.
That's the exact use case in Jack's situation, and it's also the demand side of a different question: how does a company actually structure and fund a SERP promise in the first place? That mechanic gets its own full treatment in how SERPs are funded with BOLI, COLI, and informal financing.
One thing worth being direct about: none of that cash value or death benefit belongs to the employee, even though it's their life the policy is written on. Jack's VP has no legal claim on his COLI policy or a single dollar inside it. What she actually has is Jack's word — a deferred comp agreement, a promise on paper. COLI is how Jack backs that promise financially; it isn't what makes the promise enforceable. If an executive wants more than a handshake and a policy they can't see, that's a different tool — a rabbi trust wrapped around the promise itself, trading a specific kind of protection for a specific kind of cost.
Beyond deferred comp and SERP funding, companies also use COLI to offset the future cost of postretirement benefit obligations they're already required to book as liabilities on their financial statements, and — the original, narrower use before the practice expanded — to protect against the financial impact of losing a specific key person whose knowledge or relationships the business genuinely depends on. That last use, key-person protection, is common enough and different enough in its own mechanics that it deserves a full article of its own rather than a paragraph here.
For businesses whose risk-financing needs go well beyond a single funding obligation — covering property, liability, and benefit funding together under one structure — some house strategies like this inside a captive insurance company they own themselves. That's a related but distinct decision from buying a COLI policy on its own; see what captive insurance is and how it works if that's the scale you're operating at.
How COLI Compares to Section 162 Bonus, Split-Dollar, and BOLI
COLI is one of four related strategies that all use permanent life insurance to solve a corporate or executive-benefit problem, and the differences between them come down to who owns the policy and who ends up with the money.
| Strategy | Who Owns the Policy | Who Gets the Death Benefit | Typical Use |
|---|---|---|---|
| Section 162 Bonus | The executive | The executive's beneficiary | Reward and retain, no strings attached |
| Split-Dollar | Company funds, retains a collateral interest | Split — company recovers its premiums, executive's beneficiary gets the rest | "Golden handcuff" retention for one key employee |
| COLI (this article) | The company | The company | Fund a promise the company already owes, or recover the cost of losing a key person |
| BOLI | The bank | The bank | Same mechanics as COLI, specific to bank capital treatment |
If the goal is rewarding one executive directly, Section 162 or split-dollar fit better. If the goal is the company having its own asset to fund an obligation it already carries — which is what Jack needed — COLI is the structure built for that.
When Does COLI Make Sense?
COLI tends to fit a specific pattern: a real obligation or a real risk that already exists, with the policy funding it rather than creating an excuse for it.
It's usually a good fit when:
- You've already promised a key employee a deferred comp payout or SERP-style benefit, and you want a way to fund it gradually instead of setting aside the full amount today — Jack's exact situation.
- Your company is required to book future postretirement benefit costs as a liability, and you want an asset that grows alongside that obligation instead of sitting in cash earning next to nothing.
- Losing one specific person — a founder, a top producer, someone whose knowledge or relationships the business genuinely depends on — would create a real, insurable financial gap, not just an inconvenience.
It's a weaker fit when:
- There's no real underlying obligation — the policy exists mainly to generate a tax deduction or an interest write-off. This is precisely the pattern that got broad-based programs unwound in court.
- The company hasn't confirmed it actually has an insurable interest in the person being covered — a legitimate financial stake in that person's life, which the law requires before a business can insure someone who isn't an owner or executive — or is insuring far more people than any actual obligation or key-person risk would justify.
- What you actually want is coverage on your own life as the business owner, not a company asset funding an obligation to someone else — if your business sponsors a qualified retirement plan, buying life insurance with pretax dollars through the plan may fit that need better, since the coverage and its death benefit belong to you as the participant, not the company.
Questions to Ask Before Your Business Buys COLI
- What specific obligation is this policy meant to fund, and is COLI actually the most direct way to fund it?
- Has the required employee notice been given and written consent obtained, before the policy is issued?
- What carrier and policy design fits the actual timeline of the obligation you're funding?
- Has your CPA confirmed how the premium, the growing cash value, and the eventual death benefit will appear on your financial statements?
- If you're funding a deferred comp or SERP promise, does the policy's growth timeline actually line up with when that promise comes due?
- What happens to the policy — and to the obligation it's funding — if the insured employee leaves the company before the benefit is paid?
That second question is worth sitting with. If you want to understand exactly what your employees are legally entitled to know before you insure them — and what happens if that step gets treated as a formality instead of a real disclosure — see does my employer have life insurance on me? Your rights under corporate-owned life insurance. It's worth reading before you're the one fielding that question from an employee.
Frequently Asked Questions
Is corporate-owned life insurance legal?
Yes. It's a long-standing, legitimate business practice, subject to specific notice, consent, and tax rules that tightened significantly after 2006.Does the company have to tell the employee about the policy?
For policies issued since August 2006, yes — written notice and written consent are required before the policy is issued, or the death benefit loses its tax-free treatment. See the article linked above for the full picture, including what happens when that consent isn't handled well.Is the death benefit taxable to the company?
Generally no, provided the notice-and-consent requirements were met at issue. If they weren't, the exclusion can be lost.How is COLI different from the life insurance benefit my company already offers employees?
Ordinary group life insurance is an employee benefit — the employee names their own beneficiary, and their family receives the payout. COLI is a company-owned asset — the company is both owner and beneficiary. They're structured for entirely different purposes.What's the difference between COLI and BOLI?
Mechanically, almost nothing. BOLI is the same structure, used specifically by banks and framed around bank capital and regulatory treatment rather than general corporate use.Can a small business use COLI, or is it only for large corporations?
Closely held and small businesses use it regularly — most often to fund a deferred comp promise to a key employee or to protect against the loss of a person the business genuinely depends on. Scale changes the numbers, not the structure.Those headlines you half-remembered were never really about the insurance. They were about promises that were never made in the first place — companies collecting on employees' policies to fund nothing but a deduction. Jack's VP is retiring in fifteen years either way. The only real question was whether he'd be ready for it.
Jack is a composite built from business owners I've worked with over the years, not any single client — but the shape of that promise, and the discomfort of not knowing how to fund it, is real for almost everyone who's made one. This article is general education, not a recommendation for your specific business; the right structure depends on your obligations, your entity type, your carrier, and your state, and I'd encourage you to work through the specifics with your own CPA and legal counsel before buying anything.
The actual structuring work — plan documentation, notice-and-consent, coordinating on the accounting treatment — isn't something I handle alone, and I wouldn't want you to think it is. I bring in my team for that part: the specialists who do this for a living, working alongside whatever CPA or counsel you already have in place. If you'd like to talk through your own situation, reach out — on that call, my team can walk through examples of businesses in situations similar to yours, so you can see what a structure like this could actually look like for you. You can find my background and how to reach me at my author profile.