Company-owned life insurance is a unique type of insurance policy that companies purchase to insure their high ranking employees. They are sometimes referred to as corporate-owned life insurance, or COLI, and these policies aren’t particularly common. However, they can be very complex. Here’s what you need to know about company-owned life insurance.
How Does Company-Owned Life Insurance Work?
Company-owned life insurance is essentially to protect against any financial losses a company would experience if they were to lose their top employees. The company takes out the policy and pays the premiums, but the policy is in the employee’s name. The key is that the company is listed as the beneficiary on the policy, so if the employee dies, they will get the money. These companies can be taken out for one employee or a group of high-ranking employees.
Something very interesting about COLI policies is that companies can use them as a financial asset. In addition to providing the company with financial protection if something were to happen to the employee, they can also serve as an additional source of funds in an emergency. In most cases, companies have the ability to borrow against the life insurance policies they take out on their employees.
What Are the Regulations Surrounding COLI Policies?
There are many rules and regulations put in place to make sure that companies are using COLI policies appropriately. For example, companies are not allowed to take out these policies without informing the affected employees first. They must let them know about the terms and named beneficiaries on the policy, and it must be done in writing.
Companies are also only allowed to take out COLI policies on the top third of eligible employees, otherwise, they will be subject to taxation by the IRS. This is to protect lower-level employees from having insurance policies taken out on them. The company will need to use Social Security information to file the claim after the employee has passed away.
Types of Corporate-Owned Life Insurance
There are a few different types of corporate-owned life insurance policies for companies to consider. General accounts allow the insurance company to invest their cash policy, with the company named as the risk holder on the insurance. Separate accounts, on the other hand, have the company use a professional broker to determine the investments, and the account holder is responsible for the investment risks.
Why Take out COLI for Your Employees?
One of the biggest reasons why companies decide to take out COLI policies for their employees is to offset the costs of the benefits they provide. Benefits packages can be very expensive, but they are also one of the best ways to attract highly valuable employees. Taking out a COLI policy allows companies to provide essential benefits to their employees without taking a financial hit.
Another key reason why companies take out COLI policies is to offset any loss that they would take if their employees were to pass away. The loss of a higher-level employee can be very difficult for any company. It takes time and money to hire a replacement, and productivity can take a hit as well, particularly if the employee was an influential leader. The payout from the insurance policy can help the company get back on its feet after the loss of an important figure.
What to Keep in Mind If You’re Insured
One misconception that many people have is that COLI can replace their personal insurance. Even if your company has taken out a COLI policy on you, you still need your own life insurance policy. COLI policies do not cover your funeral expenses or help support your family in the event of your death. Luckily, there are some companies that offer personal life insurance policies to their employees as a benefit. If not, meeting with a local independent insurance agent is the best way to find an appropriate policy for your needs. There are so many different policy options out there, so it’s easy to find one that makes sense for you. Whether you need a small policy to cover funeral expenses or a more extensive one that will cover your debts and support your loved ones, you will be able to find it through an expert insurance agent.
Another thing to keep in mind is that if your company decides to insure you, you will likely need to take a medical exam, the same way you would if you were getting individual insurance. The only time this might not be the case is if your company is trying to insure more than 15 people as a group guaranteed issue plan. Since your company will be paying the premiums, the medical exam likely won’t feel as stressful as it would if you were getting individual insurance. However, it will always behoove you to look after your health, not only for lower health insurance premiums but for your own comfort as well.
Company-owned life insurance can be very confusing, particularly if your company is taking out a policy in your name. If this is the case, be sure to ask any questions you may have before everything is finalized. Keep in mind that the policy doesn’t actually do anything for you, but instead is a strategy for your company to protect themselves. However, that also means that the policy is not your responsibility, so it’s much less stressful than taking out an individual insurance policy.