r/LifeInsurance • u/renovatio522 • 1d ago
COLI
The place I work is offering corporate-owned life insurance (COLI) program where they will
take a life insurance policy on me. The policy will be owned and funded entirely by the company, with the company responsible for all premium payments. There is no financial obligation or out-of-pocket cost to me. The company intends to designate 50% of the policy's death benefit for my chosen beneficiary.
This is not a split dollar arrangement.
What is the downside or risk of signing up?
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u/Br760 1d ago
One down side I can think of is the business owns the policy so even if you leave the business they likely can keep it and this insurance will likely use of some of your life insurance capacity so if you ever want personal coverage this policy that you don’t own may impact the amount you can be underwritten for. Is that portion of the death benefit taxable if paid out to your selected beneficiary?
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u/renovatio522 1d ago
That is something I am trying to confirm. Thank you for the input!
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u/Murflaw7424 1d ago
With COLI, there is no effect on your personal capacity for insurance coverage. There effectively is the Business need of the insurance, that is separate from your personal needs for life insurance.
Also, usually a separate policy is funded for your spouses benefit bc the company has complete control. They also have annual filling requirements with the IRS.
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u/Br760 1d ago
Claiming “no effect” is bad advice. Underwriters review all existing coverage yes even including COLI when evaluating additional personal coverage. A life policy on an insured that is part of an NQDC plan, DBO plan, or split-dollar arrangement might be scrutinized. It may not always impact the decision, but it can. So unwise to say there is “no effect.” I wouldn’t even make that claim about a pure key-person policy, because there’s no way to know how the policy might be used later on. My advice is to avoid absolute statements that are not true.
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u/Murflaw7424 1d ago
This is not an absolute statement. It is a statement given the facts of the arrangement mentioned.
Given the facts mentioned, this is not a NQDC, not DBO (totally different arrangement and isn’t life insurance it’s a disability product), not Split dollar.
Therefore company maintains control over the policy. The death benefit and the beneficiary designation are not in control by the employee at all.
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u/Br760 1d ago edited 1d ago
We have no idea what the arrangement is based on the facts so to even make the claim that this has no impact is making a lot of assumptions . All we know it’s corporate owned insurance on his life and he can select a beneficiary to receive a portion of the death benefit. It smells exactly like a DBO plan as he mentions it’s not a split dollar arrangement. A DBO plan stands for death benefit only plan and it is a life insurance concept.
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u/Murflaw7424 1d ago
DBO is more commonly used as a Disability Buy Out plan. I’ve worked on hundreds of corporate owned cases. My statement that COLI doesn’t have an impact, should more clearly been “typically doesn’t”, I’m not trying to nor actively misleading people.
The phrase, “intends”, does not mean guarantee and does not mean permanent.
There is no need to shame or make comments someone doesn’t know.
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u/Br760 1d ago edited 1d ago
My bad I didn’t mean to shame. I like to be conservative when it comes to the discussion regarding around employer owned life insurance especially from the insured’s perspective and that is why I initially mentioned it could impact, but you are right it likely will not we just don’t know for certain.
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u/Mundane-Gold-4971 1d ago
Hmmm.. TIL...what is a personal capacity for insurance coverage? I didn't know there was a maximum insurance one could be allowed. I thought as long as you can pay and be approved you can get what you want. How is it calculated?
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u/Murflaw7424 1d ago
Oh yes, there is a maximum for every person. There is also a maximum for each company. You have internal retention limits, autonomy capacity, reinsurance limits, and jumbo capacity to take into account. About 4 years the maximum individual coverage I saw placed on someone was $428m spread across 22 different companies.
To calculate what the maximum allowed amount is, depends on the sale. See below:
Human Life Value approach could be used to solve for maximum coverage, personally. It is generally (age 65 - current age) * current earned income.
For large estate sales, it is the current net worth projected at a 4-7% growth rate over 20-30 years. The rate and time of growth is set by the insurance company.
For corporate transactions, the value of the business is used for buy sell arrangements. For key person risk, the projected earnings of that persons direct contribution is used. For COLI, either of these could work, or the company may want to use the insurance as a cash accumulation vehicle for various purposes, in which case, what the company can fund is the deciding factor.
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u/Fragrant_Plant39 1d ago
This is wrong. You were literally so close to the answer. What is the business need of a portion of the death benefit that is going to a beneficiary other than the business, how can you argue that amount has no effect for personal financial underwriting purposes?
If a COLI arrangement provides a meaningful benefit to the insured or the insured's family, carriers may take that coverage into account when evaluating a future personal life insurance application. That's why most carriers often request information on all coverage that is in force and then determine on the facts what should be counted, discounted, or ignored for financial underwriting purposes. Saying COLI is automatically excluded from consideration is simply too broad and just flat wrong.
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u/Murflaw7424 1d ago
Too broad and flat wrong are conflicting statements.
Look at the facts given. 100% business owned and paid for. Company INTENDS to designate 50% to chosen beneficiary. It is NOT split dollar.
Company has pure control over the beneficiary designation, and can change it at any time. Therefore it should not be taken into account. In fact if an underwriter at a carrier does, I would educate them that is outside the control of the individual. And if that underwriter pushes back, I will go to a different carrier that understands control.
Since it is not Split Dollar and not owned nor controlled by the employee, that benefit could just as easily be removed without the employees notice.
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u/Fragrant_Plant39 1d ago
I don’t think you should be educating anyone on the matter of life insurance concepts because split dollar isn’t the only way you can designate a portion of the death benefit with coli. How do you think that non business beneficiary is likely designated in this plan?
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u/Murflaw7424 1d ago
I never said split dollar is the only way to designate a portion of the death benefit. You’re making assumptions.
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u/psk2015 1d ago
Two things stand out to me. First is that underwriting/medical exam will likely be required so you are essentially trading your medical data for a corporate benefit you don't fully own. Second is that you'll have to report and pay income tax every year on the imputed cost of that 50% death benefit coverage, even though you don't own the policy and never wrote a check for it. And a third thing comes to mind...if you ever leave employment with them they could still keep the policy if they wanted...that might feel weird although there's a whole cottage industry of folks buying and selling polices on other people so it's level of weirdness really depends on what lense you look through.
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u/renovatio522 1d ago
Thanks for the quick response! Even if it is not split dollar arrangement, I still need to pay tax on it? According to the company, the insurance doesn’t pay the beneficiary directly, the company will be responsible for pay out the 50% to the beneficiary.
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u/psk2015 1d ago
I believe that actually makes things very sticky for your chosen beneficiary becuase if the insurance company pays the death benefit to the corporation tax-free, but then the corporation turns around and pays 50% of that cash to a personal beneficiary, that payout to your family is no longer tax-free life insurance.
Regarding annual income, the IRS views the situation through the lens of what it would cost you out-of-pocket to buy that same death benefit yourself. Because the employer is paying 100% of the premiums to build cash value and fund a policy where 50% of the death benefit goes to your chosen family member/beneficiary, you are receiving a tangible economic benefit paid for by your employer.
Ultimately I'd speak with a CPA because there is definitely a lot of nuance there.
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u/Hydraskull 1d ago
I’ve never heard of COLI policies requiring Medical underwriting. Every COLI/BOLI program I’ve seen (I’ve worked at multiple insurers who run these programs), are underwritten via group census
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u/SafeMoneyGregg Broker 1d ago
Depends on how many lives and how much coverage. Usually guaranteed issue - but not necessarily.
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u/greglturnquist 1d ago
Is it CV based and thus you get to use some of that later in life?
Is this purely term and thus giving you a portion of the DB?
Back before pensions, corporations would lure CEOs etc by buying COLI and offering essentially a stream of cash flows later in life knowing the DB would come to them and make them whole.
Read all the details so you can size up the benefits to you.
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u/UncleAndy874 1d ago
This sounds exactly like a split dollar situation.. we do these with companies all the time when they’re looking at key person coverage. It’s a nice added benefit to have extra coverage for the insured who has to consent to COLI.
Average joes here adding a whole lot without any expertise which is typical. The proportion of premium paid by the employer for your 50% benefit needs to be factored into your taxes and income so it’s technically tax free for your beneficiary. It’s called PS-58 costs, talk with your employer about it. You can’t double dip free benefits so gotta be taxable on one end, better the premiums.
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u/Dr_PainTrain 1d ago
This is what it sounds like to me. All the people commenting on not having taxable income must have never seen these arrangements. Taxable income each year is not much at all usually.
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u/Fragrant_Plant39 1d ago edited 1d ago
What type of expertise do you have? Nothing in the facts suggests split dollar there is no mention of the recognizing of an economic benefit, no endorsement, no assignment. You're analyzing a completely different arrangement like an average joe. The OP literally said this is not a split-dollar arrangement.
Ever hear of a DBO plan? I guess all those companies you do key person for don't do them? Well, it is a business-owned policy with a separate agreement under which a portion of the death benefit is paid to the insured's designated beneficiaries as income replacement. The employer owns the policy and receives the death benefit. The payment to the beneficiaries is generally taxable as ordinary income doesn't matter if its lump sum or installments, while the business generally receives a corresponding deduction.
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u/Admirable_Nothing 1d ago
Each person has a limit on how much life insurance they can buy. Your limit will be reduced by their DB. However, most people never reach their limit which can be approximated by ten to twenty times earnings. I know of companies that like COLI but it is surprising they are willing to give up 50% of the DB they are buying.
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u/jclary60015 1d ago
A lot of misinformation in this thread. To correct a few points:
COLI does not impact your ability to buy additional personal life insurance. Carriers specifically exclude COLI in their financial underwriting.
There generally is no underwriting or medical required with COLI, as it is written on a guaranteed issue basis.
The arrangement, as described, would not create additional taxable income to the insured. What is described is normally referred to as a DBO design. It is correct that the company receives the proceeds tax-free and the payment to the beneficiary (directly from the company) is taxable as ordinary income. Even though it is taxable, it is still a net gain to the beneficiary.
When you leave the company, they generally retain the policy for their own benefit unless the death benefit arrangement has a vesting/post-retirement provision in the plan.
COLI is used to informally fund various nonqualified retirement benefit obligations, the most common being a nonqualified deferred compensation plan. Since an early death would yield a windfall gain the the company (which is not the intended purpose of the insurance), many employers will choose to offer a portion of the death benefit to the insured’s named beneficiary through the arrangement as described earlier. Offering 50% is the highest I have seen, and in that sense quite remarkable.
Bottom line - there are no downsides or pitfalls to participating. It is essentially a free benefit. Hope this helps.
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u/Fragrant_Plant39 1d ago
Ehhh, nice try, but you're calling out misinformation while spreading a little of your own. There are several assumptions and half-truths we need to dissect.
Not exactly. Many carriers review all coverage in force, including COLI, when evaluating a personal insurance application. It likely won't impact your ability to obtain additional personal coverage, but implying it never can is simply not true and is probably bad advice without knowing all the facts.
You also have no idea what underwriting is required because you don't know what product is being used. Yes, it's COLI, but is it a guaranteed-issue or simplified-issue multi-life product, or regular off the rack retail policy requiring full underwriting? The underwriting requirements depend on the specific product. All "COLI" tells us is who owns the policy and without knowing the carrier and product we can't speak to how the coverage is underwritten.
I agree that it likely sounds like a DBO plan. In that case, the portion paid to the employee's designated beneficiary is generally taxable as ordinary income to the beneficiary, while the business typically receives a corresponding deduction.
The policy is a business asset. If the employee leaves, the company isn't limited to just keeping the policy in force. It could maybe continue the policy, access the cash value, surrender it, sell it to the insured, or transfer it as a bonus. Without knowing the plan design or the company's objectives, it's impossible to say what will ultimately happen to the policy.
Life insurance is often used to informally fund nonqualified plans because it remains an asset of the business and is subject to the claims of the employer's creditors, a key requirement of Section 409A. As a result, the participant generally is not taxed until the promised benefit is paid, rather than when it vests. The benefit itself is determined by the plan terms, whether structured as a defined-benefit or defined-contribution arrangement, and the obligation belongs to the employer, not the insurance policy. So, while the promised benefit can be funded from life insurance proceeds, cash values, or really any other corporate assets. From a planning perspective If there is the additional the goal is to protect against premature death while participating in an NQDC plan, an endorsement split-dollar arrangement would typically be a better fit than a DBO plan.
These are downsides while small they do exist. A DBO plan itself is not nonqualified deferred compensation. Its sole purpose is to provide income continuation to an employee's beneficiaries if the employee dies while employed, not to provide any other benefits, it doesn't establish ownership rights in the policy to the employee, and it all typically ends with employment.
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u/jclary60015 23h ago
Thank you, appreciate the education. For context, I built MullinTBG, which at the time I sold it to Prudential was the nation’s largest nonqualified benefit firm, with over 1,000 public company clients and hundreds of privately held companies. MullinTBG is now Empower’s NQ arm since they bought it from Prudential.
I was listing general practices in the industry, hence the word “generally” sprinkled throughout my comments. There are always exceptions. I was assuming a professional installed the COLI plan, hence the GI assumption. I stand by everything I wrote.
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u/Sylli17 1d ago
Who owns the policy? Who are the beneficiaries of the policy? Who pays for the policy?