Corporate-owned life insurance (COLI), is life insurance on employees' lives that is owned by the employer, with benefits payable either to the employer or directly to the employee's families. Pejorative names for the practice include janitor's insurance and dead peasants insurance, the latter of which refers to the plot of Nikolai Gogol's novel Dead Souls. When the employer is a bank, the insurance is known as a bank owned life insurance (BOLI).
COLI was originally purchased on the lives of key employees and executives by a company to hedge against the financial cost of losing key employees to unexpected death, the risk of recruiting and training replacements of necessary or highly-trained personnel, or to fund corporate obligations to redeem stock upon the death of an owner. This use is commonly known as "key man" or "key person" insurance. Although this article refers only to practice and policy in the United States, key person insurance is used in other countries as well.
Primarily in the 1990s, some companies aggressively insured a broad base of employees, as part of general hiring requirements, and never without the employee's written consent. During the hiring process, employees sign many documents, including life, health and welfare coverage agreements or applications for insurance. Additionally, up until 1984, certain premiums for life insurance were leveraged and deducted, in essence creating a transaction with highest possible tax benefits. Even today, when a COLI plan's death benefits are paid to an employees family directly, the company paying the premiums can deduct them from corporate profits and earnings legally. In 2006, the U.S. Congress and the Internal Revenue Service (IRS) set some guidelines and limits on the installation and administration of COLI and BOLI.
Today, COLI is most common for senior executives of a firm, but its use for general employees is still sometimes practiced, primarily as a real economic transaction for Voluntary Employee Benefit Associations (VEBAs).
Read more about Corporate-owned Life Insurance: Tax Law History
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