COLI BOLI insurers provide corporate-owned and bank owned life insurance as a way to fund employee benefit programs.
Corporate Owned Life Insurance
COLI BOLI insurers provide coverage on the life of employees, but is paid for by the employer and listing the company as the policy's beneficiary. In today's corporate world, COLI (corporate-owned life insurance) is often used to fund post-retirement employee plans. COLI is designed to earn a high, early cash value comparative to the premium paid, and a variety of COLI products on the market today provide a selection which allows corporations to choose a plan suited to their needs.
COLI originally was purchased to insure the lives of executive or vital employees to help buffer the costs incurred when loosing a crucial employee to an unexpected death. It takes time to recruit and train a replacement and this time costs the company money as well as a loss in productivity.
When an employee dies, the death benefits paid under COLI are usually excluded from the taxable income of the corporation (the beneficiary), although the IRS has challenged this practice in the past because it was determined that some corporations were using COLI just to cut their taxes rather than for covering the cost of replacing a key employee. Internal Revenue Code also prohibits deduction of premiums that paid for the life insurance. Also when a policy loan is secured from the insurer, the values are not credited as income and earnings to the policy holder's values and are not currently taxed.
Interest paid is deductible on leveraged insurance. Leverage refers to taking advantage of a small benefit to gain a much bigger benefit. The plus in this case is that policy holders are able to deduct interest, but also don't have to include the interest in income credited to the policy's cash value. However, the IRS has deemed some broad-based leveraged COLI transactions to be tax shelters, so it's important to work with a reputable agent who understands the law.
Bank Owned Life Insurance
BOLI (bank-owned life insurance) is also used as a successful way to offset employee benefit costs including post-retirement benefits. Normally, a bank pays for a group insurance policy insuring directors and officers. Over the course of time, the bank uses the cash value and proceeds of the policy in an effort to recover employee benefit costs.
Like COLI, BOLI has some tax benefits. The fact that income generated by BOLI is usually tax free makes it an attractive investment option. However, just like any investment, risks are involved, and because of these risks banks are expected to implement a risk management process which should include:
- Senior Management and Board Supervision
- Comprehensive Policies and Procedures
- Pre-purchase Analysis
- Periodic Risk Assessment
To gain the best tax advantage, BOLI should be held to the death of the covered officer or director.
COLI BOLI Insurers
As you consider selection of an insurance carrier, look for those with good ratings. It's important that you choose a carrier with favorable ratings which offers policies specifically designed for banks. Ratings can be found from:
Once you've secured your insurance it's a good idea to monitor the insurance provider's ratings throughout the year. If the insurance company fails, it can affect your company's ability to meet their financial obligations.
COLI BOLI is a significant financial tool which enables institutions to offer competitive benefits to their employees while offsetting the costs. Using a knowledgeable carrier will help you bring together a plan that not only identifies specific needs for COLI BOLI but also helps determine the financial benefits which fit your institutions strategy.