Corporate Owned Life Insurance (COLI)

What is Corporate Owned Life Insurance and how is it used?

A Corporate Owned Life Insurance is a type of Life Insurance policy, that is purchased by a corporate entity, on the life of its employees. As the name suggests, this policy is entirely owned by a business organization, and not by any individual.

This means that a company might approach an insurance provider, to purchase this Employee Life Insurance. The premiums for the policy are paid by the company, when the employee is active. If the insured employee passes away, then the company will be the beneficiary of the insurance payout. That is why, it is also known as Company Owned Life Insurance or Employer Owned Life Insurance (EOLI).

Many employees question the ethics behind such policies, where the company will be a beneficiary from the death of an employee. So, sometimes COLI is also called by other slang terms like Dead Peasant Insurance.

Need for Corporate Owned Life Insurance

The main idea behind having a Corporate Owned Life Insurance is that it helps to cover the costs of replacing an employee, if the employee suddenly passes away. Moreover, it can also be used to compensate for losses that might occur, when an irreplaceable employee is lost.

Example: Suppose that an individual has specific proprietary knowledge about a product, and he/she is heading the Research and Development (R&D) department of a company. If this employee passes away, then there could be a big impact on the ongoing research projects.

So, this type of insurance can provide some time for building new strategies/plans, and the payout can cover the potential loss in revenue. So, the need for buying Corporate Owned Life Insurance policies will largely depend on the business model and the structure of a company.

This insurance policy ensures that the business continues to run on a Going Concern basis. However, there are no restrictions on how the company decides to spend the received payout amount.

COLI for junior employees

The above example mentions a situation where the business is largely dependent on one senior employee. But the Corporate Owned Life Insurance is usually very flexible, and in the past, it could be purchased on the life of any employee/individual in the organization.

There can be multiple reasons for a company to buy a Corporate Owned Life Insurance for all the employees. Some of the main benefits of this policy are:

  • Provides sufficient time to search for a replacement
  • Received payout can be used to settle any pending salary, bonus, Death Benefits etc. that the company has to pay to the nominees/heirs of the employee
  • Reimburses any advance payments, loans etc. that the company might have given to the employee
  • Insurance payout can be used to cover any other liabilities, commitments, loan guarantees etc. that are linked to the employee
  • As per tax laws of some countries, the premium payments can be claimed as a Business Expense by the company

In the past, companies had purchased these policies for the junior employees as well (even janitors). To make matters worse, the policies were mostly purchased without the knowledge or consent of the employee. Moreover, the company used to be the sole beneficiary of the payout.

It is debatable whether such policies are ethical or not. That is a major reason why this type of insurance is also called by the slang terms: Dead Peasant Life Insurance Policy or Janitor’s Insurance. But in most regions, laws have been passed to restrict these policies to cover the top employees only (Refer next section).

Keyman Insurance

The Keyman Insurance is a more popular variant of the Corporate Owned Life Insurance Policies, and it is widely used by many companies. Theoretically, a COLI could be purchased for any employee in the company. But the idea behind Keyman Insurance is that it is only bought for the employees that are considered to be critical for running the business.

The Keyman Insurance is usually purchased to insure the individuals that play an important part in running the business. This could include: top management (CxOs), Research Heads, Startup founders, Head of Departments, Directors, and other Key Managerial Personnel (KMP).

Purchasing insurance for such employees becomes more important, because the business could face a sudden disruption on the loss of these employees. So, the payout received from the insurance policy can help to soften the financial impact that the business might face.

COLI vs Group Life Insurance

The Corporate-Owned Life Insurance Policy should not be confused with the Group Life Insurance Cover or the Life Insurance benefits that some employers provide. The main difference between these policies is the beneficiary of the insurance payout.

For example, many employers pay the premium for multiple insurance policies for their employees, like Life Insurance, Accident Insurance, Medical Insurance etc. These are all for the benefit of the employees, and the payout from these policies will be given to the employee (or the nominee/legal heirs of the employee).

But in case of the Corporate Owned Life Insurance, the main beneficiary of the payout will be the company itself. The premiums for this insurance are paid by the company, when the employee is working. And if the employee passes away, then the company receives the payout from the insurance provider. Hence the policy gets the name ‘Corporate Owned’.

Working of Corporate Owned Insurance

The registered Insurance companies will provide this type of insurance product to the different entities like: Companies, Partnerships, Cooperative Societies, Business Trusts, and other corporate organizations. When a bank purchases such an insurance policy, then it is also known as a Bank Owned Life Insurance (BOLI).

The terms of providing these insurance policies will depend on the regulatory guidelines that are defined in a region. Just like any other Life Insurance Policy, there are mainly two aspects of a Corporate Owned Life Insurance Policy:

  1. Premium payments
  2. Policy payout on maturity

Premiums of COLI policy

Although the employee is the main insured party, but this type of insurance policy is usually owned by the company. This is because it has been purchased mainly for the benefit of the company. So, the obligation to make the premium payments will fall on the company that is purchasing the insurance policy. Even though the policy is on the life of the employee.

Payout of Corporate Owned Life Insurance

In this case, the policy matures when the insured employee/individual passes away. For such policies, the company will be registered as the primary beneficiary of the payout from the insurer. In very rare cases, the nominee/legal heirs of the employee could be added as a co-beneficiary, along with the company. But most of the times, this policy is exclusively used for compensating only the company, when an employee passes away.

Disclaimer

  • This page is for education purpose only
  • Some information could be outdated / inaccurate
  • Investors should always consult with certified advisors and experts before taking final decision
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