Corporate Owned Life Insurance (COLI) is an investment alternative to Mutual Fund scenarios that allow a corporation to accumulate a tax-deferred asset. The company purchases and owns a life insurance policy on a key employee and is the primary beneficiary. The corporation pays non-deductible premiums, receives tax-deferred cash values, and receives tax-free death benefit proceeds.
Properly configured life insurance funding solutions can afford the company the opportunity to recover all costs associated with a SERP of Deferred Compensation program, including lost earnings on the premium deposits.
Cash value may be accessible via withdrawals of cumulative premium (to basis) and policy loans. As long as the loans are repaid through the tax free death benefit proceeds, no income tax is due on the distributions.
Alternatively, some plans book the cash value to offset the accrued liability and pay distributions from the company’s current cash, recouping the cost through the tax free death benefit proceeds.
Companies can also establish programs that allow the investment performance of the funding to loosely match the investment allocation selected by participants by utilizing variable life insurance products. The participants’ investment choices could mirror the returns of the funds offered within the variable products.
Since the cash values are not subject to taxation during the accumulation period, the company does not need to pay the income tax costs incurred as under the Mutual Fund scenario. The full interest or gain remains within the asset, and enjoys the benefits of tax deferred growth and/or compound returns. Therefore the company can achieve improved after-tax results.
In summary, the corporation pays non-deductible premiums, receives tax-deferred cash value accumulation, tax-free death benefit proceeds, and is able to book an asset to offset the account balance liability.