Corporate-Owned Life Insurance or COLI, is a type of life insurance policy a company buys on its employees. Corporate-Owned Life Insurance is also bought for managers or large investors. According to a report by Statista, the Canadian life insurance market is all set to reach $34.69 billion in 2025.
Clearly, the Canadian market is thriving with demand for both family-bought and corporate-owned life insurance. In the case of COLI, the business is the policy owner and the life insurance beneficiary. Hence, it pays for it and is reimbursed a death benefit when a covered employee dies.
There are various reasons for companies to use life insurance. Now, we’ll discuss the finer details of corporate ownership of life insurance and understand how it works. In case you need professional advice on life insurance in Canada, contact the IBC Financial team now.
Corporate-Owned Life Insurance (COLI) is a policy that an organization purchases for its key employees or managers. Corporate-Owned Life Insurance (COLI) is a policy that helps protect against the loss of valuable workers by paying a benefit if the insured person passes away and serving as a vehicle for financing employee benefits and deferred compensation programs.
Here are the multiple strategic reasons why companies purchase COLI:
Key Person Insurance: Insurance purchased by an employer for unforeseen financial loss in the event of a key employee or manager dying.
Succession Planning: Arranging for liquidity for buyouts and debt repayment. It can also help with other financial obligations in case of an untimely exit of an executive.
Deferred Compensation Financing: Helping finance executive compensation. This also includes non-qualified deferred compensation programs.
Tax Benefits: The tax-deferred growth of cash values and the tax-free death benefit are possible. It can be provided under a well-structured COLI policy that minimizes taxation burdens.
In a nutshell, it’s a strategic financing vehicle for managing the risk of loss of critical talent. Also, it aids in financing a wide array of corporate financial obligations. To structure efficient company-owned life insurance policies through a proper contract, contact the IBC Financial experts.
Corporate-Owned Life Insurance works by identifying key employees as a starting point. Corporate-Owned Life Insurance policies work when firms pay life insurance premiums.
As per an article by Joelle Hall in Financial Post, titled “From liability to asset: Tapping the potential of insurance to maximize wealth,” life insurance for key people is a great way for Canadian business owners to mitigate risk. Take a look at how the policy actually operates:
Policy Buying: The organization purchases ownership of life insurance for major employees. This includes managers or critical-skilled workers. The firm keeps these policies in its possession and pays for them.
Notice and Consent: The employee is given notice in advance of the policy issue of the intent to insure his/her life under the contract. The amount of maximum coverage is also disclosed. The employee then provides written consent, assuring his/her agreement on the arrangement.
Cash Value and Premium Payments: After that, the employer makes policy premium payments. They can be structured so that the policy cash value is built over time.
Cash Value Application: Please note that the cash value can be withdrawn or borrowed by the business through loans. It’s usually done for financing employee benefits, compensation, or other business costs.
Death Benefit: In the event of an employee’s death, a company receives the policy’s death benefit. These life insurance proceeds then go tax-free.
The proceeds can be used for the following needs:
The policy transactions must be handled carefully since loans can reduce the policy’s death benefit. Moreover, they also have tax implications related to taxation. With the guidance of IBC Financial experts, risk management is more accessible than ever.
Corporate-Owned Life Insurance (COLI) has two major types of life insurance: Permanent and Term Life Insurance. The two types of Corporate Owned Life Insurance are for different corporate purposes and financial goals.
According to an article by Andrew Feindel for The Globe and Mail, titled “How owning insurance in a corporation can address changes to the capital gains inclusion rate” corporate-owned permanent life insurance helps in building wealth and estate planning.
Overall, the Canadian life and non-life insurance market is forecasted at $143.74 billion by 2029. That is indeed pretty lucrative. Let’s delve deeper into the types of company-owned life insurance:
Term life insurance policies
This policy pays for a specified term, say, 10, 20, or 30 years. If the employee dies, the business is paid the death benefit. Term life is typically lower in cost than coverage for life. However, it won’t build cash or accrue interest.
Permanent life insurance policies
Just like the name suggests, this policy is permanent in its coverage. Additionally, it includes a cash value component, which is earned over time with interest. The cash values are corporate assets, serving as a source of liquidity for corporate purposes.
A permanent life insurance policy is typically more expensive than a term policy. That’s because it includes other financial advantages, such as cash growth.
The tax benefits of corporate-owned life insurance are tax-deferred growth of cash values. Another one of the tax advantages of COLI is the tax-free business death proceeds. According to an article by LifeBuzz.ca, titled “Corporate-Owned Life Insurance in Canada,” tax-deferred growth supplements corporate retained earnings.
Also, there’s cost-effective financing of employee benefit costs. In addition, it creates tax-helpful active business income. It delivers tax-free capital dividend distributions to investors. They can enhance corporate financial planning and asset aggregation strategies while reducing taxation obligations.
What are the advantages of corporate-owned life insurance?
Corporate-Owned Life Insurance is advantageous in various ways for private corporations. The key advantages of Corporate-Owned Life Insurance include business continuity in the event of the loss of a major employee.
According to an article by Roxanne Arnal for Eye Care Business Canada, titled “6 Reasons to Consider Business-Owned Life Insurance as an Investment,” these policies allow business owners to leverage life insurance as an investment component.
Since the policy cash value is tax-deferred, it can be used for various corporate purposes. Take a look at the major pros:
Reduced tax cost of life insurance premiums
It is tax-efficient since it allows businesses to finance the insurance premium in pre-tax dollars. That, in turn, keeps the total tax expenses minimal. The cash value of a policy is also tax-deferred.
Also, the proceeds over the deceased shareholder or employee typically pass tax-free. Thus, COLI is a cost-effective vehicle for financing employee benefit expenses and reducing taxation burdens.
Equitable distribution of premium payments
The equitable division of premiums in COLI allows for a balanced spread of costs among stakeholders and investors.
Allocations can be made based on:
This keeps costs in balance and achieves maximum tax savings. It also aids cost-effective financing of benefits for key executives.
Control of premium payments
The payment of premiums is managed by the employer as the corporate owner. It also decides on payment periods and modes. The premiums can thus be tailored for tax optimization and cash flow planning. With sufficient planning, COLI can continue to be a corporate asset for corporate benefits.
Streamlined management
It also simplifies management by providing tax-advantageous cash growth. COLI funds executive compensation and business continuation planning.
Thus keeping financial security intact and risk in check. Overall, it improves efficiency by providing streamlined corporate asset planning. For more on this, contact IBC Financial’s team of insurance advisors.
The disadvantages of corporate-owned life insurance include high costs. Another disadvantage of corporate-owned life insurance is the ethical considerations.
According to an article by Ashlyn Brooks in Bankrate, titled “Drawbacks of corporate-owned life insurance” COLI is also called “Dead Peasant Insurance” due to its historical use. That’s because it was purchased for low-wage workers without informing them, in the 1980’s.
Here are some drawbacks of COLI:
The best practices for implementing COLI include policy alignment with corporate objectives. The best practice for implementing COLI is obtaining informed consent.
As per the report by M Benefit Solutions “A Primer on Corporate-Owned Life Insurance (COLI),” the firm must inform the employee in writing and seek consent through a proper contract.
Choosing the right insurance provider
To select the best corporate insurance company, look for the following aspects:
Following these parameters can help your business achieve its strategic and financial objectives.
Structuring the policy effectively
To structure a Corporate-Owned Life Insurance policy well, it must be aligned with the business goals. It must also be well-funded for key stakeholders and investors. Moreover, compliance with current tax regulations and taxation requirements is a key requirement.
For a well-structured plan for maximum benefits, it’s best to rely on a financial advisor or tax advisor. IBC Financial has the best-in-class resources available, so get in touch now.
Take the First Step to Financial Freedom!
Take the First Step to Financial Freedom!
