Corporate-owned life insurance (COLI) is life insurance a corporation purchases on an employee or executive, with the company as owner and beneficiary. When the insured dies, the corporation receives the death benefit—often income-tax-free—to offset benefit costs, fund executive compensation plans, or protect against the loss of a critical leader. COLI is the formal corporate name for what many small businesses call key person coverage; the difference is usually scale, structure, and how proceeds are used.
Federal rules require employee written consent before a company takes out COLI, and policies issued after 2006 face stricter tax limits on deductible employer-owned coverage. Structure and documentation matter as much as the product. See our small business life insurance hub for how COLI fits with buy-sell and valuation planning.
Key Takeaways
- Company-owned policy. The corporation is applicant, owner, and beneficiary—not the insured or their family.
- Written consent required. Employees must authorize coverage in writing before the policy is issued.
- Death benefits are generally tax-free. Proceeds paid to the corporation are usually excluded from gross income; premium deductibility is limited.
- Overlaps with key person coverage. Same ownership mechanics; COLI framing emphasizes executive comp, split-dollar, and balance-sheet planning.
- Not the same as BOLI. Bank-owned life insurance is a parallel product for financial institutions—not typical small businesses.
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COLI is illustrated to your entity type, consent process, and the insured's health profile. Compare permanent options across 30+ A-rated carriers with your attorney and CPA.
How corporate-owned life insurance works
The corporation applies for coverage on a selected employee, pays premiums from corporate funds, and names itself beneficiary. The insured completes medical underwriting and signs a consent form acknowledging the company will own the policy and receive proceeds at death.
Common uses for COLI proceeds:
- Executive benefit offset — Recoup costs of deferred compensation, supplemental retirement, or health benefits funded for key executives
- Key person replacement — Same operational uses as key person insurance: recruiting, revenue gap, lender confidence
- Split-dollar arrangements — Shared premium and benefit structure between employer and executive, coordinated with legal and tax counsel
- Informal SERP funding — Death benefit helps the company fulfill supplemental executive retirement promises
- Loan collateral — Permanent COLI with cash value assigned to secure business credit
COLI does not replace personal life insurance for the executive's family. The company receives the payout. If the executive wants income protection for dependents, that requires a separate personally owned policy.
COLI vs key person insurance
The mechanics are identical: business owns the policy, business is beneficiary, insured consents. The terminology shifts with context.
| Factor | Key person (SMB framing) | COLI (corporate framing) |
|---|---|---|
| Typical company size | Small to mid-size closely held | Mid-size to large closely held or public |
| Primary goal | Keep operations running after a death | Executive benefits, tax planning, and key person protection combined |
| Common products | Term life | Permanent life (whole or universal) more common |
| Documentation | Business justification form | Consent, notice, and often board resolution |
| Who searches for it | Business owners, CPAs | CFOs, benefits consultants, tax advisors |
If you are a small business owner sizing coverage for a rainmaker founder, start with our key man insurance guide for formulas and product selection. COLI is the right frame when your attorney or CPA is structuring executive compensation, split-dollar, or corporate-owned permanent policies on multiple executives.
COLI consent and compliance rules
Congress tightened COLI rules after widespread concern about companies insuring rank-and-file workers without clear disclosure. Current federal law requires:
- Written notice and consent before the policy is issued—the employee must know the coverage amount and that the employer will be beneficiary
- Insurable interest limits tied to reasonable compensation and benefit formulas for policies issued after August 17, 2006
- Annual Form 8925 reporting for applicable employer-owned life insurance contracts
- Restricted interest deduction on employer-owned policies unless notice and consent requirements are met or exceptions apply
State law may add requirements. Your attorney should review consent forms and board resolutions before applications are submitted—not after policies are in force.
Tax treatment of COLI
General principles—confirm with your CPA before relying on any tax position:
- Death benefits received by the corporation are generally excluded from federal gross income under IRC Section 101
- Premiums are usually not deductible as a business expense when the company is the beneficiary
- Cash value growth inside permanent COLI is generally tax-deferred while the policy remains in force
- Transfer-for-value and modified endowment contract (MEC) rules can change tax outcomes if policies are sold, assigned, or overfunded
C-corporations may face alternative minimum tax considerations on large death benefits. S-corporations and LLCs taxed as partnerships follow different pass-through rules on policy economics. Structure ownership before the first premium.
Split-dollar and executive compensation
Split-dollar life insurance is a shared arrangement where employer and employee split premium costs and death benefit rights according to a written agreement. COLI often anchors these plans for senior executives.
Typical split-dollar structures:
- Economic benefit regime — Employer owns the policy; employee is taxed annually on the economic benefit of coverage
- Loan regime — Employee owns the policy; employer lends premium dollars secured by the policy
Both require coordinated legal, tax, and insurance documentation. Split-dollar is not a DIY product—your estate attorney and CPA design the arrangement; we illustrate and place the underlying policy to match the plan.
Coordinate COLI face amounts with business valuation when policies also support buy-sell funding on the same executives.
What is BOLI—and who needs it?
Bank-owned life insurance (BOLI) is the banking industry's equivalent: a bank purchases life insurance on executives and directors, owns the policy, and receives the death benefit. Banks use BOLI to offset employee benefit costs and as a balance-sheet asset with favorable tax treatment.
BOLI is regulated by banking agencies and designed for financial institutions—not typical operating companies. If you run a manufacturing firm, professional practice, or tech startup, COLI and key person coverage are your relevant tools. BOLI belongs in a bank's treasury and benefits department, not a small business owner's insurance plan.
Who should use COLI
COLI fits when
- You are funding or offsetting supplemental executive retirement or deferred compensation
- Multiple executives need permanent corporate-owned policies with coordinated legal structure
- Split-dollar or executive benefit plans require a policy owned by the corporation
- A mid-size closely held company needs both key person protection and formal corporate documentation
Simpler coverage fits when
- A two-owner LLC only needs operational key person coverage on the founder—key person term may suffice
- You only need buy-sell funding on partners—see buy-sell agreement insurance instead
- The insured employee has not signed written consent and notice forms
- You are a bank seeking BOLI—different product, different regulators, different advisors
How to set up corporate-owned life insurance
- Define the business purpose — Key person protection, executive benefit offset, split-dollar, or buy-sell coordination with your attorney and CPA
- Obtain written employee consent — Required before application; document coverage amount and beneficiary
- Choose term or permanent — Term for defined protection years; permanent when cash value, loan collateral, or lifelong executive plans are involved
- Size the face amount — Tie to compensation multiples, benefit liabilities, or valuation formulas with documented justification
- Apply with corporation as owner — Company is applicant; insured completes underwriting and consent forms
- File Form 8925 annually — If applicable; CPA confirms reporting obligations
- Review every 2–3 years — Update face amounts when compensation, ownership, or benefit promises change
Permanent COLI—whole life or universal life—is common when policies must last for the executive's career and build cash value the company can borrow against. See permanent life insurance for product differences. Buy-sell funding on the same owners may require separate policies under your buy-sell agreement.
Expert Tip: Get consent before the medical exam
I have seen corporations schedule paramedical exams and then scramble for signed consent forms when the carrier requests them at issue. Federal rules require consent before the policy is issued—not after underwriting is complete. Have your attorney's consent and notice documents signed and filed before anyone applies.
—Ryan Wood
Conclusion
Corporate-owned life insurance gives companies a tax-efficient way to protect against the loss of critical executives and fund sophisticated benefit plans. For most small businesses, the same product is called key person insurance. COLI becomes the right label when executive compensation, split-dollar, and compliance documentation are central to the plan.
We place COLI and key person policies across 30+ A-rated carriers and coordinate applications with your attorney's consent forms and your CPA's tax reporting requirements. Get structure right before the first premium—not when a claim arrives. Return to our life insurance hub for product guides.
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