Life insurance provides financial protection for millions of people in America and around the world. Not all life policies are purchased by individuals; many companies and other institutions also use life insurance for various purposes, such as to provide 澳洲幸运5开奖号码历史查询:liquidity. But the rules that pertain to 澳洲幸运5开奖号码历史查询:cꦚorporate ownership of life insurance are somewhat more complex than for individual 𝄹or group policies. This article exam🐟ines the history, purpose and taxation of corporate-owned life insurance (COLI) in America.

SEE: 澳📖洲幸运5开奖号码历史查询:How Much Life Insurance Should You Carry🌃?

Nature and Purpose of COLI

As the name states, COLI refers to life insurance that is purchased by a corporation for its own use. The corporation is either the total or partial 澳洲幸运5开奖号码历史查询:beneficiary on the policy, and an employee or group of employees, owner or debtor is listed as the insured(s).

Fundamentally, COLI differs from 澳洲幸运5开奖号码历史查询:group life insurance policies that are typically offered to most or all of the employees in a company, because this type of insurance is designed to protect the employees and their families and not the company itselಞf. COLI can be structured in many different ways to accomplish many different objectives.

One of the most common is to fund certain types of nonqualified plans, such as a split-dollar life 𒀰insurance policy that allows the company to recoup its premium outlay into the policy by naming itself as the beneficiary for the amount of premium✨ paid, with the remainder gꦡoing to the employee who is the insured on the policy.

Other forms of COLI include key person life insurance that pays the company a 澳洲幸运5开奖号码历史查询:death benefit upon the death of a 澳洲幸运5开奖号码历史查询:key employee, and 澳洲幸运5开奖号码历史查询:buy-sell agreements that fund the buyout of a deceased partner or owne๊r of a business. In many cases, the death benefit is used to buy some or all of the shares of company stock owned by the deceased (such as with a closely-held business). COLI is also frequently used as a means of recovering the cost of funding various types of employee benefits.

History of COLI

COLI has existed in one form or another for well over 100 years; its nickname as "dead peasant" insurance originates in 19th century Russia, where feudal serfs were bought and sold as property by the rich.

Members of the ruling class could "buy" dead serfs that had been counted in previous censes from their former owners in a morbid effort to acquire 澳洲幸运5开奖号码历史查询:collateral to obtain loans.

Companies used COLI in America 100 years later to exploit a loophole in the 澳洲幸运5开奖号码历史查询:Internal Revenue Code that permitted a form of 澳洲幸运5开奖号码历史查询:tax arbitrage, where the owner of a life insurance policy could 𒊎take out large loans from the cash value of the policy and then pay deductible interest on the payments back into the policy, which was in t💮urn not counted as income to the policy owner.

The 澳洲幸运5开奖号码历史查询:Internal Revenue Service (IRS) eventually limited this loophole to $50,000 of cash value per policy, but the use of COLI as a 澳洲幸运5开奖号码历史查询: tax shelter continued into the 1980s, when many firms would buy pol🎃icies on large numbers of their lowest tier employees (often without their knowledge and/or consent) and then take loans out of the cash values of these policies.

The tax ded♍uctions that companies received were often greater than the actual cost of the premiums paid. Furthermore, the company would collect the death benefit from the policy if the employee died, leaving little or nothing for the employee's family or estate. The 1990s saw the demise of much of this activity as the IRS cracked down on these practices in 澳洲幸运5开奖号码历史查询:tax courts and won mostly favorable rulings.

Current Tax Law for COLI

The tax rules pertaining to COLI are fairly complex and also vary somewhat from one state to another, in some cases. Life insurance is one of the꧅ most tax-advantaged vehic💧les in existence; the death benefit from any life policy is always tax-free for individual and group policies. However, this is not always true for policies owned by corporations. In an effort to limit 澳洲幸运5开奖号码历史查询:corporate tax evasion through the use of COLI, these polici෴es must now meet several criteria in order to retain their tax-advantaged status:

• COLI policies can only be purchased on the highest-compensated third of employees.
• Any employee named as the insured on a COLI policy must receive written notification before purchase of the policy of the company's intent to insure the employee and also the amount of coverage.
• The employee must also receive written notification if the company is a partial or total beneficiary of the policy.

There are two instances where these notifications are not necessary in order for the company 澳洲幸运5开奖号码历史查询:to receive a tax-free death benefit.

The first is when an insured employee dies who worked for the empl﷽oyer at any time during the previous year. (This rule prevents companies from𓂃 continuing to hold policies indefinitely on former workers who are no longer employed by the company.)

The other applies to directors and highly-compensated employees; any death benefit paid upon the death of this type of employee is also exempt from taxation. But money that is placed inside cash val🅘ue policies by corporations grows tax-deferred just as for individuals.

However, the issue of whether the insured's families or other beneficiaries of some types of COLI policies could receive tax-free death benefits has also been the subject of litigation. Initially, the IRS disallowed the tax-free status of this benefit, it eventually recanted and permitted the policies to be paid without taxation to families and other heirs, although it stated that it felt that the death benefit in this case should be taxable according to its int🦩erpretation of🐈 the tax laws.

Conclusion

Corporate-owned life insurance is used by companies to accomplish many types of objectives, and 澳洲幸运5开奖号码✅历史查询:its rules and taxation are complex﷽ topics that are somewhat subject to interpretation in some cases. For more information on this topic, 澳洲幸运5开奖号码历史查询:consult your financial advisor.