When a key employee or owner dies, a business can face lost revenue, strained credit, and expensive replacement costs. Corporate-owned life insurance (COLI) is one structure some companies use when they want the business - not the family - to own the policy and receive the death benefit.
COLI is an ownership structure, not a single product purpose. The same company-owned design can support different verified business needs, depending on how advisors document the arrangement. It is not a tax slogan, and it is not a substitute for your CPA or attorney.
This guide explains what COLI is, who owns and benefits, how it can relate to key-person and buy-sell planning, how it differs from a Section 162 executive bonus design, and the high-level federal notice, consent, and reporting rules that often come up. It is educational only - not tax, legal, or product advice.
Key Takeaways
- COLI means the company is typically the owner, premium payer, and beneficiary on a life insured by an employee or owner-employee.
- It is a structure, not one automatic use case. It may relate to key-person death exposure, entity-purchase buy-sell funding, or other arrangements your advisors verify - not invented purposes.
- Key person insurance is often a purpose; COLI is the ownership design that can fund that purpose (and others).
- Section 162 executive bonus plans usually have the employee own the policy; COLI has the business own it.
- Premiums are generally not deductible when the business is the beneficiary - confirm with a CPA.
- IRC Section 101(j) can limit income exclusion on employer-owned contracts. Notice and consent matter, but they are not the only condition for favorable treatment.
- Form 8925 / Section 6039I reporting is separate from Section 101(j). Missing Form 8925 does not automatically make a death benefit taxable.
- Death-benefit tax treatment is fact-specific. Cash value is not a corporate tax-avoidance vehicle.
What Is Corporate-Owned Life Insurance (COLI)?
Corporate-owned life insurance is a life insurance contract in which the business is typically the applicant, owner, and premium payer, and is named to receive the death benefit. The insured person is often a key employee, executive, founder, partner, or other person in whom the company has an insurable interest under applicable state law.
That is the opposite of personal or many group arrangements where a spouse or estate is the beneficiary. With COLI, the company stands to receive the proceeds because the company is the party claiming a financial stake if that person dies.
You may also see related labels:
- Employer-owned life insurance (EOLI) - common IRS and statute wording for employer-owned contracts
- Bank-owned life insurance (BOLI) - the same ownership idea when a bank is the policyholder
- Key person / key man coverage - a purpose label for protecting against the death of someone critical to the business, which may or may not use a company-owned structure
Regardless of the label, start with ownership and beneficiary design, then match purpose and documentation with qualified advisors.
COLI vs Key Person Insurance
These terms get mixed together. They answer different questions:
| COLI | Key person insurance | |
|---|---|---|
| Core idea | Who owns the policy and who is beneficiary | Why the business wants death-benefit liquidity |
| Typical owner/beneficiary | The company | Often the company, but not required by the "key person" label alone |
| Focus | Ownership structure | Business purpose (replace a critical person, stabilize operations, etc.) |
A key-person need can be funded with company-owned coverage, but "key person" is not a second product name for COLI. For a purpose-focused overview, see key persons insurance.
COLI vs Section 162 Executive Bonus
A common comparison is COLI versus a Section 162 executive bonus plan:
- COLI: business owns the policy; business is typically the beneficiary (or another business-directed beneficiary design).
- Section 162 bonus: employer pays a bonus (often used toward premiums); the employee usually owns the policy and names personal beneficiaries.
Ownership drives who controls the contract, who may access cash value, and how tax and reporting questions are framed. Neither design should be chosen from a blog post alone - structure it with a CPA and attorney first.
How COLI Typically Works
At a high level, a company-owned design often follows this sequence:
- Confirm insurable interest and business purpose with legal counsel under state law.
- Coordinate tax and plan documents with a CPA and attorney before applications are signed.
- Provide required notice and obtain written consent where employer-owned contract rules apply (see Section 101(j) below). Do not treat a blog summary as a consent form.
- Apply, underwrite, and pay premiums with the company as owner and payer as designed.
- Maintain records and any required information reporting (including Form 8925 when applicable).
Insurable interest and employer-owned contract rules are technical. State insurance law and federal tax rules both matter. Use advisors who work in this area; do not rely on marketing copy.
Business Purposes COLI May Support
COLI is not limited to one use. Depending on facts and documentation, company-owned coverage may relate to:
- Key-person death exposure - liquidity if a critical employee or owner dies (key persons insurance); funding conversations sometimes start with a key man insurance quote
- Entity-purchase / stock-redemption buy-sell funding - when the entity is designed to redeem a deceased owner's interest and policy proceeds help fund that obligation (stock redemption buy-sell agreements)
- Continuity-oriented concepts that overlap with business continuation insurance when death-related liquidity is part of a broader continuity conversation
- Other verified arrangements your CPA and attorney document - only when the facts support them
What this article does not do: treat deferred compensation, severance, or executive perks as automatic COLI uses. Some businesses discuss life insurance alongside other benefit or liability planning, but those links are arrangement-specific. If your team is exploring that territory, have counsel and tax advisors define the plan first, then decide whether any insurance - and which ownership design - belongs in the picture.
Premiums, Cash Value, and Death Benefits (High Level)
Premiums
When the business is the beneficiary (or otherwise benefits from the contract in ways that trigger the usual limitation), premiums are generally not deductible as a business expense. That is a common CPA talking point and a frequent misconception. Confirm deductibility for your facts with a CPA - including any narrow exceptions that might apply in other designs. Related reading: key man insurance tax deductible.
Cash value (permanent contracts)
Permanent policies may build cash value. Companies may be able to access policy value through loans, withdrawals, or surrender, subject to the contract, available values, charges, and tax rules. Cash value is not a corporate tax-avoidance vehicle, bank account, pension, or guaranteed income source.
Policy loans accrue interest and can reduce available cash value and the death benefit. Excessive borrowing or underfunding may contribute to lapse, and lapse or surrender can create tax consequences. Loan-to-value limits, interest rates, repayment provisions, and other loan terms vary by carrier and policy. A contract that becomes a Modified Endowment Contract (MEC) can also have different federal tax treatment for certain distributions. Product illustrations are not guarantees.
Death benefit
Federal income tax treatment of a death benefit on an employer-owned contract is fact-specific. It is inaccurate to market COLI with an absolute "tax-free death benefit" slogan. Section 101 and related rules, including Section 101(j) for many employer-owned contracts, can limit or condition exclusion. Your tax advisor applies the statute and guidance to the file - not a blog checklist.
Section 101(j): Notice, Consent, and Exceptions (High Level)
For many employer-owned life insurance contracts, 26 U.S.C. Section 101(j) provides a general limitation: the income exclusion for death benefits may be limited (often described in practice as limited to amounts such as premiums and other amounts paid by the policyholder) unless an exception applies.
Notice and consent are important - they are not the whole story. Favorable treatment, when available, generally depends on satisfying statutory conditions that can include notice/consent and fitting an exception (for example, certain insured-status or beneficiary-related exceptions described in the statute). Owner-employees are not automatically exempt from these rules simply because they own equity.
High-level notice elements drawn from the statute's notice-and-consent framework typically include written notice that the employer intends to insure the employee's life, the maximum face amount the employee could be covered for at issue, and that the employer will be a beneficiary of any proceeds payable on the employee's death - plus the employee's written consent to being insured under the contract and that coverage may continue after employment ends. That is a summary, not a form. Do not DIY a consent package from this article. IRS Notice 2009-48 and current Form 8925 instructions discuss timing and related employer-owned contract issues in more detail for practitioners.
Cite the statute for the operative text: Cornell LII - 26 U.S.C. Section 101. Your attorney and CPA should apply current law and guidance to the actual contracts and insureds.
Form 8925 and Section 6039I (Separate from Section 101(j))
Employers that hold certain employer-owned life insurance contracts may have an information-reporting obligation under Section 6039I, filed on IRS Form 8925 (Return of Employer-Owned Life Insurance Contracts). That reporting is about disclosure of contracts and related information.
Failing to file Form 8925 does not, by itself, automatically make a death benefit taxable. Section 101(j) exclusion questions and Section 6039I reporting are related compliance topics, but they are not the same switch. Penalties and other consequences for reporting failures are their own issue - discuss filing duties with your tax advisor.
Policy Types: Product-Neutral Overview
COLI is an ownership design that can sit on different product chassis. At a high level only:
| Type | Cash value? | Typical planning angle |
|---|---|---|
| Term life | No | Defined-period death benefit; often simpler when the need is temporary |
| Permanent (whole, universal, variable, indexed, etc.) | Often yes | Longer horizon and possible cash-value features, with more moving parts |
There is no universal "best" COLI product. Term versus permanent depends on duration of need, budget, risk tolerance, and advisor recommendations. Carriers, riders, and underwriting classes vary. Avoid choosing a product because a web page ranked one type as best.
Compliance and Practical Risks
Business owners weighing company-owned coverage should expect real trade-offs:
- Premiums are a cash outlay and are generally not deductible when the business benefits as described above
- Permanent policies can involve surrender charges, loan interest, and market or index risk depending on design
- Notice/consent files, exception tracking, and Form 8925 processes need ongoing discipline
- Some employees object to employer-owned coverage on their lives even when rules are followed
- State insurable-interest and employer-owned insurance rules can add requirements beyond federal tax law
Who Might Explore a Company-Owned Design?
COLI discussions tend to come up when:
- The business faces material financial exposure if a specific person dies
- Multi-owner entities are documenting an entity-purchase buy-sell and want to understand insurance funding options
- Advisors have already framed a verified need and are comparing ownership designs (company-owned versus employee-owned bonus designs, etc.)
Smaller companies sometimes find that a simpler key-person term design meets the core death-benefit need with less administrative load - that is a facts-and-cost conversation, not a rule.
How Gary Can Help (After Structure Is Set)
Sequence matters. Tax treatment, agreements, ownership, and beneficiary designations belong with the business owner's CPA and attorney first. Insurance should follow a coherent structure - not lead it.
Gary Cosby is a licensed life insurance agent, licensed in all 50 U.S. states. After your CPA and attorney frame the arrangement, Gary can help business owners:
- Compare policy options at a product-neutral level (term vs permanent chassis, design trade-offs)
- Coordinate ownership and beneficiary logistics on the insurance application and carrier forms so they match the agreed design
- Navigate underwriting (age, health, amounts, financial underwriting questions carriers ask)
Gary focuses on the insurance component. He works alongside your existing tax and legal advisors rather than replacing them.
When you are ready to explore business life insurance options in that order, start here: business life insurance.
Frequently Asked Questions
What does company-owned life insurance mean?
It usually means the company owns the policy, pays the premiums, and is positioned as beneficiary on the life of an employee or owner-employee. The employee's family is typically not the beneficiary under a pure COLI design.
Is company-owned life insurance taxable?
It depends. Premiums are generally not deductible when the business benefits. Cash-value growth and death-benefit exclusion are fact-specific under federal rules, including Section 101(j) for many employer-owned contracts. There is no safe one-line "always tax-free" answer - ask a CPA.
Is notice and consent enough for favorable death-benefit treatment?
No. Notice and consent are important statutory ingredients for many employer-owned contracts, but Section 101(j) also involves exceptions and other conditions. Owner-employees are not automatically outside the rules. Use counsel; do not rely on a DIY consent template from the internet.
Does missing Form 8925 make the death benefit taxable?
Not automatically. Form 8925 relates to Section 6039I information reporting. It is separate from the Section 101(j) exclusion analysis. Filing failures can still have consequences - your tax advisor should address both topics.
Is COLI the same as key person insurance?
No. Key person describes a business purpose. COLI describes a company ownership structure that might fund that purpose or other verified needs.
How is COLI different from a 162 executive bonus plan?
In a typical 162 executive bonus design, the employee owns the policy. In COLI, the business owns it. Ownership changes control, beneficiary design, and the tax/reporting conversation.
Does COLI always build cash value?
Only permanent designs do. Term COLI-style coverage is death-benefit oriented for a set period and does not accumulate cash value in the usual permanent-policy sense.
Next Step
If your business and professional team have identified a legitimate need for company-owned life insurance, have your CPA and attorney confirm the ownership, tax, notice-and-consent, and reporting considerations that apply to the arrangement. Gary Cosby can then help explore the business life-insurance policy and funding component, including underwriting and carrier-side implementation consistent with that professional plan.
