Owned Life Insurance (COLI) is an attractive investment alternative for nonqualified benefits because it
allows the company to accumulate an asset, in the form of cash
value, on a tax deferred basis. The use of COLI
can ultimately provide a tax free return through death
Properly configured life insurance funding solutions can
afford the company the opportunity to recover all costs
associated with a program, including lost earnings on the
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
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.
It is important to remember that in order to avoid ERISA compliance, the plan
sponsor must not attribute any aspect of policy ownership to
the participants. The company, or trust (see Securing NQDP
Benefits) must be the owner and beneficiary of the