There are several different types of life insurance you should be aware of, and one of those is corporate owned life insurance plans. These plans are much more complicated than a policy which is the property by an individual, and there can be a lot of confusion surrounding this coverage.
A certain kind of key man insurance, it’s a more complex way of utilizing the lesser known growth and tax advantages of a life insurance policy. When used and structured properly, the corporation can offer additional benefits, while seeing a long term return, too.
Let’s discuss it in greater detail.
What Is a Corporate Owned Life Insurance (COLI) Policy?
As you can assume by the name, these policies are bought by a company and are used to insure a particular employee or a group of employees inside of the organization.
The business is the one who purchases the policies, pays the premiums on the plan, and is the beneficiary of the policy, but the employee or employees are listed as the ones insured on the plan.
These plans often get confused with additional insurance coverage companies own to protect the employees and their families. With those types of insurance policies, the insurance person or their family is named as the beneficiary. With a corporate owned life insurance, the business is the beneficiary.
This is the fundamental difference between the two life insurance plans, with a corporate owned life insurance policy, the coverage to the company is only a secondary benefit of the coverage.
There are several different reasons why a company would buy one of these plans for a key employee or a group of essential employees. One of the most commons reasons is to help offset the costs if the insured was to die. The more important the person is to the operation of the organization, the more difficult it’s going to be to replace the person. The insurance policy can help them pay for the costs of finding the replacement, which can be expensive.
This is only one of the many reasons a business might purchase a corporate owned life insurance plan. One of the other common reasons is to provide a way for the company to earn additional income which is more than what they pay in premiums.
Types of COLI
There are two main types of corporate owned life insurance policies, each of them operates differently and has a different set of advantages and disadvantages. The first type is general accounts. With these, the insurance company in a general portfolio invests the cash values of the policies. With this kind of policy, the insurance company takes on all of the risks for the investments.
The other type of policy is a separate account. With these, professional brokers invest the cash value.
The main difference between these types of plans is with a separate account, the account holder is responsible for the investment risks. Each of them has various pros and cons you’ll have to weigh to see which ones fits the needs of your organization better.
What You Need to Know
There are several key factors any corporation should be aware of when they are dealing with these types of life insurance policies.
The first is the medical underwriting the insurance person or group of people may have to go through to be accepted for the coverage, remember at the fundamental workings, this is still a life insurance plan. The underwriting the employees will have to go through is largely going to depend on the number of employees who are going to be insured through the policy.
If there is going to be fewer than 15 people insured, the employees are going to have to go through a traditional medical exam like with a traditional insurance plan. If the group being insured is larger than 15 people, it will qualify for a guaranteed issue program, which means the employees will only have to answer a few simple questions.
The Main Uses Of Corporate Owned Life Insurance
These types of policies are often used to help offset the costs of expensive benefits packages to their employees. It’s a great way to soften the blow taxes can put on an organization. It’s easy to see how these plans can get confusing and complicated.
One of the most important things to note for anyone involved in these plans is it does not replace any personal insurance you have. As the employee, or person insured, it’s not going to help your loved ones pay for any of the final expenses or debt you leave behind.
You will still need to have a personal insurance policy or coverage offered through your employer. Life insurance is one of the most important investments for your loved ones, it’s vital they have the coverage they deserve.