“Bank-owned and company-owned life insurance (BOLI-COLI) has a proven track record of helping corporations fund executive compensation and improving their bottom lines.”- Teresa Kuhn.
As an alternative to mutual funds, corporate-owned life insurance (COLI) is an investment tool that allows corporations to accumulate tax-deferred assets. A company buys and owns life insurance on key employees with a COLI. The policy’s primary beneficiary is the company and pays non-deductible premiums while receiving tax-advantaged cash value and death benefit proceeds. Nearly 75% of Fortune 100 companies report using COLI programs.
Many companies design these life insurance policies as funding solutions for Supplemental Executive Retirement Plans (SERPs) or other defined compensation programs. The corporation may access the cash in these policies using either policy loans or withdrawals of cumulative premium to basis. Withdrawals made in these ways are tax-free.
Because cash values are not subject to taxation during the accumulation phase, a company with a COLI won’t pay the same income tax costs associated with a mutual fund. A COLI may be significantly more tax-efficient since gains stay within the asset, enjoying tax-deferred growth and compounded returns.
BOLI, or Bank-Owned Life Insurance, is a type of COLI where a bank is both owner and beneficiary of a specially-designed life insurance policy. Like COLI, BOLI is a tax-advantaged product used by financial institutions to fund employee benefits and increase net income indirectly. As you might imagine, banks using BOLIs only consider policies issued by insurance companies with the highest credit ratings.
BOLI AND COLI benefits include:
- Tax advantages because companies pay premiums with after-tax dollars.
- Growth in the form of the guaranteed loan provision.
- Exceptional liquidity. Unlike many other financial tools, BOLI and COLI provide significant liquidity. The policy owner can withdraw up to 100% of their cash value at any time.
- Greater safety: BOLI and COLI policies, like the insurance policies I use in my “100 Year” solutions, are issued by highly-rated, financially responsible insurers. Insurance companies, in general, are highly-regulated and scrutinized to help ensure their solvency.
Those familiar with BOLI and COLI policies may also know that variable universal life (VUL) or indexed universal life (IUL) is the most common type of insurance used in designing BOLIs and COLIs. And while IUL may be useful in some instances, I don’t think it is necessarily the correct choice for individuals and small businesses who want to become their own sources of financing. Future articles will explain the pros and cons of both indexed universal life and specially-designed modified whole life.