Legal Definitions - COLI

COLI stands for Corporate-Owned Life Insurance. It refers to a life insurance policy purchased by a company on the life of one or more of its employees. In this arrangement, the company acts as both the owner of the policy and the beneficiary, meaning it pays the premiums and receives the death benefit if the insured employee passes away. Companies typically use COLI to protect against financial losses resulting from the death of a key employee, to fund employee benefit plans, or to cover other corporate liabilities.

• Example 1: Protecting Against Loss of a Key Executive

  A mid-sized pharmaceutical company has a brilliant lead researcher whose groundbreaking work is essential for the development of its next blockbuster drug. The company recognizes that losing this individual would cause significant delays, financial setbacks, and a loss of competitive advantage. To mitigate this risk, the company purchases a COLI policy on the researcher's life, naming itself as the beneficiary. If the researcher were to pass away unexpectedly, the death benefit received by the company would help cover the costs of recruiting a new lead, funding continued research, and managing the financial impact of the disruption, thereby ensuring the company's long-term stability.

• Example 2: Funding Executive Benefit Plans

  A large financial services firm offers a non-qualified deferred compensation plan to its top executives, promising them a substantial payout upon retirement or separation from the company. To ensure it has the necessary funds to meet these future obligations without straining its operating budget, the firm purchases COLI policies on the lives of these executives. The cash value that accumulates within these policies can be used to informally fund the deferred compensation plan. Should an executive die while still employed, the death benefit received by the company could help offset the financial impact of losing a valuable leader and provide liquidity for the company's other financial commitments.

• Example 3: Offsetting Employee Benefit Costs

  A national supermarket chain provides comprehensive health, dental, and retirement benefits to its thousands of employees. To help manage the ever-increasing costs associated with these extensive benefit programs, the company implements a COLI strategy. It purchases life insurance policies on a broad group of its employees, with the company designated as the beneficiary. The death benefits received from these policies, along with any cash value growth, are then used by the company to help offset the overall expenses of its employee benefit programs, such as health insurance premiums or pension contributions, thereby reducing the financial burden on the company's operational budget.