With COLI insurance, a corporation pays all premiums and receives all benefits — neither the individual nor their heirs get the benefits of these policies when the individual dies. CRS says in a recent review of COLI policies that the measure by corporations “should not be confused with group life insurance benefits that employers provide to their employees.”
COLI insurance has typically been used to insure the lives of top executives and give companies a cushion against the deaths of employees that are hard to replace. But companies looking for a tax-free way to spend surplus money, rather then funneling into mutual funds or some other investment, have been taking these policies out on rank-and-file employees for years — a measure that has sparked some criticism.
CRS acknowledges this criticism in the review, which has raised questions about employers’ motivation for COLI transactions, and acknowledged that some companies have purchased the policies to reap the tax-free investment buildup within life insurance policies, along with tax-deductible interest on related loans.
The practice by employers has also been the focus of recent court battles, particularly when a federal appellate court ruled in January that Dow Jones could not receive tax breaks for the interest it incurred on loans used to pay for COLI insurance policies on the lives of 4,051 employees (See Dow Loses COLI Legal Battle ).