Advantages of Corporate Employee Life Insurance Benefit
There are numerous types of insurance policies available. Some of these policies are employed as investments, while others are taken for the sole purpose of helping to pay expenses when the earning member dies and leaves financial burdens behind for the loved ones to take care of. The corporate employee life insurance benefits is a special kind of insurance that allows corporations to insure their employees for their own benefits. While initially developed as a way to help corporations cover rising costs, the policy was open to a lot of tax loopholes which ended up being misused.
Objective of COLI
All businesses have some critical employees who are essential for the success of the corporation. The smaller companies usually have a limited pool of employees from which to select a replacement if a key employee is lost due to death. Additionally, the success of a smaller company is usually directly linked with the critical contributions of a few select individuals. A key employee is defined as any individual who is in charge of management decisions, has direct impact on sales, has special links with customers, and is highly paid.
Key employee life insurance is purchased by a corporation to cover financial loss caused in the eventual death of an important employee. The death of a critical employee can be an expensive prospect for a company, leaving the company not only with a hole to fill in terms of expertise lost, but experience as well. Additionally, the company would lose money in the time needed to hire a replacement, cost of their training, and costs of giving out retirement benefits to the surviving heirs.
The funds recovered from a corporate-owned life insurance (COLI) policy when a worker dies can be used to fund their retirement programs or any other benefit plans that come into effect upon the workers' deaths. Any remaining funds can go towards retirement programs of co-workers and help cover the losses incurred by the corporation due to the death of the employee. When used as intended, the policy provides a lot of benefits for the corporation.
How Corporate Employee Life Insurance Benefits Work
This type of insurance is among the simplest life insurance plans to execute. After applying for the policy on the life of a key employee, the board of directors must approve its purchase. They need a resolution stating that the policy is being purchased to safeguard the interests of the corporation from the loss due to death of an employee. The employer will then apply for the policy and will be the sole beneficiary of the insurance. They will also be responsible for paying all the premiums. Should the employee die, the policy proceeds will go to the employer to use. This policy gives the corporation named as the beneficiary free hand in terms of how the money can be used, without having to meet any other legal obligations.
Basic Statistics
The money recovered from this corporate-owned insurance policy is tax-free. This makes it the perfect investment for the company, which otherwise may find itself in trouble when payments linked to employees' death have to be paid out. According to statistics collected by the American Council of Life Insurers, roughly eight billion dollars is paid out in premiums for these policies. This translates to over 20% of all life insurance policies sold in a year. According to a report by the United States General Accounting Office, 68% of Fortune Magazine's top 1000 companies buy corporate-owned life insurance on their employees. Furthermore, almost one-third of all new life insurance policies is owned by corporations. This translates to very large incomes for the insurance companies, while allowing corporations access to easy money.
Controversy
There has been a lot of controversy regarding these policies over the last few years. There is a general feeling that some corporations, due to easy availability of large amounts of funds, buy corporate employee life insurance benefits on low level employees and collect the profits when the employees die. There are even times when a company gets money if the employee does not die, but just leaves the company. Additionally, such insurance policies offer some astonishing tax loopholes that employers can take advantage of, without the knowledge of their employees. In many cases, large corporations took out large COLI policies in the names of all their employees, regardless of their pay scale or importance of their position to the company, just so they could take advantage of the tax free benefits upon their deaths.
In 2006, Congress adopted the new corporate employee life insurances practices when the Pension Protection Act was passed. This act required employers to get consent in writing of lower level employees who were insured under the COLI policy. The lower level employees also have to be informed of the maximum amount of the policy for which they are insured.
If the employee gives consent, employers can use COLI to get legal tax-efficient methods to fund employee benefit programs. Benefits include the use of funds to help take care of the deferred compensation and other delayed retirement programs. Policies can earn from growth in the account value every year and from life insurance earnings in the case of the death of the employee. Also, the policy income is tax deferred until retrieved.
The IRS has been cracking down on deductions the corporations can make with their COLI policies and individual state laws have curbed the unethical advantages corporations took at the expense of their employees. Some states have passed insurable interest laws, which make it obligatory for employers to actually have the chances of financial loss due to the death of an employee before they are actually able to take out an insurance policy on them. But perhaps the biggest punch may come in the form of President Obama's planned 2011 budget. The plan is to further reduce the amount that will be allowed interest deductions when borrowing against the policies.