Your employees are the lifeblood of your business. This is especially true if your business depends on a small team of individuals to remain functional and successful.

In such a case, the unexpected loss of a key member can be devastating. What’s more, the cost of providing your employees with benefits is steadily increasing. Thankfully, there’s a way to offset these expenses and get a financial cushion to absorb the impact of losing a key employee: corporate-owned life insurance.

How does corporate-owned life insurance work? What are its benefits? Read on to learn all you need to know.

What Is Corporate-Owned Life Insurance (COLI)?

Corporate-owned life insurance is a type of life insurance policy that companies purchase to insure an employee or a group of employees. Since the company owns the policy, it handles premium payments and gets the death benefits.

What Are the Benefits of Corporate-Owned Life Insurance?

Here’s why more and more companies are opting for a COLI policy.

Key Employee Protection

Think of it as a type of key person insurance. If you lose a vital member of your business, the payout you get can help you fund the recruitment or training of a new employee and cover the loss of revenue you’ll experience.

Tax Efficiency

The policy also provides your business with several tax benefits. For example, this type of insurance offers cash value accumulation on a tax-deferred basis. One of the best parts, though, is the fact that your business may get tax-free death benefit proceeds.

Business Continuity Funding

Your business’s corporate-owned life insurance policy can offer the liquidity you need to cover expenses like estate taxes and even buy-sell agreements.

Let’s say, for example, one of your shareholders passes away. Your company can use the proceeds to buy out the shares from their heirs and keep the company under the control of its existing partners.

Deferred Compensation Plan Funding

Considering how competitive the corporate world is, retaining key employees will always be in your company’s best interest. Thankfully, a COLI policy can help you do just that.

Since your policy’s cash value acts like a dedicated asset, you can promise senior leaders and executives future payments without worrying about dipping into your working capital.

Types of Corporate-Owned Life Insurance

How does corporate-owned life insurance work? Each company can structure its policy however it likes, depending on the objective it would like to achieve. This structure will play a role in shaping the policy’s risk profile, overall fit, and return potential.

Your company’s COLI policy can fall under one of the following types.

Term Life Insurance

This is a type of COLI policy that lasts only for a set period, usually up to 30 years. While it is the most affordable option, the policy doesn’t have a cash value component.

Whole Life Insurance

This is the most conservative and straightforward type. The policy offers your company guaranteed cash value growth, fixed-level premiums, and a set death benefit.

Universal Life Insurance

Here, your company gets a bit more flexibility to adjust premium and benefit amounts within a certain parameter. So, if a previously insured employee becomes more valuable to your company’s success, you can raise the death benefit.

Also, the policy’s cash value will earn interest at a fluctuating crediting rate set by your insurance carrier.

Variable Universal Life Insurance

Would you like to get higher returns? This type of policy allows you to do so by letting you invest the cash value in a few sub-accounts. However, if your investments perform poorly, your policy’s cash value can decrease.

Indexed Universal Life Insurance

Want to roll the dice on higher returns while shielding yourself from potential losses? You might want to consider an indexed universal policy.

Here, the growth of your policy’s cash value will depend on how a market index performs. The best part is that the market index will include a floor that guarantees a minimum interest rate and helps you limit losses when the market performs poorly.

The only downside is that there will also be a ceiling that limits your policy’s growth.

Should You Get Corporate-Owned Life Insurance?

Once you’re done asking, “How does corporate-owned life insurance work?” your next question will likely be, “Should I get it?” It all depends on your understanding of life insurance.

The thought of adding an extra expense to your business might not seem ideal. What’s more, corporate-owned life insurance policies have a few drawbacks.

For instance, the premiums can be quite high, especially if you opt for a permanent policy. Also, it won’t look good if employees feel your company is trying to profit from their untimely deaths. This could negatively impact employee morale and productivity.

So, before rushing into the long-term commitment that a COLI policy demands, it’s a good idea to determine if you need it in the first place.

Normally, getting a corporate-owned insurance policy will make sense if:

• Your company’s functionality and success heavily rely on a select few employees
• You’re looking for tax-efficient solutions to manage your excess cash
• You are a large corporation with multiple financial resources or a long-term financial strategy
• You employ highly compensated executives who have expensive compensation plans

Find Out If Corporate-Owned Life Insurance Is Right for Your Business

As painful as it is to lose an employee, you still want to ensure your business continues as seamlessly as possible. Thankfully, having a COLI policy can help you do just that. Before you rush to get one, though, it’s a good idea to ask a few questions.

For instance, how does corporate-owned life insurance work? What are its benefits? And, most importantly, what are its drawbacks and risks?

Here at Union Risk Services, we’re dedicated to helping you answer these concerns and more, creating tailored insurance solutions that will meet your business’s unique needs and manage potential risks. Connect with us today at 718-370-3131.