Corporate-owned life insurance (COLI) in North Carolina is life insurance owned by a business, commonly with the company paying premiums and receiving the death benefit. It may support key-person protection, a buy-sell arrangement or an executive-benefit obligation. The business policy does not automatically provide personal family protection. Before applying, identify the owner, insured, beneficiary, business purpose and funding commitment, then coordinate consent, applicable reporting and tax treatment with the insurer, CPA and attorney. A policy purchase or a completed tax form alone does not guarantee the intended tax result.

What is corporate-owned life insurance (COLI)?

Corporate-owned life insurance, often shortened to COLI and sometimes written as company-owned life insurance, is any Life Insurance policy where the business itself — not the individual insured — is the owner and the beneficiary. In a corporate-owned life insurance policy:

  • The business is the applicant and legal owner of the policy.
  • The business pays the premiums out of company funds.
  • The insured is an employee, executive, or owner who has given written consent to being insured.
  • The business is the beneficiary and receives the death benefit.
  • If the policy is permanent, the cash value belongs to the business and sits on the company's balance sheet as a corporate asset.

COLI is really an umbrella term. Several strategies business owners hear about separately are all forms of corporate-owned life insurance under the hood: key person insurance is COLI bought to protect against losing a vital person; an entity-purchase buy-sell agreement funded with life insurance uses company-owned policies to buy out a deceased owner's shares; and the employer side of a split-dollar life insurance arrangement can be corporate-owned as well. When people say "COLI" on its own, they usually mean the broader use of company-owned permanent policies to fund and recover the cost of executive benefit plans.

How does corporate-owned life insurance work?

The mechanics are straightforward, and doing the steps in the correct order is what protects the tax treatment of the eventual payout:

  1. The business identifies the insured — the owner, executive, or key employee whose loss the company wants to insure against, or whose benefit the company wants to fund.
  2. The insured gives written notice-and-consent before the policy is issued. For a business-owned policy this step is not optional (see the IRS 101(j) rule below).
  3. The business applies for and owns the policy, listing itself as owner and beneficiary.
  4. The business pays the premiums with company dollars. These premiums are not tax-deductible.
  5. Cash value grows tax-deferred inside a permanent policy, as an asset the company controls and can borrow against or surrender if needed.
  6. At the insured's death, the insurer pays the death benefit to the business, generally income-tax-free if the 101(j) requirements were met.
  7. The business uses the proceeds for whatever purpose it set the policy up for — replacing a key person, paying a deferred-compensation promise, or reimbursing itself for benefits already paid.

Because the company is both owner and beneficiary, the money never passes through the insured person's estate and is not meant for their family. Any personal family protection for that person should be handled by a separate, individually owned Life Insurance policy. It is common for a business owner to carry both: a personal policy for their household and a corporate-owned policy for the business.

Term or permanent Life Insurance for COLI?

A corporate-owned life insurance policy can be written as either term or permanent coverage, and the choice follows the purpose:

  • Term Life Insurance is the low-cost option for a defined need — protecting against the loss of a key person while a loan is outstanding, or while a successor is being trained. It buys a large death benefit for a modest premium and builds no cash value.
  • Permanent Life Insurance may provide long-term coverage and cash value if kept in force under the policy’s premium and other requirements. Compare guarantees, charges and lapse risk rather than assuming a permanent policy lasts for life regardless of funding. The business purpose, cash flow and actual contract determine whether it fits.

When the premiums get large, some companies borrow rather than pay from cash flow — see how life insurance premium financing works.

What businesses use corporate-owned life insurance for

COLI is flexible, which is exactly why it has so many names. The main business uses are:

  • Key person protection. The most common reason a small or mid-size company owns Life Insurance on someone. If an owner, partner, top producer, or specialized employee dies, the death benefit gives the company cash to cover lost revenue, keep paying its bills, and recruit and train a replacement. This is covered in depth on our key person (key man) insurance page.
  • Funding a buy-sell agreement. In an entity-purchase (stock-redemption) buy-sell, the company owns a policy on each owner and uses the proceeds to buy back a deceased owner's shares. Important caution for North Carolina owners: after the U.S. Supreme Court's 2024 decision in Connelly v. United States, corporate-owned insurance earmarked for a redemption counts as a corporate asset that increases the company's value for federal estate-tax purposes, with no offset for the buyout obligation. That can raise the estate-tax value of an owner's shares, which is why many advisors now favor cross-purchase arrangements or a separate insurance LLC. See how a buy-sell agreement funded with life insurance works for the full picture.
  • Informally funding nonqualified deferred compensation and executive benefits. When a company promises a key executive future deferred compensation, that promise must legally stay "unfunded." Many employers informally back it with a corporate-owned policy: the company owns the policy on the consenting executive, the cash value grows tax-deferred, and the eventual income-tax-free death benefit reimburses the company for what it paid out. The insurance assets remain company property and are subject to the employer's creditors — that is a feature of keeping the arrangement "unfunded," not a bug.
  • Split-dollar arrangements. A company can share the premium and benefit of a large permanent policy with a key executive under a formal split-dollar life insurance agreement, often as a selective executive or estate-planning perk.
  • Cost recovery for benefit programs. may help recover benefit-program costs if a covered claim is paid and the planned tax treatment applies. Timing, benefit obligations and tax rules must be reviewed rather than assuming all costs will be recovered tax-free.

The tax rules that make or break a COLI policy

Three tax facts sit at the center of every corporate-owned life insurance policy. Get them right and COLI is highly tax-efficient; get them wrong and the payout can be taxed. This is educational information, not tax or legal advice — the exact treatment for your entity should always be confirmed with your CPA and attorney.

1. The premiums are not tax-deductible

Under Internal Revenue Code Section 264(a)(1), a business gets no deduction for premiums on a Life Insurance policy when the taxpayer paying them is directly or indirectly a beneficiary. Because the company owns the policy and collects the death benefit, it is the beneficiary, so COLI premiums are paid with after-tax dollars. Any material you see suggesting a company can simply write off the premiums on its own key-person or COLI policy is wrong.

2. The death benefit is income-tax-free only if you clear the 101(j) hurdle

A Life Insurance death benefit is generally received income-tax-free under IRC Section 101(a)(1). For business-owned coverage, though, that result is not automatic. Under IRC Section 101(j), for employer-owned Life Insurance contracts issued or materially changed after August 17, 2006, the death benefit above the total premiums paid is taxable income to the business by default. In plain terms: skip the paperwork and the IRS can tax most of the payout — the opposite of what owners expect.

The business keeps the death benefit income-tax-free only if both of these are true:

  • The notice-and-consent requirements are satisfied in writing before the policy is issued, and
  • A statutory exception applies — for example, the insured was an employee at some time during the 12 months before death, or was a director or a highly compensated employee when the contract was issued.

"Notice and consent" has three specific written parts that must all be done before the policy is issued:

  1. The employee is notified in writing that the employer intends to insure their life, and is told the maximum face amount they could be insured for.
  2. The employee consents in writing to being insured, including consent that the coverage may continue after they stop working for the company.
  3. The employee is told in writing that the employer will be a beneficiary of the policy.

That consent also has a shelf life: the policy must be issued before the earlier of one year after the consent is signed or the date the employee leaves. And here is the part that catches owners — a missed consent generally cannot be fixed after the policy is issued. Outside a narrow IRS correction window for certain inadvertent failures under IRS Notice 2009-48 (which also cannot be used after the insured has died), tax consequences depend on the applicable rules and facts; do not assume a later consent or a reporting form cures the failure. Doing this correctly up front is exactly where a knowledgeable agent earns their keep.

3. Check annual Form 8925 reporting requirements

An applicable policyholder with covered employer-owned contracts issued after August 17, 2006 generally files IRS Form 8925 each year, attached to its income tax return. The reporting scope depends on the statutory employer-owned-contract definition and applicable transition or exchange rules; it is not a blanket rule for every policy a business has ever owned. The form reports covered employees, insurance in force and consent information. Filing it does not replace the separate pre-issue notice-and-consent and statutory-exception analysis.

Cash value grows tax-deferred

Inside a permanent corporate-owned policy, the cash value grows tax-deferred, and the company can borrow against or withdraw from it (subject to policy rules and potential tax on gains if the policy lapses or is surrendered). That tax-deferred growth is a big part of why permanent COLI is used to informally fund long-term executive benefit promises.

COLI vs. an employee-owned policy: a quick comparison

One of the most useful decisions a business owner faces is whether the company should own the policy (COLI) or whether to bonus the money to the employee and let them own it — a Section 162 executive bonus plan. The two are almost mirror images:

Feature Corporate-owned life insurance (COLI) Section 162 executive bonus Who owns the policy The business The employee Who pays The business pays premiums directly The business pays a bonus; the employee buys the policy Deductible? No — premiums are not deductible Potentially — compensation deductibility and employee taxation depend on applicable tax requirements, not simply the arrangement’s label Who gets the death benefit The business The employee's own beneficiary (their family) IRS 101(j) notice-and-consent? Yes — required, or the payout can be taxed No — the employee owns it, so 101(j) does not apply Main purpose Protect the business and fund/recover benefit costs Reward and retain a key person

Neither is "better" in the abstract. COLI keeps the value and control inside the company; an employee-owned bonus arrangement shifts ownership and beneficiary choices to the employee, with its own compensation and tax requirements. Many owners end up using both — company-owned coverage to protect the business and a bonus arrangement to keep a star employee happy.

Is corporate-owned life insurance ethical?

This is a fair question, and it comes from real history. Decades ago, some large employers bought life insurance on huge numbers of rank-and-file workers — often without the workers' knowledge — and quietly collected the death benefits. That practice earned COLI unflattering nicknames like "janitor's insurance" and "dead peasant insurance," and it is the reason people still ask whether the whole idea is above board.

For employer-owned contracts within Section 101(j), the pre-issue requirements include that the employee be told in writing about the coverage and consent in writing. A qualifying statutory exception must also apply for the broader death-benefit exclusion. Those exceptions are not limited to executives: the rules also address an insured who was an employee during the 12 months before death and certain payments to or equity purchases from qualifying family members, beneficiaries, trusts or estates. Have the actual arrangement reviewed rather than treating a job title or a consent form as sufficient.

Used the modern way — on a specific, consenting key person, for a genuine business purpose like continuation planning or funding an executive benefit — corporate-owned life insurance is a mainstream, legal, and widely used planning tool. The ethical line is transparency: the person knows, agrees in writing, and there is a real business reason for the coverage. Structure it that way and you satisfy both the law and the fairness concern behind the question.

Advantages of corporate-owned life insurance

When it fits the business and is set up correctly, the advantages of corporate-owned life insurance include:

  • Cash after a covered claim is paid. The business may receive funds after a covered death claim is approved and paid under the contract. It is not a promise of immediate payment or enough proceeds to meet every obligation.
  • Income-tax-free death benefit may be available when the applicable exclusion requirements, including notice-and-consent and a statutory exception where required, are met. Applicable Form 8925 reporting remains a separate obligation; filing alone does not establish tax-free treatment.
  • Tax-deferred cash value on a permanent policy, giving the company a balance-sheet asset it controls and can borrow against.
  • A way to informally fund and recover the cost of nonqualified deferred compensation and other selective executive benefits.
  • Selectivity. Unlike a qualified retirement plan, the company can choose exactly which people to insure and benefit, with far less administrative burden.
  • Flexibility. The same tool covers key person protection, buy-sell funding, and executive benefits, so a growing business can layer uses over time.

Drawbacks and cautions to weigh

A balanced look also means naming the trade-offs:

  • Premiums are not deductible — the company pays with after-tax dollars.
  • The 101(j) paperwork is unforgiving. Miss the notice-and-consent step and the payout can be permanently taxable.
  • The cash value is a corporate asset exposed to the company's creditors. That is required to keep deferred-compensation funding "unfunded," but it means the money is not protected from business creditors.
  • Estate-value effects. After Connelly, corporate-owned insurance used to fund a redemption can raise the estate-tax value of an owner's shares. North Carolina repealed its own estate tax in 2013, so only the federal estate tax applies to NC residents — but with the 2026 federal estate-tax exemption at $15 million per person, owners of larger companies should have a buy-sell reviewed with this in mind.
  • It is documentation-heavy. Maintain beneficiary records, applicable consents and required reporting, including Form 8925 where it applies.

Get corporate-owned life insurance set up right in Charlotte, NC

A useful COLI review starts with the business purpose, the financial effect of losing the insured, the intended ownership and beneficiary arrangement, and a sustainable premium commitment. Bring existing buy-sell or benefit agreements and tax questions to the discussion. The Jordan Insurance Agency in Charlotte can compare options across the insurers and coverage lines it is authorized to offer; an independent agency does not necessarily represent the entire market.

Ask us for a free consultation to review the coverage purpose, available policy options and the insurer’s documentation requirements. Confirm any proposed premium and permitted service fee in writing rather than assuming all buying channels have identical prices. The insurer determines underwriting and claims under the contract. Your CPA and attorney should coordinate the tax reporting, notice-and-consent requirements and legal agreements before issue; no agent can guarantee a particular tax outcome.

Next step: Talk to The Jordan Insurance Agency in Charlotte, NC for free help structuring corporate-owned life insurance. For coverage details, review our Life Insurance coverage guidance.

Primary references: IRS Form 8925 reporting scope; IRS Notice 2009-48 employer-owned coverage guidance; NC charges beyond premium.