What is corporate-owned life insurance (COLI) and how does it work?

Corporate-owned life insurance (COLI) is Life Insurance that a company buys and owns on the life of one of its people — usually an owner, executive, or key employee. The business is the policy owner and the premium payer, and the business is the beneficiary, so if the insured person dies the death benefit is paid to the company, not to the person's family. Businesses use a corporate-owned life insurance policy to protect against the financial loss of someone critical, to informally set aside money to pay promised executive benefits, and to recover the cost of those benefit programs over time. For business owners in Charlotte and across North Carolina, COLI is one of the core building blocks of a serious business-continuation and executive-benefits plan — but it only works the way owners expect if a few specific tax rules are followed from the start.

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 (whole life or universal life) costs more but lasts for life and builds tax-deferred cash value the company can access. Permanent COLI is what businesses use when they want a balance-sheet asset that also informally funds a long-term benefit promise. Whole life premiums commonly run several times the cost of comparable term coverage, so permanent COLI fits established companies with steady cash flow rather than a business on a tight budget.

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. Because the death benefit ultimately comes back to the company income-tax-free, COLI lets a business recover, over time, the money it spends on the executive benefits it provides.

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), the payout is permanently taxable. Doing this correctly up front is exactly where a knowledgeable agent earns their keep.

3. Form 8925 must be filed every year

A business that owns employer-owned Life Insurance must file IRS Form 8925 each year, attached to its income tax return. The form reports the number of employees, how many are insured, the total amount of employer-owned Life Insurance in force, and confirmation that the business holds valid written consents. It is a short form, but it is a standing annual obligation for as long as the coverage is in place, and it keeps the consent records front and center.

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:

Neither is "better" in the abstract. COLI keeps the value and control inside the company; a 162 bonus is simpler, deductible, and rewards the employee directly. 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.

Congress responded by tightening the law. The IRC Section 101(j) rules described above — which apply to employer-owned policies issued after August 17, 2006 — exist precisely to prevent the old abuses. Today, for the death benefit to be received tax-free, the insured person must be told in writing that they are being insured, must consent in writing, and the favorable treatment is generally reserved for policies on directors and highly compensated employees, not anonymous groups of hourly workers. In other words, the law now requires the transparency and consent that were missing in the cases that gave COLI a bad name.

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 exactly when the business needs it. The death benefit arrives right when a company is most exposed — the loss of a key person or an owner.
• Income-tax-free death benefit to the business, provided the 101(j) notice-and-consent and Form 8925 requirements are met.
• 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. Consents, beneficiary designations, and the annual Form 8925 all have to be maintained.

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

COLI is one of the most powerful tools a business owner can use, but the details — the right policy type and amount, the 101(j) consents, Form 8925, and coordinating with a buy-sell or deferred-comp plan — are exactly where do-it-yourself buyers get tripped up. The Charlotte-Concord-Gastonia area is home to more than 300,000 small businesses, and many of their owners have never had these strategies explained in plain English. The Jordan Insurance Agency is an independent agency based in Charlotte, North Carolina that works with multiple Life Insurance carriers, so we can compare coverage and pricing across companies instead of steering you to one.

We will help you decide who to insure, land on a coverage amount the carrier will actually approve, complete the notice-and-consent paperwork before the policy is issued, and coordinate with your CPA and attorney on the tax and legal side. There is no charge to talk it through, and using an independent agent does not cost you more than going direct — the premium for a given carrier's policy is the same either way, and we shop the market on your behalf. If you also carry business partners, own the building your business operates from, or have a bank loan that requires coverage, we will make sure your whole Life Insurance strategy — key person, buy-sell, and executive-benefit coverage — fits together. Reach out to The Jordan Insurance Agency to get corporate-owned life insurance structured and documented the right way from day one.