Corporate-owned life insurance (COLI), also known as company-owned life insurance, is a life insurance policy an employer takes out on a highly valuable employee, like a founder. The business is the beneficiary of the policy and pays the premiums. If the employee dies, the company gets the death benefit.
A company-owned policy is especially important if your business can’t replace key executives quickly or easily.
How does corporate-owned life insurance work?
Companies use COLI to replace lost profits or expenses if one of their top executives dies. Just as there are different forms of insurance to protect individuals, there are also different types of insurance that a company can use to protect their business. There are two common types of corporate-owned life insurance: key person insurance and split-dollar life insurance.
Learn more about other types of life insurance
What is key person life insurance?
Key person insurance insures top executives or other highly skilled employees whose deaths would cause a financial loss to the company. Key person policies are usually term life insurance, but can be permanent life insurance. The business owns the policy, pays the premiums, and is the beneficiary of the payout.
Learn more about key person life insurance
What is split-dollar life insurance?
Split-dollar insurance is an agreement where two or more parties, often an employer and employee, split the ownership and benefits of a permanent life insurance policy that has a cash value feature. It’s sometimes offered as an executive employee benefit.
Split-dollar contracts are most often used by companies to decrease the financial impact of losing a key executive (like a CEO) or as a benefit in executive compensation packages.
Unlike key person insurance, the employer and the employee’s family both benefit from the policy’s payout or cash value. The exact breakdown of how each employer splits the cost and benefits with their employee varies.
Learn more about split-dollar life insurance
Why is corporate-owned life insurance called dead peasant insurance?
The nickname “dead peasant insurance” started in the 1980s, when several large companies — including Walmart, Procter & Gamble, Nestle, and Winn-Dixie — bought corporate-owned life insurance policies on thousands of regular employees. [1]
This was done for tax benefits, not to profit from the deaths of employees. But because companies did it without telling employees — and raked in millions through tax breaks and death benefits — critics started calling it dead peasant insurance.
The term references the Nikolai Gogol novel, Dead Souls, in which the main character buys dead serfs from landowners to use as collateral for a massive loan in a get-rich-quick scheme.
Dead peasant insurance isn’t the same as group life insurance, which is an employee benefit where the company pays some or all of the premiums for your own policy.
Learn more about how to pay for life insurance
Does your employer have corporate-owned life insurance?
It’s very unlikely you’re insured under a COLI policy without knowing it. After media attention and publicized lawsuits exposed employers that abused COLI, the 2006 Pension Protection Act put new regulations on corporate-owned policies. [2]
Today, if your employer wants to get life insurance coverage for you and name themselves as the beneficiary, they must follow these guidelines:
You must be notified and give written consent.
COLI can only be taken out on the top 35% of highest-paid employees.
Your employer can’t punish you for rejecting the plan.
Corporate-owned life insurance isn’t illegal as long as an employer follows these guidelines. If you’re not sure if you agreed to a corporate-owned policy before, check with your HR department or benefits manager — they’re required to let you know.
If you’re a business owner, you may need a company-owned policy in addition to a personal policy for your loved ones. An independent insurance broker can help you find the right combination of life insurance to protect your family and your business.
