If you’re a chief financial officer, you probably have a mental checklist you run through every quarter: cash flow, leverage ratios, tax exposures, and—slotted somewhere between “renegotiate the credit line” and “approve the audit fees”—the company’s life-insurance portfolio. 

 

That last item can seem like small potatoes beside a nine-figure budget, yet the way you structure corporate-owned life insurance (COLI) can shave real dollars off your tax bill, buttress executive-retention efforts, and even smooth the ride for shareholders during choppy markets. Below are seven tax advantages of COLI every CFO worth their green-eyes-hade should keep on the radar.

 

 

Advantage #1: Tax-Deferred Cash-Value Growth

Think of the cash value inside a COLI contract as a miniature, off-balance-sheet savings engine. Premiums accumulate tax-deferred, meaning you don’t owe the IRS a nickel on the buildup as long as you leave the funds in the policy. Compare that with a conventional side fund invested in bonds: coupon payments flow in, and you record taxable income every year. 

 

With COLI, growth compounds quietly in the background, free of current taxation, until you choose to tap it. Over a ten- or twenty-year horizon that difference can be material—especially for companies with tight after-tax hurdles on internal projects.

 

 

Advantage #2: Tax-Free Death Benefits (If You Dot Your I’s)

Under IRC §101(a), death benefits paid to the corporation are generally income-tax-free. That single sentence in the code is what makes COLI so attractive in the first place. The trick? Compliance with the 2006 “COLI Best Practices” rules—formally, the Pension Protection Act amendments. You must (a) secure written consent from the insured employee, (b) notify them of coverage amounts, and (c) file Form 8925 annually. 

 

Miss any of those steps and the death benefit may become taxable, instantly erasing the advantage. But get the paperwork right, and your company receives a lump sum at precisely the moment executives and shareholders least expect any silver linings.

 

 

Advantage #3: Book-Income Smoothing Through COI Charges

Here’s a benefit that hides in plain sight: the cost-of-insurance (COI) charge booked inside the policy can offset deferred tax liabilities generated by other GAAP entries. Because the COI charge is recognized immediately for book purposes but not necessarily for tax purposes, it creates a timing difference. 

 

That difference can help tame volatility in the effective tax rate—a metric analysts watch like hawks. Think of it as a built-in dampener that makes your quarterly earnings calls marginally less tense.

 

 

Advantage #4: Non-Taxable Access via Policy Loans

Need to finance a supplemental executive retirement plan (SERP) or replenish working capital without spooking bondholders? CFOs can borrow against the cash value of a COLI contract and—here’s the kicker—receive the proceeds tax-free as long as the policy remains in force. Interest accrues but is typically lower than bank-line rates because the policy itself serves as collateral. 

 

Used judiciously, policy loans function like a revolving credit facility that never shows up as a liability on your balance sheet. Wall Street loves clean leverage ratios; COLI helps you present exactly that.

 

 

Advantage #5: Deduction of Interest on Policy Loans (Limited but Real)

Section 264(a)(4) generally disallows interest deductions on loans used to carry life insurance. Still, an exception exists for policies covering 20-percent-or-greater owners, directors, and officers when aggregate borrowing stays under $50,000 per insured. For midsize private firms, this carve-out isn’t trivial. 

 

It turns a non-deductible financing cost into a partially deductible one, trimming your after-tax interest rate and improving the NPV of whatever project the funds support. Granted, you won’t retire early on this perk alone, but it’s low-hanging fruit many companies leave unplucked.

 

 

Advantage #6: Step-Up in Basis on Cash Surrender Value

When a COLI policy is transferred—say, during a merger, spin-off, or sale of a subsidiary—the inside basis of the policy can step up to fair market value if handled properly. That larger basis reduces potential gain on future dispositions or partial surrenders. Picture acquiring a competitor that has carried COLI on its books for years. 

 

If you structure the transaction correctly, you capture not only their customer base but also a tax shelter embedded in the insurance itself. Over multiple deals, these basis adjustments compound into meaningful dollars.

 

 

Advantage #7: State Premium-Tax Offsets and Deferred Acquisition Cost (DAC) Relief

Many states levy a 1-to-3-percent premium tax on life-insurance contracts. Insurers often credit institutional buyers—companies that purchase COLI in bulk—with a “premium-tax offset.” Those offset amounts reduce the net premium you pay, which in turn lowers the deferred acquisition cost asset you’d otherwise capitalize under ASC 944. 

 

Bottom line: smaller DAC equals faster expense recognition and lower taxable income in early policy years. For firms that prize short payback periods, that accelerated timing is the cherry on top.

 

 

#	Advantage	What it is	Why it matters (CFO lens)	Actions & watchouts
1	Tax-Deferred Cash-Value Growth	Policy cash value grows without current income taxation as long as funds remain in the contract.	Defers tax drag vs. taxable side funds; improves compounding and after-tax IRR on benefit funding pools.	Model after-tax vs. taxable alternatives; set policy funding schedules aligned to liabilities.
2	Tax-Free Death Benefits (IRC §101)	Death proceeds are generally income-tax-free to the corporation when notice/consent and filings are satisfied.	Creates liquidity precisely when needed; strengthens balance sheet without tax leakage.	Obtain written notice & consent; keep board approval; file Form 8925 annually; maintain compliance files.
3	Book-Income Smoothing via COI Charges	Cost-of-insurance recognized for book can differ from tax timing, creating helpful temporary differences.	Can dampen effective tax rate volatility and smooth quarterly earnings optics.	Coordinate tax & accounting entries; disclose policy impacts appropriately; avoid overreliance for optics.
4	Non-Taxable Access via Policy Loans	Borrow against cash value; proceeds are generally not taxable if the policy stays in force and avoids lapse.	Flexible, low-visibility liquidity to fund SERPs/benefits or working capital without hitting income taxes.	Monitor loan-to-value and interest accrual; stress-test lapse scenarios; document internal borrowing policy.
5	Limited Interest Deduction (§264 carve-out)	Interest on certain policy loans may be deductible up to limited thresholds per insured (e.g., officers/directors).	Reduces after-tax borrowing cost; improves NPV of projects funded via policy loans (within limits).	Track borrower classes and caps; coordinate with tax counsel; maintain substantiation for deductions.
6	Step-Up in Basis on Transfers	In certain transactions (M&A, spin-offs), policy basis can step to FMV, reducing future taxable gains on disposition.	Adds tax planning flexibility in corporate actions; can enhance deal economics cumulatively over time.	Structure transfers carefully; document valuation; align with M&A tax strategy and post-deal integration plans.
7	State Premium-Tax Offsets & DAC Relief	Carrier credits/offsets can reduce net premium; lower DAC under ASC 944 accelerates expense recognition early on.	Improves early-year cash metrics and payback; supports cleaner earnings trajectory for new policies/blocks.	Verify offset terms; reflect in DAC and cash planning; compare carriers’ net-of-offset pricing.

Note: This table is informational only and not tax, legal, or accounting advice. Consult qualified advisors for decisions.

 

Putting the Advantages to Work: Three Quick Scenarios

1. Key-Person Protection Plus Retention

Your CTO is irreplaceable, and you know it. Use COLI to fund a retention bonus payable at retirement. The policy’s cash value grows tax-deferred, the company can loan against it to pay the bonus tax-free, and—should the worst happen—the death benefit lands tax-free to cushion the hit to R&D schedules.

 

2. Funding a Nonqualified Deferred-Comp Plan

Instead of parking assets in a taxable brokerage account, match plan liabilities with COLI. The policy loans can pay benefits as they come due, while tax-deferred growth aligns perfectly with long-dated obligations.

 

3. M&A-Ready Balance Sheet

If acquisition rumors swirl, having COLI with stepped-up basis potential can boost your valuation or provide buyers with instant tax-planning options—sometimes worth more than the synergies everyone fixates on.

 

 

Common Pitfalls (and How to Dodge Them)

• Forgetting Notice-and-Consent Rules: Skip those signatures and your CFO report will include an ugly tax contingency footnote.
• Overfunding Beyond MEC Limits: A Modified Endowment Contract loses some of the tax perks—watch funding levels carefully.
• Treating Policy Loans as “Free Money”: Interest still accrues; model the spread vs. alternative financing to avoid unpleasant surprises five years down the road.
• Ignoring Creditor-Protection Statutes: State laws differ; COLI may or may not be shielded in bankruptcy. Coordinate with counsel.

 

A Word on GAAP vs. Statutory vs. Tax Accounting

If juggling three accounting treatments for the same dollar sounds like fun, you’re in luck—COLI offers precisely that. For GAAP, you record cash-value changes in other comprehensive income until realized. Statutory statements (if you’re an insurer-owned entity) follow entirely different rules. Then there’s the IRS, living in its own universe. The disparities can be leveraged to your benefit, but only if your accounting and tax teams talk to each other before quarter-end, not after.

 

So, Should You Jump In?

COLI is not a silver bullet, nor is it as sexy as the latest SaaS roll-up or blockchain pivot. But from a pure tax-efficiency standpoint, few tools offer as many levers to pull with as little day-to-day maintenance. The real hurdle is education—getting the board, the CEO, and sometimes even HR comfortable with the idea that life-insurance policies can be strategic corporate assets rather than dusty compliance line items.

 

Closing Thoughts

Any time a planning idea sounds too good to be true, the IRS is already looking for ways to curtail it. That makes rigorous compliance non-negotiable. Still, when structured correctly, corporate-owned life insurance delivers a menu of tax advantages tailor-made for CFOs tasked with squeezing every ounce of efficiency from the balance sheet. Work with experienced counsel, model multiple scenarios, and revisit assumptions annually. Do that, and COLI might just become your quiet MVP—no press releases required.