If you run a business, you have probably heard sharp opinions about corporate-owned coverage and self-funding strategies, often delivered with the confidence of a barista who insists you will love beetroot lattes. Here is the short version. Corporate-Owned Life Insurance, or COLI, is a company-owned policy that can support long-term obligations.
Self-funding is exactly what it sounds like, your firm pays claims or benefits from its own resources, sometimes with backstops. Both aim to manage risk, support employee programs, and steady the budget. One involves a policy structure tied to life insurance. The other keeps you closer to the raw math of claims and cash. Choosing between them is less about buzzwords and more about your risk appetite, time horizon, and tolerance for administrative complexity.
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What is COLI, In Plain English?
COLI is a policy that the company owns and pays for, typically on certain employees, with the company as beneficiary. The policy can build cash value over time. That value may grow on a tax-advantaged basis under current rules, and the eventual benefit can offset costs tied to compensation programs, retiree obligations, or other long-range promises. Think of it as a funding vehicle with a built-in timeline. Premiums go in.
Cash value accumulates based on the policy type and credited rates. Over a long horizon, the expected benefit can help the business match future liabilities with future dollars. That description sounds neat, but it is not a magic piggy bank. Premiums are real cash out the door. Policy charges, carrier stability, and design choices matter.
The benefit is long-dated and uncertain in timing. The appeal, when it works, is combining protection with an internal asset that can be accessed through policy loans or withdrawals, all while pairing long-term obligations with a long-term instrument.
What is Self-Funding?
Self-funding is the choose-your-own-adventure version of risk management. The company pays benefits or claims from its own resources rather than handing the entire risk to a carrier. In practice, firms often buy stop-loss or excess coverage to keep catastrophes from capsizing the budget, then handle predictable or moderate costs internally. The strategy leans on data and discipline.
You study your historical claims, set reserves, monitor trends, and decide when to adjust contributions, benefits, or both. The upside is control and potential savings. If your experience comes in better than the market price implied by fully insured options, you keep the difference. The downside is volatility. Bad years feel bad. You must carry reserves, track compliance, and be honest about what your team can manage without losing sleep or missing vacations.
The Core Tradeoff: Risk, Control, and Cash Flow
Risk Appetite and Volatility
COLI smooths some shocks by shifting a slice of risk to the carrier and by building cash value in a regulated, contract-based structure. Returns are steadier than market exposure but not guaranteed beyond contractual terms.
Self-funding hands you the wheel. You may beat the market if claims run light. You may also hit a pothole the size of a meteor. If your board will not tolerate a surprise in February that ruins the plan for September, you need strong reserves or stricter stop-loss limits.
Control and Flexibility
COLI is structured. Once you set it up, the rules are the rules. You can change design and funding levels, but it is not a weekly tweak. Self-funding lets you tune the system with finer granularity. You can adjust contribution schedules, change administrators, tighten plan features, or pilot new programs based on fresh data.
The price of that control is work. You will need governance, dashboards, and someone who enjoys spreadsheet pivots the way other people enjoy long walks on the beach.
Cash Flow and Liquidity
COLI requires premiums and patience. The value builds over time. If you think in decades, that can be attractive. If you think in quarters, you may feel itchy. Self-funding keeps money closer to home. You hold cash until needed, which is friendly to working capital, as long as you can meet a spike without borrowing at ugly rates. To keep liquidity safe, many firms set reserve targets and revisit them after every plan year.
Taxes and Accounting Considerations
COLI’s potential advantages often sit in the tax and accounting footnotes. Cash value growth may be tax-advantaged, and the eventual benefit is generally received favorably under current law if notice-and-consent requirements are met. Premiums are typically not deductible. Policy loans and withdrawals can be complex, and poorly managed transactions can create tax friction.
Accounting treatment depends on policy type and intent, which means your controller will want documentation that would make a librarian proud. Self-funding keeps more activity on the income statement. You expense what you spend, accrue what you expect, and book reserves for claims incurred but not reported.
You can also capture savings in good years without waiting for a later benefit to arrive. The tradeoff is less smoothing. Your earnings will tell the truth about claims in near real time, which investors may appreciate, as long as you communicate assumptions clearly.
People and Governance
Consent and Optics
With COLI, there are regulatory notice-and-consent requirements and ordinary human factors. Employees do not like surprises involving policies on their lives. Clear communication matters. Keep records systematic and respectful. With self-funding, the people angle shows up as plan design and fairness. Set rules that are clear, explain why they exist, and audit them. If your plan feels like a scavenger hunt, morale will evaporate faster than coffee in a sales bullpen.
Administration and Compliance
COLI administration focuses on policy management, documentation, and carrier relationships. You track premiums, performance, and compliance. Self-funding adds claim processing, vendor management, data integrations, and regular plan reviews. Neither path is truly simple. Both demand a playbook, a calendar of tasks, and an owner who wakes up knowing what is due this week.
Cost Comparisons, Without the Headaches
Every comparison boils down to expected cost per dollar of benefit and the value of stability. With COLI, cost includes premiums, internal charges, opportunity cost of capital, and the time value of money. The payoff includes policy value and the eventual benefit, discounted by timing uncertainty.
With self-funding, cost includes claim payments, administrative fees, reserves, and any stop-loss coverage. The payoff is keeping upside in good years and the option to redesign quickly if data shifts.
If your population is stable, claims are predictable, and your finance team is nimble, self-funding can be less expensive on average. If your obligations are long-dated and you value matching a future promise with a contract-based asset, COLI can feel right. When the two are close in expected cost, your tie-breakers become volatility tolerance and governance capacity.
When COLI Shines
COLI fits best when you have specific long-term liabilities and a desire to pair them with a funding instrument that accumulates value within the policy. It also helps if your capital structure can handle steady premiums without crimping investments in growth. If your leadership sees value in a measured, rules-based approach, and you prefer gradual accumulation over near-term variability, this structure aligns with that temperament.
Another quiet advantage is organizational sanity. Once implemented properly, COLI reduces the frequency of plan changes. Your team is not reinventing the wheel each year, which saves managerial attention. The cost is flexibility. You accept a more deliberate pace of adjustments in exchange for a calmer ride.
When Self-Funding Shines
Self-funding wins when your data is your friend and you can handle noise without panic. If you have a culture that believes in measurement, quick iteration, and transparent communication, you can squeeze waste from intermediaries and respond faster to new trends. The savings can be meaningful over time.
The challenge is discipline. You need stop-loss guardrails that you actually respect, reserve policies that you actually follow, and reporting that a non-actuary can actually read. It also suits firms that prize liquidity. Cash stays closer, so you can redirect money if a quarter turns south or a surprise opportunity appears. That flexibility is addictive. It works only if your finance team resists the temptation to underfund reserves when times are rosy.
A Simple Framework to Decide
Start with purpose. Are you trying to fund a defined long-term promise, or are you trying to minimize average costs for benefits with rolling claims? If it is the former, COLI is a natural candidate. If it is the latter, self-funding deserves a long look. Next, test volatility tolerance with numbers, not adjectives.
Model a good year, an average year, and an ugly year. If the ugly year makes your board’s eyes water, either strengthen stop-loss in a self-funded approach or lean toward COLI. Then, check your operating capacity. Do you have the people to run a self-funded program with tight vendor oversight, fast analytics, and regular plan updates? Or do you prefer a policy-centric structure that trades some flexibility for stability and documentation you can point to in a board packet?
Finally, estimate total cost of ownership over a ten-year window. Include reserves, taxes, administrative hours, carrier charges, and the opportunity cost of capital. The right answer usually becomes obvious after that exercise, the way a cluttered closet tells you which shoes you never wear.
| Decision Step | What to Ask | If “Yes,” Lean Toward | Why It Matters |
|---|---|---|---|
| 1) Clarify the purpose | Are we funding a defined long-term promise (retiree benefits, exec comp, future obligations)? | COLI | COLI is built to match long horizons with an asset that grows over time. |
| 2) Stress-test volatility | Can we handle a “bad year” in claims without derailing budgets or board confidence? | Self-Funding (if volatility is tolerable) COLI (if volatility is not tolerable) |
Self-funding saves money in good years but exposes you to swings; COLI smooths risk. |
| 3) Check operating capacity | Do we have the people, data discipline, and vendor oversight to run a self-funded plan well? | Self-Funding (if strong internal capacity) COLI (if you prefer a simpler, policy-centric setup) |
Self-funding needs active management; COLI trades flexibility for steadier admin. |
| 4) Compare total cost over time | Over ~10 years, which has the lower true cost after fees, reserves, taxes, and opportunity cost? | Whichever pencils out better for your scenario | A long-view model usually makes the right choice obvious. |
Conclusion
Both paths can work. COLI offers contractual structure, potential tax advantages, and a patient route to funding long-term obligations. Self-funding offers control, liquidity, and the chance to keep savings when experience beats the market price. The sensible choice depends on your goals, your tolerance for bumpy years, and your team’s capacity to manage complexity. If you want steadier pacing and a policy-based asset that can align with future promises, COLI may fit.
If you want flexibility and direct control over moving parts, self-funding can shine. Either way, ground the decision in real data, clear governance, and a timeline that matches your promises. Your future self will send a thank-you note, possibly with confetti.