If you hang around the life-insurance industry long enough, you’ll notice an almost whispered acronym popping up whenever large employers discuss executive perks and capital efficiency: COLI. Short for Corporate-Owned Life Insurance, COLI is at once mundane (it’s still just life insurance, after all) and surprisingly sophisticated. The country’s biggest public companies have been using it for decades to solve two problems at once: they need a carrot big enough to keep star talent from jumping ship, and they never tire of balance-sheet assets that grow tax-advantaged.

 

Below is a behind-the-curtain look at how Fortune 500 finance teams weave COLI into their benefit programs, why the strategy continues to survive IRS scrutiny, and where the approach can misfire if handled sloppily.

 

 

1. First, a Quick Refresher: What Exactly Is COLI?

Think of COLI as a cousin to the more familiar “key-person” policy, except scaled up and systematized. The corporation—not the individual—owns and pays for a permanent life-insurance policy on selected employees. In many cases that policy is universal life or whole life with a cash-value component that behaves much like a bond fund wrapped in an insurance chassis.

 

Three features matter most:

• The premiums are made with after-tax corporate dollars, but cash values accumulate tax-deferred.
• Death benefits are generally received income-tax-free.
• Inside build-up can be tapped later (through loans or partial surrenders) to reimburse the company for executive benefit costs.

 

Because the enterprise—not the insured—controls the contract, COLI is booked as an asset rather than a compensation expense. That small accounting nuance is the beating heart of the strategy.

 

 

2. Why Do Fortune 500s Care? Follow the Benefits Math

A newly promoted division president might be offered a non-qualified deferred-compensation plan promising, say, $250,000 a year for 15 years after retirement. The CFO needs a way to hedge that future liability without blasting current-period earnings. Enter COLI. Here’s the simplified math Fortune-level controllers like to cite in board decks:

• Premium Outlay: $1 million a year for ten years.
• Projected Cash Value in Year 15: $18 million (assuming a conservative crediting rate).
• Present Value of the Deferred Comp Liability: $12-$14 million.

 

The spread covers benefit costs, while any residual value plus the eventual death benefit drops straight to corporate coffers. By parking dollars in a tax-efficient insurance wrapper, the company turns a potentially volatile P&L item into a self-funding asset.

 

One treasurer I interviewed compared COLI to “owning a muni bond portfolio that also insures your key rain-makers.” Slight hyperbole, perhaps, but the point stands: few other balance-sheet assets provide that cocktail of tax deferral, downside protection, and executive-retention optics.

 

 

3. COLI as Glue in the Executive-Benefit Package

Cash alone rarely seals the deal with C-suite hires anymore. They want security, estate-planning perks, and headline numbers that look good in the proxy statement. Fortune-500 HR chiefs use COLI to bankroll several sweeteners:

 

Supplemental Executive Retirement Plans (SERPs)

Instead of paying SERP benefits out of operating cash 20 years from now, the company accrues value inside the policy. If the executive dies prematurely, the death benefit may even extinguish the remaining obligation.

 

Long-Term Disability and Survivor Income

Some firms carve out a piece of the death benefit as a contractual survivor benefit for the family, which makes COLI feel more generous while still preserving the bulk of proceeds for the employer.

 

Golden Handcuffs

Vesting schedules tied to the policy’s cash-value milestones keep leaders anchored. Should they resign early, the company can re-purpose the policy or recoup surrender values.

 

Because the policies are owned by the corporation, the benefit can be structured so that an executive never recognizes imputed income—at least not until distributions begin. That asymmetry (tax-free growth for the firm, no current taxation for the employee) is difficult to replicate with plain-vanilla investment accounts.

 

 

4. The Balance-Sheet Bonus: GAAP, Statutory, and Shareholder Optics

Wall Street analysts don’t zoom in on COLI during earnings calls—unless the positions are outsized—yet the presence of policy cash values quietly strengthens liquidity ratios. Under GAAP, those values sit on the asset side at fair market value; meanwhile, the corresponding benefit liabilities are booked at present value, typically discounted. The visual gap helps:

• Return on Assets looks healthier.
• Debt covenants keyed to tangible net worth get cushion.
• Rating agencies view diversified, high-quality COLI holdings as a faint positive, or at worst neutral, in capital-adequacy models.

 

During the 2008 credit crunch, a few household-name conglomerates tapped COLI loans to avoid issuing expensive short-term paper. The move drew almost no headlines because, technically, the company was borrowing from itself. That kind of optionality—especially when capital markets seize up—is the sort of safety valve CFOs covet.

 

 

5. Regulatory Guardrails: Don’t Wing It

Mention COLI at a cocktail party and someone will inevitably recall the 1990s scandals when fast-food chains insured rank-and-file workers without consent. Congress responded with IRC §101(j), which now requires:

• Written notice and acknowledgement from each insured employee.
• Board-level resolutions approving the program.
• Annual Form 8925 filings to certify compliance.

 

Fortune companies have the legal staff to tick those boxes, but mid-market adopters occasionally miss a step and taint the tax benefits. Another trap: over-funding a policy too aggressively, turning it into a Modified Endowment Contract (MEC). That classification erodes the very tax advantages COLI is supposed to offer. Moral of the story? Work with counsel and an actuarial firm that lives in this niche every day, not a generalist broker who last read the COLI regs in 2017.

 

Guardrail	What it is	How to comply (practical steps)	If you miss it
Employee Notice & Consent (IRC §101(j))	Written notice and acknowledgement from each insured employee before issue.	• Provide plain-language notice (coverage, amounts, employer as beneficiary). • Obtain signed consent and store in policy file/HRIS. • Re-verify on policy changes.	Loss of tax-free death benefit on non-compliant policies.
Board Authorization	Formal approval of the COLI program and parameters.	• Pass board resolution (covered classes, limits, purposes). • Keep minutes, resolutions, and program policy documents together.	Weak governance trail; audit findings and potential tax challenges.
Annual Reporting (Form 8925)	IRS certification that the employer-owned life insurance meets §101(j) rules.	• File Form 8925 each year with return. • Reconcile insured headcount, face amounts, and consent records.	Compliance risk; jeopardizes tax treatment if not filed accurately.
Avoid MEC Status	Over-funding can create a Modified Endowment Contract (MEC) with punitive tax on distributions.	• Monitor funding against 7-pay/MEC limits. • Use actuarial illustrations; lock a funding policy and alerts. • Document corrections if limits are breached.	Loans/withdrawals may be taxable (and penalized) instead of tax-advantaged.
Records & Controls	Documentation and internal controls that prove compliance and ownership/beneficiary structure.	• Centralize consent forms, policy contracts, beneficiary designations. • Map policies to covered plans (SERP/NQDC). • Schedule annual legal/compliance reviews.	Audit pain, classification errors, and policy/benefit mismatches.
Use Specialists	Expert counsel and actuarial support for design, funding, and filings.	• Engage ERISA/tax counsel; select carriers familiar with COLI. • Run stress tests/illustrations; align with GAAP and IR rules.	Design/funding mistakes that erode tax benefits or trigger scrutiny.

 

6. When COLI Doesn’t Make Sense

It’s not a magic wand. A few scenarios where COLI can backfire:

• High-turnover industries. If the executive bench churns every three years, the policy may never reach the efficient, mid-cash-value zone.
• Start-ups burning cash. Premiums require real dollars up front; equity-rich but cash-poor firms should probably stick with phantom stock.
• Shareholders allergic to complexity. Some activist funds view COLI as a black-box asset that muddies transparency. Right or wrong, you need investor-relations buy-in before loading the balance sheet with insurance contracts.

 

 

7. Key Takeaways for the Curious CFO (or Benefits Director)

• Model, don’t guess. Insurance-company illustration software can generate Monte Carlo scenarios showing cash-value trajectories under different crediting rates and funding patterns.
• Think portfolio fit. A COLI block should complement, not replace, fixed-income allocations.
• Over-communicate. HR, finance, and legal must be in sync so that plan documents, board minutes, and IRS filings all sing from the same hymnal.

 

 

Wrap-Up

Corporate-Owned Life Insurance sits at a strange intersection: part compensation tool, part liquidity reserve, part tax shelter. The Fortune 500 like it precisely because it multitasks. Handled properly, COLI lets a company promise rich, stick-around-for-years benefits to its leadership team while simultaneously growing a low-volatility asset that props up key financial ratios. Handled sloppily, it becomes an expensive afterthought that draws unwelcome attention from shareholders and the IRS alike.

 

If you’re exploring COLI for the first time, start with a candid question: “Do we want life-insurance assets on our books for two, three, maybe four decades?” Answer that honestly, loop in specialist advisors early, and you’ll know soon enough whether COLI is a strategic fit—or just another shiny idea better left to the mega-caps.