Corporate-owned life insurance, also known as COLI or EOLI, is insurance taken out by a company to reimburse it upon the death of an employer. It was previously exploited by companies for tax-free benefits, but legal cases have made it less common. Companies must inform employees and gain consent to insure them.
Corporate-owned life insurance or employer-owned life insurance may be called COLI or EOLI, respectively. It is also sometimes humorously referred to as dead peasant benefits, but usually only when companies employ it with employees who tend to earn low wages. Corporate-owned life insurance is not necessarily used to provide death benefits to an employee’s family or survivors. Rather, it may be insurance taken out by a company to reimburse it upon the death of an employer.
One reason some companies purchase corporate life insurance is to bear the potential costs of losing a top employee in a company. The loss of partners or who owns a stake in the business can cost money and result in unexpected expenses. When a company uses corporate property life insurance, it can do so to recoup these expenses if an employee dies.
Until mid-2000, corporate life insurance had extraordinary tax loopholes that could be taken advantage of by employers. Under the US tax code, most life insurance benefits were not taxable. This created an opportunity for companies to take out life insurance policies for their employees, regardless of how much or little they were paid, and benefit without tax penalties for their death.
By the early 2000s, companies such as Wal-Mart had adopted a large number of insurance policies to create instant, tax-free benefits when employees died. In a significant legal case on this matter, Wal-Mart had to pay tax on the benefits. Furthermore, Wal-Mart and other companies using the so-called dead peasant insurance loophole were not taking most of these policies to seniors in their company. They bought them at low wages, which certainly gave the impression of some impropriety. It should be noted that Wal-Mart lost $1.3 billion dollars from the court decision to make them liable for taxes.
With the closure of this loophole, many companies stopped taking out corporate life insurance due to the possible resulting tax problems, although it is not illegal to do so in the US. There are still some important laws about this. Employees on whom a company has corporate-owned life insurance must be made aware of this, signify that they understand that such insurance does not entitle their survivors to benefits, and must consent to being insured by the company. There are some exclusions to this law if the employee earns very high wages.
There are still some good reasons why an employer might want to shoulder the costs of losing a key employee. However, the way the law has been applied in the past in the US, it seemed that some companies planned to directly benefit from the death of their employees. Perhaps this is not the best public relations idea for a company.
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