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How Coli Can Boost Your Company's Balance Sheet & Valuation

Updated: Mar 10

Maximizing Value with Corporate-Owned Life Insurance

Numerous non-qualified benefit packages, such as deferred compensation plans, are commonly provided by large and medium-sized businesses to their key executives. The liabilities stemming from these strategies for the corporation may initially be modest but frequently increase dramatically over time. Many firms have made the informal decision to use corporate-owned life insurance to pay for their non-qualified benefit programs in order to partially mitigate the effects of these liabilities (COLI).

Everyone can feel secure thanks to COLI. Business owners and executives can take solace in the fact that their company has taken precautions to match cash flow demands with benefit responsibilities, and employers can rest easy knowing that assets are available for distribution in a tax-efficient way.

Business people meeting an advisor in an office setting

A corporate-owned life insurance (COLI) cash value life insurance policy can have a positive impact on a company's balance sheet and valuation by providing the company with a source of liquid assets and tax-free income for the company upon the death of the insured individual.


The Benefits of COLI

The death benefit from the policy can be used to offset expenses such as key person replacement costs or to fund employee benefit plans. The cash value of the policy can be used to provide funding for various business activities, such as investment opportunities, acquisitions, and debt repayment. It can also be used as collateral for business loans.

On the balance sheet, the cash value of the policy will be recorded as an asset, which can help to improve the company's overall liquidity and financial position. Additionally, the death benefit of the policy can be recorded as a liability, which can help to offset any potential losses in the event of the insured's death.

The death benefits you receive from a COLI policy are free from federal income tax. However, Internal Revenue Code Section 101(j), enacted as part of the Pension Protection Act of 2006, limits the amount you, as an employer can receive as a tax-free death benefit in certain circumstances.

The Impact of COLI

The tax benefits of COLI include:

  • Reducing taxes on invested assets, increasing after-tax returns and enhancing shareholder value.

  • Income tax advantages over alternative investment options including:

☑️ Tax-deferred growth of cash value

☑️ Tax-free reallocation within the policy

☑️ Tax-free receipt of death proceeds

☑️ Low net-cost loans and withdrawals

  • The ability to access COLI cash values via tax-free loans and withdrawals for cash flow flexibility

  • Favorable accounting and P&L treatment relative to taxable investments

In terms of valuation, a Coli cash value life insurance policy can be used to enhance the value of the company by providing additional liquidity and financial flexibility. This can make the company more attractive to potential investors and increase its market value.

The Risks of COLI

As with any financial vehicle, COLI has potential risks along with its rewards. Companies should consider:

  • Possible changes to the taxation of life insurance. This may not always be the case, but historically, life insurance has typically enjoyed “grandfathering,” where tax changes apply prospectively to new policies acquired after the date the legislation is enacted.

  • Carrier insolvency. Variable (stock market based) life policy assets are held in a separate account and are not subject to the claims of general creditors, yet death claims in excess of cash surrender values do pose a carrier insolvency risk.

  • The performance of a product/carrier. This could be mitigated by the ability to transfer from one COLI policy/carrier to another via IRC §1035 tax-free exchange.

  • The inability to deduct losses in a down market. COLI is a long-term investment. The lack of short-term deductions could be offset to some extent by the long- term advantage of tax-deferred buildup on the cash value.

  • The definition of life insurance. The carrier will certify that the policy qualifies as a contract of life insurance under current regulations.

Implementing COLI

It is important to note that Coli policies can be complex and may require significant management and monitoring. Additionally, they may be subject to certain regulations and limitations.

It is important to consult with a financial professional to ensure that a Coli policy is appropriate for a company's specific needs and circumstances.

Feel welcome to contact us (via button below) to learn more, or to take action with COLI.

Please note that the information provided in this article is for informational purposes only and should not be considered as financial or legal advice. The contents of this article are based on general assumptions and may not apply to your specific situation. We recommend consulting with a financial advisor or attorney before making any decisions regarding Corporate-Owned Life Insurance (Coli) policies. The information provided in this article is not intended to be a substitute for professional advice.


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