Corporate-Owned Life Insurance (COLI)

A company purchases and owns life insurance on a key employee, with the corporation as primary beneficiary. Premiums are not tax-deductible (§264(a)(1)). Death proceeds are received income-tax-free only if the §101(j) rules are met: before the policy is issued the employer must give the employee written notice of the intended coverage and the maximum face amount, obtain the employee's written consent, and disclose that the employer will be a beneficiary — and the insured must be an employee within 12 months of death or a director/highly compensated employee at issue. Fail that, and the exclusion is capped at the premiums paid. Many COLI policies include a change-of-insured provision: when the covered employee leaves or retires, the insured can be swapped to a replacement employee (subject to insurability) — avoiding new policy fees and commissions.