Corporate-Owned Life Insurance
Corporate Owned Life Insurance is a type of life insurance that is most commonly used on senior executives of a firm, but can be used on regular employees as well to enhance a company’s benefit package. Under a Corporate Owned Life Insurance policy, the business is the owner of the policy and is either complete or partial beneficiary. They are used most commonly to protect the company against the costs of having to replace a key employee or redeem stocks of an owner in the event of their untimely death.
There are a few different types of Corporate Life Insurance policies. They include split-dollar life, key-person life, and buy-sell agreements.
Split-dollar life policies have two different methods: the endorsement method and the collateral assignment method. In an endorsement method the employer owns the policy and pays the premiums on the policy. If the cash value is surrendered or if proceeds of the policy are paid, the employer would receive a total of all the premiums paid in and would pay the remaining balance to the employee’s secondary beneficiaries. The company would be the primary beneficiary.
In the collateral assignment method the employer owns the policy and loans its share of the premiums to the employee. The employer would hold the policy as collateral and would receive a total of all premiums paid if the cash value is surrendered or if proceeds of the policy are paid. Under this plan, the employee would be able to select their primary beneficiary and the employer would be the secondary beneficiary.
Both of these policy types are used in cases where the employee may not have been able to afford life insurance on their own- usually in cases of rate ups due to age or health. The employer would help pay the premiums on the policy and would get the premiums back if the cash value was surrendered or if death benefits were paid.
Key-person life policies pay the employer a death benefit upon the death of a key employee. A key employee is one who would be very difficult to replace; typically someone in a management position or co-owner. Key-person life insurance gives the employer a cushion to work with while they take on the task of replacing that employee.
Buy-sell life policies fund the buyout of a deceased partner or owner of a business. In most cases, employers use the death benefits to buy shares of company stock owned by the deceased.