COLI takes a whole life insurance policy, and places it on the rank and file of the company. In this case, 350,000 policies that are of a low death benefit (meaning $10,000 to $50,000).
The premiums on these policies are figured and issued on a guaranteed basis, at the age of issue. They are premament policies, so the premium in the earlier years is based on mortality, expense (M&E) and expected interest earnings of the insurance company, so they can pay the death benefit should one of the employees die (and it's not based on that pool of 350,000 people, it's based on the age of the individual and all the others in that class of employement).
These premiums are in excess of the actual cost amount for the M&E. This excess goes into what is called the "cash value" (CV).
That's where the ofther 5/8ths of the story begins.
This CV is unique in the world of tax law. These policies are typically held in some for of pension benefit plan. The CV is very, very favorable. It grows tax-deferred, can come out in the form of loans tax-free (when the total premiums paid is exceeded), and is sheltered from creditors.
When someone dies, it helps to pay for the pensions. Should they continue to live, the CV continues to help the pensions.
Large insurance companies have whole departments dedicated to COLI...
Update [2005-4-4 16:12:11 by changingamerica]:
Why do they do this? Simple.
It's so they can have another way of not paying taxes. Some of the programs permit the premiums to be tax-deductible. The growth in the program is tax-deferred. And the benefits, whether paid out of the cash value or the payment of a death benefit, are tax-free.
Because it is an insurance policy, it is sheltered from creditors.
This comes up in legislative session after legislative session (finding a way to tax the build up of the cash value), but the National Association of Insurance and Financial Advisors has one of the most well-funded PACs in the country, and they defeat it every time.
The average citizen has the ability to create a similar situation for themselves, though they cannot deduct the premiums...but it doesn't make sense because they have vehicles like the ROTH IRA, traditional IRAs, 401(k), etc. Only if these are maxed does it make sense to even pursue this type of saving vehicle.
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