As it is still Life Insurance Awareness Month (LIAM), let’s continue to focus on the discussions of what life insurance is and more importantly what it does.

Life insurance is not a religion, it is a tool.  It is a contract that shifts a large risk to an organization that can bear it for small systematic payments (premiums).  People who say “I don’t believe in life insurance” might just as well say “I don’t believe in mortgages” as they are similar in nature (large asset purchased with small payments) or “I don’t believe in probability”, because the mathematics underlying life insurance is actuarial science.  There is little faith, just math.

Now that we have changed the discussion somewhat away from a belief to knowledge, let’s expand our knowledge further to get a better grasp on what the life insurance tool can do.  Let’s look at the specific subset of life insurance applications known as COLI, which is Corporate Owned Life Insurance.

COLI is actually more regulated than just personally owned life insurances because of some perceived abuses on broadly based leveraged COLI (so called “janitor’s insurance”), being under the auspices of not just the Treasury but also the Department of Labor for documentation and fair use reasons.  Assuming that a company has met all the requirements from these organizations, the internal cash value growth of a COLI policy continues tax deferred and the death benefits when paid are 100% income tax free (per section 101j), just like personally owned policies.

As a corporation can have a life time that is longer than that of a human and the ownership thereof is transferred to others over time (sale, gift, etc), there are often multi-decade capital needs that COLI helps offset, especially in organizations that must repurchase shares from existing shareholders.  The classic example is an ESOP repurchasing ownership from retiring or dying members.  Life Insurance is by far the most effective way to fund this as it allows the repurchase to be done for pennies on the dollar, thus allowing more capital to be deployed elsewhere and accelerate the growth of the organization.

Furthermore, if cash value policies are used they can further leverage the value of the company in that the internal growth of the cash value will exceed cash equivalents while maintaining liquidity.  The fact that the cash grows on a non-taxed basis enhances this value, especially in the current extremely depressed interest rate environment.  Four percent tax free blows away 1-2% taxable over a several decade period, directly contributing to the corporate bottom line and hence value.

 This discussion is ignoring the fact that key individuals to the corporation directly positively impact the organization and as such have intrinsic value that needs to be protected.  There is no question that insuring a key machine makes economic sense, and there should logically be little dispute about applying the same financial concept to the people that make the money for the company.  This concept of “key person coverage” will be explored at another point.

To boil it all down: life insurance, when used properly, is a great corporate asset that will create tremendous value for employees and owners, ultimately creating more jobs and tax revenue in the community.  It is a tool that in the right places makes great sense.