Steve is a partner at a multi-family housing development company. He has substantial balance sheet assets held in treasuries for reserve requirements and is looking to purchase $15 million of life insurance for buy-sell purposes.
Steve is weighing his options for the life insurance that will be used in his buy-sell agreement. He is deciding on whether to buy term life insurance or reposition a small portion of balance sheet assets into corporate-owned life insurance (COLI).
A COLI policy is commonly used to secure corporate debt, hedge costs related to the loss of employees or hold a portion of a corporation’s liquid assets in a relatively high-yield, tax-deferred accumulation instrument. With COLI, the company is the owner and beneficiary, and the policy is a company asset. It pays a benefit to the company when an insured employee dies.
COLI products have several key benefits that retail life insurance products do not offer, including low policy expenses and higher early cash values. This coupled with its tax benefits make it an attractive option for business owners.
In this case, the idea is that the company would simply “shift” assets held in low interest bearing accounts to the insurance company where they have the opportunity to achieve higher interest on the cash and insure Steve to fund the buy-sell agreement.
After comparing the term life option and the COLI option, Steve decides to purchase the COLI product. This allows the company to obtain $15 million of life insurance on the partner while retaining a tax-efficient asset once the pure insurance need expires. It also means that equivalent liquidity relative to other balance sheet assets was maintained, future taxation on repositioned assets was eliminated and long-term tax costs will exceed the cost of insurance even at suppressed rate of returns
