Corporate owned life insurance is a new and emerging policy type. For example, with a bank owned life insurance plan, the financial firm acts as the policy owner and beneficiary. Employees are included in the latter. Generally, workplace-provided plans, regardless of who owns or underwrites them, are advantageous for consumers.
Not only do they get free (employer-paid) life insurance protection, but these policies also offer a large amount of coverage. Equally as important, the beneficiaries (i.e. the deceased’s family) don’t pay any taxes on the proceeds. Yet not many people understand how life insurance works, let alone corporate owned plans. After all, it is uncomfortable to think about death and difficult to get excited about payouts that you will never receive.
For that very reason, corporate owned life insurance could become popular and widely offered by employers. Policyholders enjoy living benefits, such as access to the funds during an emergency. Moreover, you can utilize corporate owned life insurance plans even if you leave your job. In fact, there are several other notable advantages that these policies have over traditional employer-provided coverage.
Corporate Owned Life Insurance: A Simple Concept
Life insurance companies make money when policyholders outlive their plans. Just as with any other insurer, life providers determine your premiums based on the risk that you (or your family) will submit a claim. For example, a smoker pays a higher monthly premium than a non-smoker because, in general, the former has a shorter life expectancy.
Corporate life insurance plans retain the same structure. However, instead of directly providing the insurance product, the company pays the premiums. When they accumulate and the employee outlives the plan, the firm collects the cash balance. The employer might be a partial beneficiary. In turn, businesses don’t owe taxes on the premiums, and equally as important, they keep the revenues when employees outlive the plan.
Above all else, corporate owned life insurance providers can invest, withdraw, or borrow from the policy’s cash balance. Employees and policyholders also enjoy this access. In other words, if your workplace covers you with a corporate owned life insurance plan, withdrawing or borrowing against that money might be an option.
Furthermore, your cash balance may grow over time. For example, when a company invests its employees’ insurance funds, they are entitled to the profits. The beneficiaries may allow it to accumulate and therefore grow the death payout. Alternatively, they could take out a loan from their cash balance, including the investment revenues.
An Elite Product?
Instead of covering all of their employees, some companies prefer to only purchase a corporate owned life insurance policy for their executives and leaders. As a result, many people mistakingly believe that these policies aren’t available to the entire workplace. Yet the reality is that this type of insurance product is becoming more popular amongst companies and workers alike. Moreover, corporations’ potential benefits and tax deductions increase when they cover a larger number of employees.
Bank Owned Life Insurance: In Demand
Bank owned policies are arguably the most widely growing form of corporate life insurance. Between 2014 and 2018, for instance, companies and employees obtained hundreds of dollars in additional bank owned life insurance coverage.
Life Insurance: There for Life
One of the main downsides to employer-provided coverage is that it expires when you leave your workplace. This is even more concerning for seniors and retirees. To clarify, your life insurance premiums become more expensive with age because providers take on more risk. Just as importantly, employer-based plans only have a 30-day grace period. After that, you have to obtain coverage privately or through a new job. Corporate owned life insurance policies also expire, but employees retain the benefits for one full year.
For example, if a banker retired or changed companies in March 2019, they may borrow money from their bank owned life insurance balance until the same month in 2020. Moreover, the policy would payout the full death benefit if the banker died during that period. This is important because corporate and bank owned plans give retirees time to find a suitable and affordable alternative. Otherwise, their policies are more likely to lapse in the future due to nonpayment.
At this point, elderly consumers may incur more in premiums for even less coverage. Similarly, employees who leave the workforce as a result of a disability will have access to the cash balance for 12 months in case of an emergency. In an urgent situation, consumers don’t have time to fill out application forms and wait for the bank to approve a loan request.
A Bad Rep
When corporate owned life insurance first entered the market, it became widely abused. Some companies covered their employees without paying their family the death benefit. In fact, some workers didn’t even know that they had a policy because their workplace is listed as the beneficiary. Corporations only purchased life insurance to take advantage of the tax loopholes. Employers also retained the premiums’ cash value and maximized their profits.
Yet in the 1990s, the federal government prohibited some of these practices. Subsequently, firms had to pay millions to the families of former employees that passed away during the early 2000s. In 2006, the IRS further restricted the tax loopholes that workplaces can utilize.
In short, while firms previously abused corporate owned life insurance plans, increased regulation and awareness made these policies secure and genuine.
Protected and Insured
The proceeds from all policy types are tax-free, but corporate and bank owned life insurance plans enjoy certain advantages. Firstly, policy holders attain living benefits, such as access to the accumulated premiums. Secondly, plans last longer when you leave the workplace. Thirdly, investments will allow your proceeds/death benefits to increase.
If you haven’t heard of corporate or bank owned life insurance, you almost certainly will in the future. For a start, you might get cash while you’re alive, instead of after.
