Unlocking potential tax-free wealth: How companies can maximize their executive benefits

Nonqualified deferred compensation (NQDC) plans are a powerful way to attract and retain key executives, but they can also create long-term financial obligations for employers. 

That’s where corporate owned life insurance (COLI) comes in. COLI can be used as a financial tool for companies to help manage executive benefit liabilities while improving long-term tax efficiency and financial flexibility.

What is corporate owned life insurance?

Corporate owned life insurance is a life insurance policy a company purchases on the lives of select executives, typically those that participate in a nonqualified deferred compensation plan. The company pays the premiums, owns the policy and is the beneficiary. While employees must consent to being insured, they don’t pay for the coverage or receive benefits from the policy. Instead, COLI functions as a corporate asset, designed to support the long term financial needs of the business.

When funding NQ plans with COLI generally a Variable Universal Life or Indexed Universal Life policy is used. These policies have a Cash Value Account with investments that mirror those of the plan participants so that plan assets are correlated with plan liabilities. The cash value inside of the insurance policies grow tax free for the plan sponsor and can be used to help pay participant distributions.

COLI as a funding vehicle for NQDC plans

COLI is commonly used to informally fund non-qualified deferred compensation plans, because employers aren’t required to fund NQDC plans in advance, but many choose to set aside assets to better align future liabilities with current planning. COLI is one option for doing just that.

When used this way, COLI can help companies:

• Grow their assets tax deferred alongside deferred compensation liabilities
• Reduce balance sheet volatility compared to traditional investments
• Provide access to cash values for future liquidity needs

By matching the tax treatment of plan assets with the tax-deferred nature of plan liabilities, COLI can help improve overall financial efficiency.

Why COLI could make sense for businesses

For companies facing rising benefit costs and increasing pressure to retain top talent, COLI offers a flexible, tax-advantaged way to help manage long-term obligations. It allows employers to hedge executive benefit liabilities, recover plan related costs over time and strengthen financial stability — all while supporting key compensation strategies.

Key takeaways

• Corporate owned life insurance is a company-owned financial tool, not an employee benefit
• COLI can be used to help fund non-qualified deferred compensation plans and other executive benefits
• Employers can use COLI to help hedge executive benefits liabilities through tax-deferred growth and generally tax-free death benefits 
• COLI can help businesses align assets with executive compensation liabilities while maintaining flexibility

Learn More About Voya’s NQDC Solutions