Also known as COLI, company possessed life insurance coverage is more than seldom, a demand from one business partner to another, to protect the business if one of the partners dies. The proceeds from the COLI policy can help pay off debts, or can be used as a way to grow or expand a business, as well as making the working capital of a business flush. Because COLI policies are an investment venue, while they grow in strength, the business can choose tax deferments or tax-free growth as an option.
The cash surrender values for COLI polices aren’t taxed, if used when they become available. Other times, business owners may choose to borrow from company owned life insurance coverage for cashflow purposes-they need to keep the business afloat. Recently, some statutory laws and regulations have been changed on what goes on if financing is taken from these insurance policies. Loan Premiums – Any COLI loans can be used to pay the premiums on the COLI policy actually, however the interest on those loans is not deductible.
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Cash Flow Need – If a business is battling and determines borrowing COLI money is ways to help cash-flow problems, this is often a losing situation for any business. Often COLI policies come with restrictions on what loans can be utilized for-cash flow being one particular restrictions on some, but not all, policies.
Payback – When cash flow is low, taking loans from a viable development source can place a hardship at payback time-if loan obligations are not well-timed, the plan may lapse. Funding – Often, the business will borrow on COLI policies to invest in employment plan benefits and while the obligations to these various employee benefit plans may be taxes deductible, again the loan interest is not. Although it is possible to make use of borrowing against the company possessed life insurance cash flow needs might not be the only concern a business faces.
Experts warn business owners to perform homework on any insurance company offering a COLI policy. When there is a downturn in the economy and the insurance provider suffers, any tax and growth benefits may be lost. Before an ongoing company considers borrowing against company owned life insurance coverage for cash flow needs, a more prudent idea would be to learn some money flow management skills. The only real advantage of borrowing from COLI policies is the capability to fund other employee benefits (non-qualified plans).
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