Employer owned life insurance (EOLI) can be a boon for your business if you purchase policies on your key management employees. Why? Because if one of your essential employees dies, you can use the death benefit proceeds from your EOLI policy to keep your business operational. Use this “”financial cushion”” to hire a replacement, offer incentive packages so as to entice hard-to-get talent to come and work for you, and fund benefits packages for your employees. Employer owned life insurance is also know as corporate owned life insurance for larger companies.
The basics of EOLI
With employer owned life insurance, the employer takes out life insurance policies on key employees. The employer holds the policies and pays the premiums on them. If an EOLI-covered employee dies, the employer collects the death benefits. This differs from traditional life insurance policies, whereby the insured is usually the policyholder, pays his/her own premiums, and designates a beneficiary to receive the death benefits should he or she die.
The benefits of EOLI
There’s really no drawback to taking out employer owned life insurance on your employees. This is in essence money that’s yours to use for your business operations as you see fit. With it, you can:
You own your business, to be sure, but you probably don’t run it alone. What would happen to your business if you lost your CFO, top sales manager, etc., tomorrow? In addition to the obvious emotional ramifications, such a loss could also have a devastating impact on your business operations. The death benefits you receive from your employee’s EOLI will soften the financial impact of that loss. It can also provide you the money necessary to attract a qualified replacement quickly, so that you’re back to business as usual as soon as possible.
Because most employer owned life insurance payouts are tax free, they give you “”free”” money to improve your business operations and make life better for your employees. One of the most important things you can do with EOLI proceeds is to provide benefits for your employees, such as retirement benefits.
Note: Make sure you get your EOLI benefits tax free
Death benefits from an employer owned life insurance (EOLI) policy were traditionally tax-free, but the Pension Protection Act of 2006 has put some restrictions on that. Now, death benefits received by the policyholder (employer) are tax-free only to the amount equal to the premiums paid unless you follow some pretty strict guidelines.
How do you get your EOLI policy payouts completely tax-free?
EOLI policy payouts will remain tax free if you follow some basic rules. You must tell the employee to be covered that you’ll be taking employer owned life insurance out on him or her, and what the maximum value of the coverage is. You must also tell the employee that the company will be the beneficiary of that policy.
The employee must also be a “”key”” employee, invaluable to business operations, and must have been in that role for 12 months prior to death.
In addition, stricter recordkeeping rules require you to keep detailed records and report annually to the government, filing form 8925 with the IRS.
What happens if you forget to follow these rules?
Unfortunately, there’s no provision if you forget to follow these guidelines. You can’t “”fix”” things retroactively once the policy is in force so that you’re in compliance with the new rules. It’s still not a complete disaster, in that you’ll still get the benefits, but they’ll be taxable for any monies less the premiums you’ve paid in for that policy. Why risk losing that money when it should be yours to keep? With a little careful attention, you can avoid having to pay taxes on employer owned life insurance benefits.