Process

• The process involved in lowering future corporate taxes or recovering some of the money paid out in taxes by a corporation involves buying a whole life insurance policy. Whole life insurance provides guaranteed death benefits and cash values. These guarantees allow a corporation to know, in advance, how much money it stands to recover in the future. The insurance policy is taken out on the life of corporate executives, with the corporation named as the beneficiary of the policy.
  
  

Significance

• The life insurance policy's cash value may be used for business expenses during the life of the executive. Upon the executive's death, however, the death benefit is paid to the corporation. The corporation can calculate the expected future taxes it will pay over the life of the executive and then structure the death benefit of the policy so that all taxes are recovered when the executive dies.
  
  

Benefit

• Current costs associated with running the corporation are recovered over time. The corporation is able to be run more efficiently when compared to paying taxes without a tax recovery strategy. Because the cash value of the policy may be used during the executive's lifetime, the corporation loses little or nothing in terms of liquidity. Life insurance companies often provide special policies for corporate-owned life insurance, or COLI, which build high cash value in the early years of the policy. This allows the business to set money aside without losing access to its funds.
  
  

Considerations

• A corporation needs to know that the IRS rules for COLI have changed over time. When borrowing from COLI policies, interest deductions are limited. Also, the once-common practice of buying life insurance on rank-and-file employees is limited. A corporation can't buy life insurance on rank-and-file employees without the employees' consent anymore.