Corporate-Owned Life Insurance (COLI) for Construction Companies: What Owners Need to Know

Most construction owners have never heard of corporate-owned life insurance. Their CPA has. Their bonding company might ask about it eventually. And if a partner or key employee dies unexpectedly, it can be the difference between a company that survives the loss and one that doesn't.

Here's what it is, how it works, and where it fits for a construction business.

What Is Corporate-Owned Life Insurance (COLI)?

Corporate-owned life insurance is a life insurance policy that a business owns on the life of an owner, partner, or key employee, with the company as beneficiary. It's used to protect the business against the financial impact of losing someone whose knowledge, relationships, or bonding capacity the company depends on, and it can build cash value the company may be able to access over time, depending on the policy.

For construction companies specifically, COLI shows up most often in three places: funding a buy-sell agreement between partners, protecting against the loss of a key person, and supporting bonding capacity.

Why Construction Companies Use COLI

1. 01Potential yield on cash reserves. Depending on the policy design and carrier, COLI can offer a more competitive return than sitting in low-yield cash or CDs, particularly over a longer time horizon, once early policy costs are absorbed. Every policy carries mortality and expense charges that create a drag in the early years, so this is potential, not a guarantee. Illustrations should be run at both guaranteed and current crediting assumptions before treating any projected yield as something to plan around.
2. 02Access to cash value. COLI policies can be structured to build cash value the company may be able to access through loans or withdrawals, subject to the policy's terms and any surrender charges. How much access exists, and how soon, depends heavily on the policy design. Whole life and indexed universal life structures handle this differently, and neither makes cash value automatic or unlimited.
3. 03Tax treatment. Premiums are generally paid with after-tax dollars, but the death benefit is typically received income-tax-free by the company. That's a meaningful part of why COLI gets used for buy-sell and key-person planning. Your tax advisor should confirm how it applies to your specific situation before you treat it as settled.
4. 04Bonding capacity. Some, though not all, surety and bonding companies will recognize COLI cash value as a “cash equivalent” asset when evaluating a company's bonding capacity, though how cleanly that cash value can be collaterally assigned varies by policy design. If bonding capacity is a bottleneck for taking on larger projects, put this in front of your surety directly rather than assuming it applies.
5. 05Buy-sell and key-person protection. If a partner or a person the business depends on dies, COLI can provide the company with funds to buy out a deceased owner's share, replace lost expertise, or keep operations funded through a transition, so the loss doesn't also become a liquidity crisis.

Who Should Be Involved in the Decision

1. 01Your CPA. To evaluate the tax treatment and how the policy sits on the company's books.
2. 02Your bonding company. To confirm whether they'll credit COLI cash value toward bonding capacity, and under what terms.
3. 03The owners. To weigh the policy's cost and structure against what it's meant to protect: a buy-sell agreement, a key person, or both.

Is COLI Right for Your Company?

It depends on your structure, your bonding needs, and whether you already have a buy-sell agreement in place, funded or not. Like any insurance-based strategy, it comes with costs and carrier-specific terms that should be weighed against your company's specific situation before moving forward.