Why Insurers Choose ICOLI
What insurance company-owned life insurance is, how it works, and why insurers use it.
Allowable Employee Benefit Obligations
Insurance Company Owned Life Insurance (ICOLI) is a life insurance arrangement where the insurance company is both the owner and beneficiary of policies on select senior employees. It is often used to informally fund certain employee benefit obligations in a tax-efficient and capital-efficient way
Types of Employee Benefit Obligations That Can Be Used
ICOLI is typically structured to address general employee benefit costs rather than just executive deferred compensation. Common allowable obligations include:
- General employee benefits such as health, dental, vision, and other group insurance coverage
- Retirement plan funding (e.g., 401(k) matching contributions, pension plan costs)
- Severance and retention benefits for key personnel
- Other non-qualified benefit expenses that are part of the insurer’s overall benefit plan
These obligations are often aggregate costs that the insurer wants to offset without creating a taxable liability or a direct balance sheet charge.
Economic Benefits Of ICOLI
Favorable Tax Treatment
- Inside buildup
- All gains on all investments within ICOLI compound free of all tax.
- Tax-free distributions
- Death benefits are tax-free to the company (cash value + mortality component = death benefit).
- No DTL
- ICOLI inside buildup is non-operating income — no deferred tax liability.
Favorable RBC & rating-agency treatment
- NAIC risk-based capital
- Capital charge of 0% (N/A) for Life; 5% for P&C / Health companies.
- S&P, AM Best BCAR
- Market practice of purchasers is consistent with the NAIC RBC model.
- ICOLI
- Considered informal funding — offsets employee & executive benefit obligations.
Risk management
- ERM tool to insure against economic loss from premature death of a key employee.
- Economic hedge / informal funding of deferred compensation or other executive benefit programs.
- Offset funding costs of employer-sponsored health and welfare plans.
Investment earnings stabilization
- Volatility-reducing “wraps” can allow book-value accounting on assets within ICOLI that would otherwise receive mark-to-market treatment.
How It Works
COLI policies issued by highly rated carriers
Carrier 1, Carrier 2, Carrier 3, Carrier 4, and others
Client-selected asset manager
Investments held within the policy’s separate account
Expenses include
DAC · M&E · Premium tax · Broker compensation
Expense factors
Age · Tobacco & health · Gender · Size of group
Total ICOLI asset (net crediting rate)
Insurance company balance sheet
Admitted asset, immediately accretive to surplus.
RBC charge is 0% for Life, 5% for Health and P&C.
Investment earnings permanently (Stat and GAAP) tax-exempt.
Implementation Timeline
Determine budget & strategy
Typically 2–3% of net admitted assets.
Define the census
Prepped by Advisor from standard HR data (gender, DOB, citizenship, date of hire, compensation).
Complete plan optimization
Pro forma built by Advisor.
Negotiate with carriers & develop solution
No action required from client.
Summarize & present findings
Compiled and presented by Advisor.
Final approval & Board resolution
Client determination authorizing the Transaction.
Develop & distribute employee communications
Prepared by Advisor.
Complete consents via DocuSign
4–5 questions, no medical underwriting.
Paperwork submission to carriers
Minimal paperwork (10–15 pages); outstanding items resolved.
Wire premium to carriers
Capital is deployed into the IDF as scheduled.
Policy issuance & ongoing admin
Monthly performance and accounting reports shared with client.
Timelines vary by engagement. The primary drivers are the asset-manager selection process and the client’s funding schedule.
Mechanics Of ICOLI Over Time
For a pool of insured lives, cash surrender value and death benefit grow tax-free for decades. As lives pass, death benefits are paid to the company — so the in-force CSV and death benefit eventually decline while cumulative death benefit paid keeps compounding.
Accounting Treatment
Admitted asset
COLI surrender value is considered an Admitted Asset* on the balance sheet.
- Stat
- Aggregate write-ins other than invested assets (Line 25)
- GAAP
- Other asset
Change in value
Any changes in the value of the asset are recognized on the income statement.
- Stat
- Net investment income via aggregate write-ins for invested income
- GAAP
- Other income (FASB ASC 325-30)
* In accordance with SSAP No. 21 (6), “Life Insurance Policies” as defined by IRC § 7702 are considered an Admitted Asset.
STAT Statutory accounting — NAIC annual statement presentation.
| Premium Payment | Debit | Credit |
|---|---|---|
| Aggregate write-ins for other than invested assets | $185,000,000 | – |
| Cash | – | $185,000,000 |
| To record the payment of premium in cash value life insurance | ||
| Period increase / decrease in cash surrender value | Debit | Credit |
|---|---|---|
| Aggregate write-ins for other than invested assets | $12,500,000 | – |
| Aggregate write-ins for other income | – | $12,500,000 |
| To record the periodic change in cash surrender value | ||
| Receipt of death proceeds | Debit | Credit |
|---|---|---|
| Cash | $5,000,000 | – |
| Aggregate write-ins for other than invested assets | – | $3,000,000 |
| Aggregate write-ins for miscellaneous income | – | $2,000,000 |
| To record the receipt of a death benefit | ||
GAAP US GAAP presentation — FASB ASC 325-30.
| Premium Payment | Debit | Credit |
|---|---|---|
| Investment in ICOLI | $185,000,000 | – |
| Cash | – | $185,000,000 |
| To record the payment of premium in cash value life insurance | ||
| Period increase / decrease in cash surrender value | Debit | Credit |
|---|---|---|
| Investment in ICOLI | $12,500,000 | – |
| Increase / decrease on investment in COLI | – | $12,500,000 |
| To record the periodic change in cash surrender value | ||
| Receipt of death proceeds | Debit | Credit |
|---|---|---|
| Cash | $5,000,000 | – |
| Other asset – life insurance | – | $3,000,000 |
| Miscellaneous income – non-taxable | – | $2,000,000 |
| To record the receipt of a death benefit | ||
Consent Process
NAIC Regulatory Affirmation
The accounting and capital treatment of ICOLI has been reviewed and reaffirmed by the NAIC. The citations below trace that treatment back to source.
Admitted asset status
The NAIC’s own reasoning for admitted-asset status treats an insurer-owned policy’s cash value like a cash deposit realizable on demand — admitted net of any outstanding policy loans and surrender charges.
Source: NAIC Statutory Issue Paper No. 87 — Other Admitted Assets, underlying SSAP No. 21R
Risk-based capital charge
The Life RBC formula assigns a static 0% C-1 asset charge to policy cash value for life and health insurers (5% for P&C) — with no look-through to the underlying investment allocation inside the policy.
Source: NAIC Life Risk-Based Capital formula (Life/Fraternal RBC Instructions)
Federal legitimacy layer
Beyond NAIC accounting and capital treatment, the practice sits on a federal statutory foundation. The Pension Protection Act of 2006 codified “COLI Best Practices” in Internal Revenue Code Section 101(j) — governing insurable interest, notice-and-consent, and highest-compensated-employee eligibility limits.
Source: Pension Protection Act of 2006; Internal Revenue Code §101(j)
ICOLI adoption has grown steadily rather than emerging as a fringe strategy — industry data shows the number of holders up roughly 58% and aggregate ICOLI cash surrender value up roughly 32% since 2012.
Citations
- NAIC Statutory Issue Paper No. 87 — Other Admitted Assets content.naic.org
- NAIC SSAP No. 21R — Other Admitted Assets (AP&P Manual)
- NAIC Life Risk-Based Capital formula, Life/Fraternal RBC Instructions
- Pension Protection Act of 2006; IRC §101(j) — COLI Best Practices