Prior to September 11, 2001, the airline industry went into a deep recession and many airlines were struggling. Cash flow was king and retaining key executives was paramount. This company implemented a nonqualified voluntary deferral plan to rectify the low government limits placed on 401k annual contributions. The participation was good as executives desired to save as much as possible on a pre-tax basis above the 401k limits. This company reviewed various financing alternatives for their nonqualified plan liabilities and turned to Corporate Owned Life Insurance (COLI) as a preferred solution from a tax advantage standpoint as well as a self-completion standpoint.
A year into this plan, one of their key executives, who was only 35 years old, passed away of cancer. A claim was paid on the COLI policy owned by the company. The tax-free income received as part of the key man life insurance policy helped finance the benefit liability owed to the deceased executive’s family and provided a meaningful amount of cash that the company put back in the operations.
During those lean months, airlines carried two weeks of capital on their balance sheet. This cash from informally financing their nonqualified plan liabilities with Corporate Owned Life Insurance was crucial for this company to make it through another month of operations in this trouble time.
While many corporations (over 50% according to a recent survey) utilize Corporate Owned Life Insurance to finance nonqualified plan liabilities, few do it strictly for the death benefits payable to the corporation. When these benefits are received by the corporation, it is typically welcomed cash flow that can be used to subsidize operations or to fill the void in many of their unfunded benefit liabilities.
For more information on how bank or corporate or bank owned life insurance (COLI / BOLI) can help your business, please contact a consultant at Executive Benefits Network.