Company-owned life insurance is a balance-sheet asset, and in a business sale it follows the deal structure: in a stock sale the policies generally go with the entity unless they are specifically excluded, while in an asset sale they stay with the seller unless the purchase agreement expressly transfers them. Decide that deliberately in the letter of intent, not in a schedule nobody reads at closing.
COLI shows up in privately held companies for four reasons: key person protection, buy-sell funding, informal funding of deferred compensation, and, occasionally, as a tax-advantaged place to park surplus cash. Each purpose has a different answer after the sale. Key person coverage on a founder who is exiting has no remaining use. Deferred comp funding, by contrast, may need to stay matched to a liability the buyer is assuming.
This page covers the deal mechanics, the two tax provisions that most often surprise sellers, and every option for the policies once the transaction is done. Pine Lake Life Solutions offers a free policy review; it is not a law firm or accounting firm and does not provide legal, tax, or investment advice. COLI in an M&A context needs your own transaction counsel.
In This Article
Stock Sale vs. Asset Sale: Where the Policies Land
In a stock sale, the buyer acquires the legal entity, and everything the entity owns – including insurance contracts – comes along by operation of law. If the seller wants to keep a policy on their own life, it must be distributed or sold out of the company before closing, and that pre-closing transfer has its own tax consequences.
In an asset sale, only the assets listed in the purchase agreement transfer. Insurance policies are frequently omitted from the schedules entirely – sometimes intentionally, more often because nobody thought about them. The seller entity retains them, which is fine if that was the plan and awkward if the seller entity is about to be dissolved. See what happens when the company is dissolving.
A third pattern deserves mention: the buyer wants the deferred compensation liability but not the funding asset, or vice versa. Splitting those apart leaves an unfunded promise on one side and a purposeless asset on the other. Match them deliberately.
IRC Section 101(j) Follows the Policy
The Pension Protection Act of 2006 added Section 101(j), which makes death benefits on employer-owned life insurance issued after August 17, 2006 taxable to the employer above premiums paid, unless written notice and consent were obtained from the insured before issue and a statutory exception applies. Employers report these contracts annually on Form 8925.
In diligence, a buyer’s tax adviser should ask for the notice and consent files. If they do not exist, the buyer is acquiring a policy whose death benefit may be largely taxable – which changes its value materially. Sellers who cannot produce the documentation should expect a price adjustment or an exclusion of the policy from the deal.
Policies issued before August 17, 2006 are generally grandfathered from 101(j), though a material change to the contract can pull them in. Given that a large share of COLI in closely held businesses predates 2006, this grandfather question is worth resolving early with your CPA as of 2026.
The Transfer-for-Value Rule in a Deal Context
IRC Section 101(a)(2) causes a death benefit to become taxable above consideration paid plus later premiums when a policy is transferred for valuable consideration. The exceptions cover transfers to the insured, to a partner of the insured, to a partnership in which the insured is a partner, to a corporation in which the insured is a shareholder or officer, and carryover-basis transfers.
Note what this means in a sale. If the seller-founder buys their own policy out of the company before closing, that fits the transfer-to-the-insured exception cleanly. If the company sells a policy on the founder to an unrelated buyer as part of the deal, the exception does not apply and the death benefit becomes largely taxable to the new owner – which is precisely why buyers discount those policies or refuse them.
The Tax Cuts and Jobs Act of 2017 layered on reporting obligations for reportable policy sales, including information returns from acquirers and carriers. See the TCJA reporting rules and how basis is computed.
| Deal Structure | Where COLI Goes by Default | How to Change It | Watch For |
|---|---|---|---|
| Stock sale | With the entity, to the buyer | Distribute or sell out before closing | Pre-closing transfer is a taxable event |
| Asset sale | Stays with the seller entity | List policies on the transferred-assets schedule | Transfer-for-value if sold to an unrelated buyer |
| Merger | Generally with the surviving entity | Address in the merger agreement | 101(j) documentation should follow the policy |
| Founder wants personal coverage | N/A | Buy the policy at fair market value pre-closing | Fits the transfer-to-the-insured exception |
| Seller entity being dissolved | Policies must be moved or surrendered | Transfer, surrender, or evaluate a sale | Do not let contracts lapse in the wind-down |
Valuing COLI in Diligence
Three numbers matter, and they are rarely equal. Cash surrender value is what the carrier pays on surrender and what usually appears on the balance sheet. Fair market value is the tax measure for transfers, and the IRS has provided safe harbor approaches for valuing contracts in employer transactions. Secondary market value is what an institutional buyer would pay, which for an older insured with health impairments can substantially exceed both.
A seller who treats cash surrender value as “the” value can leave real money on the table, particularly on older universal life contracts where surrender value has been eroded by rising cost of insurance while the death benefit stayed level. See how cost of insurance works and fair market value.
Practical step: before signing an LOI, request current in-force illustrations for every corporate policy, projected to age 95, plus a statement showing loans and surrender charges. Those documents drive every subsequent conversation.
Every Option After the Sale, Compared
Transfer to the buyer with the entity. Sensible when the buyer is assuming the deferred compensation liability the policies informally fund.
Distribute or sell to the insured before closing. The cleanest tax path for a founder who wants to keep personal coverage; fits the transfer-to-the-insured exception.
Keep in the seller entity. Only workable if that entity will continue to exist and pay premiums.
Reduced paid-up or extended term. Ends premiums while preserving some guaranteed benefit on whole life contracts. See extended term.
1035 exchange. Tax-free repositioning of cash value into a contract that fits the post-sale plan.
Surrender. Cash surrender value only, with gain above basis taxed as ordinary income.
Life settlement. A lump sum, generally 10% to 35% of face value and roughly 4 to 8 times surrender value per the federal GAO’s market study (GAO-10-775), for policies of roughly $100,000 or more with a cooperating insured typically 65 or older.
When Not to Sell the Policies
Three clear cases. First, when the policies informally fund a nonqualified deferred compensation plan that survives the transaction. Selling the asset while the liability continues leaves someone holding an unfunded promise – see deferred comp funding.
Second, when the founder personally wants to keep coverage. Buying the policy out of the company at fair market value preserves decades of favorable underwriting that cannot be replicated at 68. Replacement coverage, if available at all, will cost multiples of the current premium.
Third, when the insured is under 65 and in good health, or the face amount is modest. Secondary market pricing keys off life expectancy underwriting, and small or healthy-life policies typically draw weak offers or none. Final expense contracts are essentially never large enough to interest a buyer.
A market check makes sense when a policy insures someone with no remaining connection to the business, when premiums are escalating on an aging universal life contract, or when the alternative is surrender for a thin cash value.
A Pre-Closing Checklist and Disclosures
Sixty days before closing, do this: list every policy with owner, insured, beneficiary, face amount, cash surrender value, loan balance, and annual premium. Pull the 101(j) notice and consent file for each post-2006 contract. Request in-force illustrations to age 95. Identify which policies fund which liabilities. Decide with counsel which transfer before closing and which travel with the entity, and put that decision in the purchase agreement rather than a side letter.
If any policy’s market value is an open question, a free policy review starts with the cover page – carrier, policy number, face amount, issue date – plus the insured’s willingness to sign a HIPAA authorization. No cost, no obligation. Call (305) 209-7183.
Pine Lake Life Solutions provides educational information and free policy reviews only. It is not affiliated with any carrier, is not a law or accounting firm, and does not provide legal, tax, or investment advice. Sections 101(j) and 101(a)(2), grandfathering, and valuation safe harbors are technical; confirm each with your own advisers as of 2026.
Frequently Asked Questions
Do company-owned life insurance policies transfer automatically when I sell my business?
In a stock sale they generally travel with the entity unless specifically excluded, because the buyer acquires the company that owns them. In an asset sale they remain with the seller unless the purchase agreement lists them among transferred assets. Address this explicitly in the letter of intent rather than at closing.
Can I keep the policy on my own life after selling the company?
Usually yes, by purchasing or receiving it from the company before closing. A transfer to the insured is a statutory exception to the transfer-for-value rule, so the death benefit generally remains income-tax-free. Expect the transfer itself to be measured at fair market value, not cash surrender value.
What is IRC Section 101(j) and why do buyers ask about it?
It makes death benefits on employer-owned policies issued after August 17, 2006 taxable to the employer above premiums paid unless written notice and consent were obtained before issue and an exception applies, with annual reporting on Form 8925. A buyer without that documentation may be acquiring a policy whose payout is largely taxable. Locate the files early in diligence.
Why would the buyer discount the policies?
Two reasons: missing 101(j) notice and consent documentation, and the transfer-for-value rule, which can strip tax-free treatment when a policy moves to an unrelated party. Both reduce the economic value of the death benefit. Sellers who anticipate these questions negotiate from a better position.
What is the policy actually worth?
There are three different numbers – cash surrender value on the balance sheet, fair market value for tax transfer purposes, and secondary market value from institutional buyers. On older universal life contracts with an impaired insured, the third can exceed the first substantially. Get all three before deciding.
What if the policies fund a deferred compensation plan?
Then the asset should generally stay matched to the liability. If the buyer assumes the deferred compensation obligation, the funding policies typically should go with it, and if the seller retains the obligation the policies should stay. Splitting them leaves an unfunded promise on one side of the deal.
How do I find out whether a policy has secondary market value?
Send the policy cover page showing carrier, policy number, face amount, and issue date for a free review, and confirm the insured will sign a HIPAA authorization. There is no cost and no obligation. If the policy is not a realistic candidate, you will be told that directly.
Find out what your policy is worth — free, confidential, no obligation.
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Related Reading
- Sell Coli Policy Company Dissolving
- Tcja Life Settlement Tax Rules Explained
- Life Settlement Tax Basis Explained
- What Is Cost Of Insurance
- What Is Policy Fair Market Value
- What Is Extended Term Insurance
- Deferred Comp Policy Funding
- Can I Sell A Policy Owned By A Business
- Key Person Policy Executive Retired
- Buy Sell Funding Partner Bought Out
Pine Lake Life Solutions does not purchase life insurance policies and does not provide legal, tax, or investment advice. Information provided is for educational purposes only. Eligibility for any option, including life settlements, is not guaranteed and depends on individual circumstances, policy terms, underwriting, and market conditions. Consult independent legal, tax, or financial professionals before making decisions regarding a life insurance policy.