If your former employer owns the policy, you cannot sell it, cash it in, or change its beneficiary — the owner can, and you are only the insured. Your first move is to write to the company and ask three questions: does the policy still exist, is the company still paying premiums, and will it sell or transfer the policy to you. Everything else follows from those answers, and the last one is where the real opportunity sits.
This is the single most common misunderstanding in the corporate-owned life insurance space, and it cuts both ways. Retirees are told they “have a policy” and assume it is theirs; companies discover a decades-old block of policies on people who left in 1998 and assume they can simply sell them. Neither assumption survives contact with the documents.
The distinction that governs everything is owner versus insured. The owner holds every contractual right: to surrender, to borrow, to name beneficiaries, to assign, to sell. The insured holds none of them. If the declarations page names the company as owner and beneficiary, the retiree’s practical options are to negotiate a transfer, to confirm whether a separate promise exists in a deferred compensation or split-dollar agreement, or to do nothing. See what changes when the owner and the insured are different people.
In This Article
First, Establish What Kind of Policy This Is
Corporate-owned life insurance shows up in several distinct forms and the label matters.
Key person coverage insures an executive whose death would damage the business. The company owns it, pays it, and collects. When the executive retires, the business reason evaporates but the policy often keeps running because nobody reviewed it.
Deferred compensation funding. The company promised the executive a stream of payments in retirement and bought a policy to informally fund the promise. Critically, the policy is a general asset of the employer and reachable by its creditors — even inside a rabbi trust. The executive is an unsecured creditor of the company, not an owner of the policy. See how deferred compensation policy funding works.
Split-dollar. Two parties share premium cost, cash value, and death benefit under a written agreement. There is usually a defined exit, or should be. Split-dollar arrangements entered after September 17, 2003 fall under the economic benefit or loan regimes of Treasury Regulations sections 1.61-22 and 1.7872-15, and unwinding one badly creates a tax event. Read unwinding a split-dollar arrangement before touching it.
Broad-based COLI or BOLI. Large blocks of policies on many employees, historically used by banks and large corporates to offset benefit costs. Bank-owned life insurance is its own world with its own regulatory guidance; see bank-owned life insurance basics.
Buy-sell funding. Policies backing a shareholder agreement. Once the shareholder is bought out or retires, the funding purpose is gone.
The Section 101(j) Rule Every Company Should Check Before It Does Anything
This is the fact that most often changes the economics of a legacy COLI block, and many controllers have never heard of it.
The Pension Protection Act of 2006 added Internal Revenue Code section 101(j), effective for employer-owned life insurance contracts issued after August 17, 2006. Under it, the death benefit on an employer-owned contract is excluded from the employer’s income only up to the premiums paid — meaning the gain is taxable — unless the notice-and-consent requirements were satisfied before the contract was issued and the insured fits one of the statutory categories, such as a director, a highly compensated employee, or an employee who was employed within twelve months of death. Notice and consent must be in writing, and consent cannot be obtained retroactively.
Section 101(j) also requires annual reporting on IRS Form 8925 with the employer’s return, showing the number of employees insured and confirmation that the consent requirements were met. A company sitting on post-2006 policies with no consent documentation is potentially holding an asset whose death benefit is largely taxable. That materially changes whether keeping the policy makes sense — and it is exactly the kind of finding that prompts a company to consider a sale of the contract instead.
Note the related rule: under Internal Revenue Code section 264(a)(1), no deduction is allowed for premiums on a policy where the taxpayer is directly or indirectly a beneficiary. COLI premiums are not deductible. A company carrying policies on retirees is spending after-tax dollars on an asset it may no longer need.
What the Retiree Can Actually Do
Ask the company to transfer the policy to you. This is the most valuable step and it is rarely taken. Many companies will transfer or sell a legacy policy on a former employee for a nominal amount or for the cash surrender value, because they no longer want the premium obligation and the administrative burden. Once you own it, every option opens up. Put the request in writing to the CFO or controller, not to human resources.
Ask whether a promise exists that is separate from the policy. If you signed a deferred compensation agreement, a supplemental executive retirement plan, or an endorsement split-dollar agreement, your rights come from that document, not from the insurance contract. Find it.
Ask for confirmation of your consent form. If the policy was issued after August 17, 2006 and you never signed a notice and consent, that is a fact the company will want to know and one that is relevant to what happens next.
Do nothing. A legitimate answer. A policy you neither own nor pay for costs you nothing.
One thing you cannot do is take the policy by demand. Insurable interest was established at issue, and the company’s ownership is lawful. If the relationship has soured, an employment attorney is the right professional — not an insurance agent.
| Question | Retiree (insured only) | Company (owner) |
|---|---|---|
| Can surrender the policy | No | Yes; gain over premiums is ordinary income |
| Can change the beneficiary | No | Yes |
| Can borrow against cash value | No | Yes |
| Can sell it in the secondary market | No | Yes; reportable policy sale under IRC 101(a)(3) |
| Can stop premiums | No | Yes; consider reduced paid-up |
| Can acquire ownership | Only by negotiated transfer or purchase | Can transfer; IRC 101(a)(2)(B) exception applies |
| Has a claim if a promise was made | Yes, under the deferred comp or split-dollar agreement | Owes under that agreement, not the policy |
What the Company Can Do, Ranked
If you are the CFO, controller, or owner deciding what to do with policies on people who retired years ago, these are the realistic paths.
Keep paying. Correct when the policy still funds a live obligation — an unpaid deferred compensation balance, a buy-sell commitment, a promise to a surviving spouse. Verify the obligation before assuming it is gone.
Surrender for cash value. Immediate, simple, and taxable to the extent proceeds exceed the aggregate premiums paid, reported as ordinary income. It is also usually the lowest-value exit for an older insured, because surrender value ignores mortality entirely.
Reduced paid-up. Elect the nonforfeiture option and stop premiums while retaining a smaller death benefit. A quiet, low-effort way to end the cash drain without giving up the asset.
1035 exchange. A tax-free exchange under Internal Revenue Code section 1035 into a better-performing contract, with basis carrying over. Sensible when the block is underperforming and the obligation is still live.
Transfer or sell to the insured. Often the cleanest and most humane outcome. Note that a transfer to the insured is an explicit exception to the transfer-for-value rule under Internal Revenue Code section 101(a)(2)(B), so the death benefit stays income-tax-free in the insured’s hands. Do not skip a written valuation.
Sell the policy in the secondary market. Realistic for policies with roughly $100,000 or more of death benefit on insureds who are older or health-impaired. A sale by a corporate owner is a reportable policy sale under Internal Revenue Code section 101(a)(3), added by the Tax Cuts and Jobs Act of 2017, which triggers information reporting under section 6050Y on Forms 1099-LS and 1099-SB. See selling a policy owned by a business.
When Selling Is the Wrong Answer
When the policy still funds a promise. If the company owes a retiree a deferred compensation stream and this policy is the informal funding, selling it converts a matched asset into cash that will be spent on something else. That is how unfunded liabilities become crises a decade later.
When the insured never consented and the transaction would surface it. Selling a policy on a living former employee without their knowledge is legally permissible in most circumstances but is a reputational and litigation risk of its own. The “dead peasant” cases of the early 2000s were about exactly this dynamic. Talk to the insured first. Often they are glad to cooperate and would rather the policy be sold than surrendered for a fraction of its value.
When the block is small-face. A broad-based block of $25,000 and $50,000 certificates has essentially no secondary market. Surrender or reduced paid-up is the realistic exit.
When the company is in or near bankruptcy. Policy dispositions in the run-up to a filing draw scrutiny as potential preferential or fraudulent transfers. Involve bankruptcy counsel first, not after.
When the insured wants the policy and will pay for it. A sale to the insured is usually better for everyone than a sale to a stranger: it avoids the reportable policy sale reporting regime, preserves the section 101(a)(2)(B) exception, and produces goodwill instead of a lawsuit.
The Documents That Settle Every Question
Six items resolve almost any corporate-owned policy question. The policy declarations page showing owner, insured, beneficiary, face amount, and issue date. The most recent annual statement showing cash value and any loans. A current in-force illustration run to maturity at current charges and at guaranteed charges. The notice and consent form signed by the insured, if the contract was issued after August 17, 2006. Any deferred compensation, split-dollar, or buy-sell agreement referencing the policy. And the company’s Form 8925 filings, if any.
The in-force illustration is the one people skip and the one that matters most. It shows whether the policy will actually stay in force to the insured’s maturity age at current cost of insurance charges, or whether it is quietly running out of gas in the insured’s late eighties. A policy projected to lapse before life expectancy is worth far less to a buyer and far less to the company than the face amount suggests.
If you are a retiree who has been told a former employer holds a policy on you, or a company reviewing a legacy block, Pine Lake Life Solutions provides a free, no-obligation review of what a policy is realistically worth. Send the declarations page or call (305) 209-7183. This page is educational only and is not legal, tax, or accounting advice — section 101(j), split-dollar, and transfer-for-value questions all belong with your own tax counsel.
Frequently Asked Questions
My old employer has a policy on my life. Can I sell it?
Not while the company owns it. Every contractual right belongs to the policy owner, and the insured has none. The productive move is to write to the company’s CFO or controller and ask whether it will transfer or sell the policy to you. Many will, because they no longer want the premium obligation.
Is it legal for a company to insure a former employee?
Generally yes. Insurable interest is tested when the policy is issued, not later, so a policy properly issued while you were employed remains valid after you leave. What changed in 2006 is the tax treatment: section 101(j) conditions the employer’s income exclusion on written notice and consent obtained before issuance.
What is IRS Form 8925 and why does it matter?
It is the annual information return an employer files with its tax return reporting employer-owned life insurance contracts, including the number of employees insured and confirmation that the section 101(j) notice and consent requirements were met. Missing filings and missing consents are a signal that the block deserves a full review.
The company wants to transfer the policy to me. Is that taxable?
There are two questions: whether the transfer itself creates income or compensation to you, and whether the death benefit stays tax-free later. On the second, a transfer to the insured is an express exception to the transfer-for-value rule under section 101(a)(2)(B). On the first, get your own CPA involved before signing.
Does my deferred compensation depend on the policy staying in force?
Legally, usually not. In a typical arrangement the company owes you under the deferred compensation agreement and merely uses the policy as informal funding; the policy is a general corporate asset reachable by creditors. Practically, if the policy goes away the funding goes away, which is worth knowing about.
Can the company sell the policy without telling me?
In many circumstances yes, since the company holds all ownership rights. Whether it should is a different question. A sale is a reportable policy sale under section 101(a)(3), triggering information reporting, and providers will require medical records that in practice cannot be gathered without the insured’s cooperation.
What should a company send for a review of a legacy COLI block?
The declarations pages, current annual statements, and an in-force illustration for each policy run at both current and guaranteed charges, plus any notice and consent forms. The in-force illustration is the item that most often changes the conclusion, because it shows whether the contract will actually survive to maturity.
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Related Reading
- Can I Sell A Policy Owned By A Business
- Business Sold Coli Policies
- Sell Coli Policy Company Dissolving
- Key Person Policy Executive Retired
- Bank Owned Life Insurance Basics
- Deferred Comp Policy Funding
- Split Dollar Unwind
- Policy Owner Vs Insured Different
- Can I Sell A Key Man Life Insurance Policy
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.