Unlocking Smarter Funding: How COLI Supercharges NQDC Plans Without Breaking the Bank
- Anatoly Iofe
- Jun 23
- 3 min read
Let’s face it—retaining top talent isn’t getting any easier. Equity’s diluted. Bonuses are taxed to death. And if your 401(k) fails discrimination testing, good luck trying to keep your best people from walking out the door.
So what’s the move?
Nonqualified Deferred Compensation (NQDC) plans have become a go-to solution for smart companies looking to reward key employees beyond the limits of traditional retirement plans. But there’s one question that always follows:
“How do we fund this without tying up a ton of cash—or wrecking the balance sheet?”
That’s where Corporate-Owned Life Insurance (COLI) comes in. And no, this isn’t some old-school, boring insurance play. It’s a sophisticated strategy used by over 60% of companies with NQDC plans—and for good reason.
First, a Quick Recap: What’s an NQDC Plan?
In plain English, an NQDC plan lets select executives defer income today and receive it later—usually at retirement or separation. No IRS limits, no immediate tax hit, and complete flexibility for the employer.
It’s a powerful carrot. But since it’s nonqualified, the money stays on the company’s books—meaning the employer needs a smart way to set aside assets to match those future promises.
So Why COLI?
Corporate-Owned Life Insurance is exactly what it sounds like. The company takes out a life insurance policy on a key employee, owns it, pays the premiums, and is the beneficiary.
But here’s the kicker: the cash value inside the policy grows tax-deferred, and the death benefit is typically received tax-free.
Here’s what that looks like in practice:
Company funds the policy using after-tax dollars.
Cash value inside the policy grows over time—no taxes along the way.
If structured right, that cash value can be tapped via policy loans to fund deferred comp payouts.
If the employee passes away, the company receives a tax-free death benefit.
Think of it as a Swiss Army knife for executive benefits: tax-smart, efficient, and surprisingly flexible.
Four Big Wins of Using COLI to Fund NQDC Plans
1. Tax-Deferred Growth
You’re not paying taxes on gains each year like you would in a taxable investment account. That means more compounding—and more value to match your liabilities.
2. Tax-Free Death Benefit
If something happens to a key executive, the company receives a tax-free payout. That money can be used to offset the cost of replacing talent or fulfilling deferred comp promises.
3. Balance Sheet Friendly
Unlike traditional investments, COLI doesn’t swing wildly with the markets. Many policies offer stable, fixed-crediting options or modest market exposure with downside protection.
4. Retention + Risk Management in One
COLI helps you fund your NQDC plan and gives the company protection in case a key person passes unexpectedly. That's a real dual-purpose value.
“But Isn’t Life Insurance Complicated?”
Not when you have the right team.
We’re not talking about selling policies for the sake of commissions. We’re talking about custom-designed, institutionally priced COLI strategies that align with your long-term compensation goals.
Yes, there are rules—like notice and consent requirements under IRC § 101(j)—but when done right, COLI becomes one of the cleanest and most tax-efficient tools in the executive benefits toolkit.
Real Talk: What Makes This Work?
COLI-based NQDC strategies can be effective across a wide range of industries—from high-growth startups to established professional firms. Regardless of the sector, successful implementation typically depends on:
✅ Strong executive leadership that values retention
✅ Willingness to think beyond cookie-cutter benefits
✅ A trusted advisor to quarterback the design, funding, and compliance process
Final Thought: Your Talent Strategy Needs a Funding Strategy
If you’re offering a nonqualified plan but haven’t nailed down how to fund it—you’re halfway across the bridge. COLI might just be the missing piece.
Let’s chat. No pressure, no jargon—just a real conversation about how you can turn a liability into a long-term advantage. Schedule a private consultation here.
Sources of Information*:
*These organizations are not affiliated with IFG. IFG does not endorse, support, or recommend any information that is not provided by its affiliates or representatives.
Disclaimer:
Information provided is for informational purposes only, and does not constitute a financial advise, an offer or solicitation to sell, a solicitation of an offer to buy, any security or any other product or service. Accordingly, this document does not constitute investment advice or counsel or solicitation for investment in any security. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
