COLI Policy Loans and Cash Flow
Business owners that engage in borrowing from company owned life insurance for cash flow purposes, can face a few challenges:
Loan Premiums – Any COLI loans can be used to actually pay the premiums on the COLI policy, however the interest on those loans is not deductible. Although loan interest was once a tax benefit, it is simply disallowed as of 2003.
Cash Flow Need – If a business is struggling and determines borrowing COLI money is a way to help cash flow problems, this can be a losing situation for any business. Often COLI policies come with restrictions on what loans can be utilized for—cash flow being one of those restrictions on some, but not all, policies.
Payback – When cash flow is low, taking loans from a viable growth source can place a hardship at payback time—if loan payments are not timely, the policy may lapse.
Funding – Often, business will borrow against COLI policies to fund employment plan benefits and while the payments to these various employee benefit plans may be tax deductible, again the loan interest is not.