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Amanda Rogers

How to Retain Top Talent Using Executive Compensation

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Executive compensation is one of the most important tools that you can use to retain top talent in your organization. By providing a competitive salary and using executive benefits, like corporate-owned life insurance (COLI), you can attract and keep the best employees. 

COLI is a great way to fund employee benefit programs, like health insurance and retirement plans. In this blog post, we will discuss how executive compensation can help you retain top talent in your organization!

Employee Retention

The effects of poor employee retention and high turnover within a business are catastrophic. In fact, poor employee retention can lead to:

  • Decreased team morale
  • Reduced employee productivity
  • Expensive recruitment efforts, and
  • Time being wasted

Today, employee retention goes beyond offering company-wide happy hours and snacks in the office (those strategies will only get you so far!).

Powerful compensation programs — particularly those that include executive compensation — will set you apart in the hiring and retention game.

But how can you fund these benefits? Let’s talk about how to retain top talent using executive compensation; but first, an overview of executive comp plans.

Executive Compensation Plans: The Basics

Like a snowflake, no two compensation plans are the same. There are a variety of benefits with varying degrees of attractiveness that can be bundled together in compensation design.

(Secret’s out: It’s not all about the cash!)

Executive compensation plans typically consist of the following elements:

  • Base salary (cash compensation)
  • Short-term incentive or incentive compensation (i.e. an annual bonus)
  • Long-term incentive (deferred compensation)
  • Additional benefits and perquisites

Salary and Short-term Incentives

When it comes to executive compensation, there are two main types of benefits: salary and bonuses. Salary is the most common type of executive compensation, and it is important to offer a competitive salary in order to attract and retain top talent. Bonuses are also a great way to incentivize employees and show them that they are valued by the organization.

Long-term and Additional Benefits

COLI is a type of long-term incentive, executive compensation that can be used to fund employee benefit programs. COLI is a life insurance policy that is owned by the organization and pays out benefits to the employees in the event of their death. This type of executive compensation can be used to fund health insurance and retirement plans for employees.

Not only does executive compensation help with employee retention, but it can also be used to fund other employee benefits programs. For example, corporate-owned life insurance (COLI) can be used to provide death benefits to employees’ families or to pay for medical expenses.

Corporate-Owned Life Insurance (COLI)

Of course, corporate-owned life insurance (COLI) can play a crucial part in many deferred compensation plans for executives. Let’s discuss what this might look like and its benefits.

COLI is an asset on the employer’s balance sheet. It has a cash value component that grows faster than other safe investments, which can be used to offset the rising costs of employee benefits like health insurance and executive retirement plans. It also has a death benefit component that can allow the employer to recover all of its costs and more. The employer also has the option to share a portion of the death benefit with the insured key employee’s beneficiaries, serving as a meaningful retention tool (Golden Handcuff). 

As mentioned, the higher earnings generated by COLI can be used to offset the costs of other retention tools like employee benefit plans. These may include executive retirement arrangements funded with additional life insurance policies that can provide both an incentive-based retirement benefit to the key employee and a death benefit to his or her beneficiaries.

What is Corporate-Owned Life Insurance?

Life insurance is a contract between a policy owner and an insurer, whereby the insurer promises to pay a designated beneficiary a sum of money, called a “death benefit,” upon the passing of the insured person, in exchange for a premium, paid as a lump sum or over time. 

With corporate-owned life insurance (COLI), the insured person is a key employee. The beneficiary may be the organization, the key employee’s heirs, or a combination. Similar policies, called bank-owned life insurance (BOLI), have been used by commercial banks for nearly 40 years.

Death benefits can be used by the organization to protect against the economic loss caused by the passing of a key person. They can also be directed to the executive’s beneficiaries to reward and incentivize performance and longevity, serving as a valuable retention and family protection tool.  

COLI designs also include a substantial cash value account, which grows tax-deferred and can be accessed tax-free via policy loans and withdrawals of principal to eventually support the agreed-upon retirement benefit, generally paid out over a period of years. 

Why Corporate-Owned Life Insurance?

There are various benefits when it comes to corporate-owned life insurance. This particular investment vehicle:

  1. Is Safe: COLI policies are issued by some of the world’s strongest insurance carriers, some of which have been around for over 150 years.
  2. Is Liquid: In the event that you choose to redeploy all or a portion of your capital elsewhere, you have the ability to do so without penalty for exit with many of the policy designs.
  3. Provides Meaningful Rates of Return: These cash values of these policies are currently earning very meaningful current rates of return. In fact, they sit somewhere between 2.5-and-6.0%, depending upon the class of policy selected, with guarantees against loss and without direct market exposure.*

Moreover, given these benefits, COLI allows organizations to balance the cost of employee benefit programs while potentially enjoying higher yields than the typical “safe” investments.

Finally, one of the most attractive features of properly-designed executive compensation plans is that they’re highly customized and tailored to an individual executive or organization. The benefits from both the death benefit and cash value components can be allocated differently depending on the situation.   

A Final Word

At Acumen Insurance Solutions, we focus on ways that we can leverage tools like COLI to make your organization’s investments support executive compensation programs that inspire growth and ensure employee retention.

COLI policies are an appealing executive compensation tool because they offer a number of benefits for both employers and employees. For employers, COLI policies can help reduce turnover and attract top talent. For employees, COLI policies can provide financial security in the event of their death.

Interested in learning more about COLI? Read on in our article “Why CUOLI is the Best “Otherwise Impermissible Investment” for Your Credit Union.”

Or, contact us today to learn more.

*Disclaimer: Policy performance is based on current rates as charges, and some values are not guaranteed. These policies are not considered securities. Guarantees are based on the claims-paying ability of the underlying insurance carrier. Policies are not FDIC-insured. Pricing can be based on many factors, including the insured’s age, gender, and health. Please refer to a current policy illustration for details. Please refer to 26 U.S. Code §101(a) regarding tax-fee death benefit and 26 U.S. Code § 7702 (a) (g) regarding tax treatment of cash value. Medical and financial underwriting is required. Excessive policy withdrawals and loans may cause the policy to lapse, which will result in the loss of death benefit and adverse tax consequences. Acumen Insurance Solutions, LLC does not provide tax, legal, or investment advice, and is not FINRA registered.

Businessman on the phone sitting at the laptop in his office. Male business professional in office talking on cell phone.
The Acumen Team

Top Six Reasons Why Smart Business Owners Use Life Insurance

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Life insurance is a crucial component of maintaining and growing a successful company

Most smart business owners recognize the importance of using life insurance to protect themselves, their families, and their companies. They use life insurance as a financial tool to solve problems associated with maintaining and growing a successful company, as well as to meet retirement, succession, and estate planning goals.

Succession Planning for Business Owners

Protecting the entity and deciding when and whom to eventually transfer it to, is a critical aspect of succession planning for business owners.

The particular tools and techniques used in a business succession plan will depend on the goals and objectives of the four groups most impacted:

  • The senior generation business owner
  • The junior generation family member involved in the business
  • Key non-family employees, and
  • Family members not involved in the business

Below are the top six reasons why smart business owners use life insurance as a key component in their strategic business succession, retirement, and estate planning.

Infographic for "Why Smart Business Owners Use Life Insurance"

#1: Protect the Business at the Death of an Owner or Key Person

In many small businesses, the owner is also the key person in the company.

Key-person life insurance is purchased on the business owner’s life to protect the company if they unexpectedly die. In fact, the death of a key person in a small company without key-person insurance often results in the immediate shuttering of the company.

With key-person insurance, the company:

  1. Purchases a life insurance policy on the key employee
  2. Pays the premiums, and
  3. Is the beneficiary of the policy

If that key person unexpectedly dies, the company receives the insurance proceeds.

The Benefits of Key-Person Life Insurance

Key-person life insurance for the business owner can provide much-needed stability. If the business owner dies, the business receives the policy proceeds and can use the funds to:

  • Pay expenses while searching for and hiring a capable replacement
  • Retire debts
  • Distribute money to investors
  • Pay severances to employees
  • Explore options other than immediately going out of business, and/or
  • Buy time until the business can be closed, and the assets liquidated

In addition, many family-owned businesses depend on non-family employees for the company’s continued success.

To guard against financial loss due to the death of a key employee and to ensure that the business stays in the family, many privately-held companies acquire key-person life insurance for their key employees.

#2: Protect the Owner’s Family and Ensure the Survival of the Business

A buy-sell agreement is a legally binding contract that states that in the event of an owner’s death, disability, retirement, or separation from the company, the owner’s interest in the company must be sold back to the business or to the remaining owners at agreed-upon terms.

Buy-sell agreements are crucial for small and closely-held companies where, as in many cases, the death or disability of a business owner creates a significant financial burden on the family, the business, and the remaining owners.

A buy-sell agreement guarantees a market and a fair price for the business interests, ensures control over the business by the remaining owners, and can set the value of the business interest for estate tax purposes.

Life insurance for each owner is the best way to provide the cash necessary for the business or the surviving owners to purchase the deceased owner’s share of the business. Death benefits are typically paid as a tax-free lump sum to the entity or surviving owners.

In many instances, the cash surrender value in a permanent life insurance policy can also be accessed tax-free via policy loans and withdrawals to help pay for a lifetime purchase of a business owner’s interest, such as due to retirement or disability.

Depending on the type of buy-sell agreement, the business itself or the individual owners acquire a policy on each owner so that at death or disability, the funds needed to “buy out” the deceased owner’s interest are readily available.

#3: Accumulate Assets for Retirement

In addition to protecting the company, many business owners use cash value life insurance as a diversified vehicle, separate from the performance of the company, to accumulate assets and build future retirement income for themselves and their key employees.

Permanent life insurance policies include a cash value account that grows tax-deferred and can be accessed tax-free via withdrawals and policy loans while the insured is living. The type of life insurance policy depends on the desired objectives and other factors.

In many cases, business owners and key employees earn levels of income that exceed the contribution limits under a 401(k), profit sharing, or other qualified retirement plans. There are no contribution limits on non-qualified, private life insurance-based plans that provide additional retirement income.

Read on to learn more about the difference between term life insurance vs. permanent life insurance.

The Benefits of Properly Structured Life Insurance

Properly structured life insurance in a non-qualified plan is a legitimate option to grow wealth. It can provide members of the senior generation with death, disability, and retirement benefits, especially when the senior members have transitioned the business to the junior members and are no longer receiving compensation.

This combination of tax-advantaged death benefits and cash values makes life insurance the best way to accumulate and grow funds for retirement while simultaneously providing the cash necessary for the business or the surviving owners to purchase a deceased owner’s interest. 

Often referred to as “golden handcuffs,” the same concept is often used as a way to attract and incentivize key employees to remain with the business and perform with the promise of future retirement income from policy cash values. The business is simultaneously protected against the loss of a key person.

#4: Protect Assets from Liabilities and Future Creditors

Businesses assuming the risk of potential environmental contamination (i.e., waste hauling, landfills, chemicals, etc.) are subject to liability under federal and state pollution laws.

Service firms, including the following examples, are often exposed to professional liability claims:

  • Law and accounting firms
  • Physicians’ groups, and
  • Engineering and architectural firms

Moreover, such liability is not limited to the business itself, as the business owners also may be personally liable under such laws. As the business passes to the next generation, so does the potential liability.

Life insurance is ideal in this situation. The business owner can establish an irrevocable life insurance trust (ILIT) to last for the maximum period permitted by state law (in perpetuity for some states).

The ILIT would provide the business owner’s heirs with income and principal as needed for health, education, maintenance, and support.

If properly structured, the assets in the ILIT cannot be reached by the beneficiaries’ creditors. Additionally, in many states, life insurance cash value is protected from creditors making it an especially effective tool for business owners to use to grow their assets.

#5: Prevent a Family Feud

A senior generation business owner can use life insurance and a common legal agreement to transfer assets to other family members with “equitable” treatment.

Leaving the ownership and control of the business to the children who are active and the life insurance proceeds to the children who are inactive equalizes the inheritances among them and creates a family “bank.”

This can prevent arguments about money when the senior generation is no longer there to serve as the peacemaker and allow the family business to continue operations smoothly.

In addition, it avoids the need for active children to purchase the business interests of inactive children, perhaps when the business may not be able to afford it.

Depending on the particular circumstances, the insurance may be owned by an ILIT for the benefit of the inactive children, and the insured may be the business owner, the business owner, and his or her spouse.

#6: Say “Goodbye” to Uncle Sam

Some senior generation business owners wait until death to transfer all or most of their business interests to the junior generation.

If the business owner has a taxable estate, life insurance can provide the recipients of the business with the cash necessary to pay estate taxes. With estate tax exemptions likely decreasing in coming years, many business owners and their families will face increased transfer tax liabilities.

Using life insurance to pay estate taxes is particularly useful for business owners because their equity interests cannot be readily liquidated. The junior generation receiving the business may also need life insurance to pay estate taxes.

Usually, the insurance policy will be owned by an ILIT, as discussed above, so that beneficiaries will receive the death proceeds both income and estate tax-free.

In many cases, most of the business owner’s estate is tied up in the value of the business. Without an effective estate plan, including a business succession plan, the business may have to close or be liquidated to afford estate taxes.

With the proper use of life insurance, a business owner can provide the liquidity needed to pay any estate taxes due at death.

For example, an ILIT can be established for the purposes of owning a life insurance policy on the life of the business owner (or business owners, if married). The trustee of the trust is usually the intended beneficiary. At the owner’s death, the policy proceeds are payable to the trust which can then, at the trustee’s direction, be used to pay any applicable estate taxes.

Read on to learn more about maximizing your legacy using life insurance.

A Final Word

At Acumen Insurance Solutions, we recognize that formulating the perfect succession, estate, and life insurance plans can prove difficult. Contact us today to review such plans.

Then, read on for more information on succession planning amidst the Great Resignation.

*Acumen Insurance Solutions does not provide legal or tax advice, and the information contained herein should not be construed as such; consult your legal and tax professional before making important financial decisions. Life insurance is backed by the claims-paying ability of the carrier and is not FDIC insured. Withdrawals and loans can reduce death benefits and may cause the policy to lapse. See policy illustration for details.

The following federal tax code sections apply to life insurance:

  • IRC §101 (a): Death benefits are income tax-free.
  • IRC §7702 (a), (g): Cash value growth is tax-free.
  • IRC §72(e): Withdrawals of cash value to basis are tax-free.
  • IRC §72 (e)(5): Investment gains in cash value can be borrowed tax-free.
  • IRC §7202 (a): Modified Endowment Contracts (MECs) retain tax-free growth and tax-free death benefit, but gains are taxed first when taking loans and withdrawals.
The Acumen Team

Life Insurance 101: Difference Between Buy-Sell and Key-Person

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Welcome to Life Insurance 101. We’re here to make things simple for you. Today, we have ​​David A. Jacobs, J.D., Principal at Acumen Insurance Solutions on camera to discuss the difference between buy-sell and key-person insurance.

Let’s dive in.

What is Buy-Sell Life Insurance?

Buy-sell life insurance is different from key-person (or key-man in the old days) life insurance. Buy-sell life insurance is used to protect a departing owner and his/her heirs, as well as the business and its remaining owners.

An Example of Buy-Sell Life Insurance

Let’s say Bob and Rick are in business together; they are 50-50 owners. Bob happens to pass away unexpectedly. In this case, Rick would then be in business with Bob’s beneficiaries, which is likely not an ideal situation for any party.

Therefore, the payout from a life insurance policy on Bob’s life is used as a way for Rick (or the business) to immediately obtain the financial resources necessary to buy out Bob’s beneficiaries, and vice versa. This way, Bob’s beneficiaries walk away with cash, and Rick with the shares of the business.

Make sense?

What is Key-Person Life Insurance?

Key-person life insurance, on the other hand, provides money to the business that’s lost a key employee which can be used to help replace lost revenue and offset costs to identify and train a replacement.

When Do You Use Buy-Sell Life Insurance?

There’s often a legal agreement between partners in a business—a shareholders’ agreement. The buy-sell portion of this agreement dictates what happens when a triggering event occurs and ownership needs to change hands.

These triggering events, to name a few, might include:

  • Death
  • Disability
  • Divorce of a partner, or
  • Retirement

Regardless of the triggering event, the organization and/or the partners need to have the funding available in order to buy out the departing partner or the departing partner’s heirs, if necessary.

Life insurance is a great way to do that. 

Infographic of Life Insurance 101: Difference Between Buy-Sell and Key-Person

Using Permanent Life Insurance to Fund Buy-Sell

Permanent life insurance (whole, universal, index, and variable) with cash value can help you handle all of those triggering events, whether the departing owner leaves due to death or another reason.

If an owner happens to pass away, the life insurance death benefit is used. However, if another triggering event occurs, the life insurance cash value can be tapped in order to meet that obligation and prevent using company cash flow or having to borrow at high interest rates.

The Importance of Life Insurance

Even if you don’t have a business partner, it’s important to make sure you protect your family by having insurance on your life for the current value or projected value of your business. If you pass away unexpectedly, your family will lose the income you generated and the value of your business will likely decline or perhaps disappear. It would be a shame for your family to not be able to reap the rewards of your hard work if you’re no longer there.

Interested in learning more? Check out another one of our Life Insurance 101 topics: Term Life Insurance vs. Permanent Life Insurance.

The Acumen Team

Succession Planning Amidst the Great Resignation

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Reviewing Forbes’ “Struggling to Keep Employees Amid the Great Resignation? Look to Succession Planning.”

At Acumen Insurance Solutions, one of our core services is business succession planning. For this reason, Forbes article titled, “Struggling to Keep Employees Amid the Great Resignation? Look to Succession Planning” stuck out to us like a sore thumb.

Read on for a little context on business succession planning at Acumen. Then, we’re handing over the reins to Forbes to talk about how succession planning can help boost employee retention during this time.

The Importance of Business Succession Planning

At Acumen, we do our fair share of business succession planning for clients. Most commonly, life insurance is utilized by business owners as a mechanism to:

  1. Protect their families in case they are no longer there to provide income
  2. Protect their businesses in case a key person dies
  3. Provide the liquidity needed to redeem shares when an owner leaves the company or passes away
  4. Provide non-equity compensation to fund executive incentive and retention programs 

There are, however, additional succession planning elements that can increase employee retention during the Great Resignation.

Interested in learning what they are? Continue reading for the full Forbes article.

Struggling to Keep Employees Amid the Great Resignation? Look to Succession Planning.

The Great Resignation has been prevalent for some time now, and unfortunately for businesses, the search for greener pastures is still picking up pace. Nearly 4.3 million people left their jobs in January 2022. In February, another 4.4 million people called it quits. An estimated 44% of workers said they actively looked for new jobs at the end of 2021 or planned to find new employment at the beginning of 2022, so these numbers could continue to jump for the foreseeable future.

Needless to say, employee retention has become a top priority. Some companies have chosen to go the monetary route, using compensation increases to attract and retain employees. Others have given more perks to reengage their teams, offering greater flexibility, remote work options, and paid parental leave. These solutions can work in some instances, but they don’t truly address the root cause of the Great Resignation problem.

The pandemic gave people time to step back, reassess their lives, and unlearn the old ways of working. Many people have realized that life’s too short to stay in jobs that aren’t fulfilling, especially when staying doesn’t allow them to grow. An increasing number of employees now want future-oriented job opportunities, so a solution to the Great Resignation can be found in the unlikeliest of sources: succession planning.

Succession planning is often just thought of as a means for identifying and developing future company leaders. Though that’s certainly true, succession planning is also vital for every other area of a business—especially employee retention.

Establishing a companywide succession plan

Although no two succession plans will look the same, certain elements have proven to be most successful when retaining and attracting talent. The following should be part of your succession planning process:

1. Create a mentorship program.

It’s no secret that mentorship programs benefit employers and employees alike. Such initiatives can support career development, strengthen onboarding efforts, reduce training costs, and even help nurture a culture of learning. Mentoring is also essential to succession planning and talent retention, as it develops your future leaders and can even increase the momentum of a mentee’s growth within your company.

How you go about establishing a mentorship program is entirely up to you. Vince Dawkins, president and CEO of Enertia Software, suggests a systematic approach: “Assess your workforce and ask yourself where you see each person fitting within your operations. Then, carefully pair junior employees with more seasoned team members.”

“For your mentorship program to work, however, don’t forget to set mentoring goals,” Dawkins writes. “Each pairing will have different objectives, and participants should revisit these objectives regularly to keep knowledge transfers on track and ensure ownership among the team.” Once mentors and mentees are paired and goals are set, it becomes much easier to measure the program’s success across both development and business objectives.

2. Employ individual self-selection.

In many organizations, one of the biggest issues in succession planning—and leadership development in general—can be attributed to the selection process. Though logic would tell you to evaluate team members and select the worthiest candidates based on a mix of performance and potential, such an approach leaves room for biases. It’s akin to the unconscious biases seen in certain recruitment practices where “like hires like.”

Although evaluation will always play a role in succession planning for specific positions within your company, a much better approach is self-selection. It’s simply more inclusive. And according to Janice Burns, chief people officer at Degreed, “This creates a pipeline of unexpected (and otherwise hidden) talent committed to proving their success and, therefore, more likely to remain at the company.”

Allow team members to nominate themselves for development opportunities that put them on track for leadership roles. Ask interested individuals to provide a business case for the investment and then monitor their progress. You might be surprised at the hidden talent within your organization.

3. Prioritize organizational culture.

Culture impacts all aspects of a business. Everything from engagement and productivity to collaboration and decision-making can be traced back to the health of your organization’s culture. The time is now to review your mission, values, goals, and expectations, as they collectively serve as a North Star to guide teams and motivate employees to do their best possible work.

Culture is a living, breathing organism, so it can change when left unchecked. That change might be gradual but is still consequential to your company. So, make a habit of seeking feedback from employees. Ask your team where they might need support, resources, and so on. Invest in them, and they’ll invest in you. As writer Kat Boogaard explains, “Regularly asking employees what you can do to support them and implementing that feedback can reduce your organization’s attrition, which is even more important during ‘The Great Resignation.’”

What’s more, your efforts will create a pool of devoted employees, all with a greater understanding and appreciation for your organization’s mission, vision, and values. Each one could be a future leader.

4. Practice transparency.

Individual aspirations can take an employee only so far. Sometimes, people need to hear where leadership sees them progressing within operations to truly find the right career development paths. Therefore, schedule time with each employee to discuss your plans for their future growth. And be sure to open the floor for their input. Maybe you see a sharp and talented customer service representative moving into management, but that person’s interests don’t match your vision.

The ultimate goal is twofold: identify the ideal development opportunities to keep employees happy, engaged, and content to stay at your organization and develop a succession plan for all operational roles. If you haven’t taken the time to discuss a team member’s future, you could miss out on a great leader—and you might lose the person to another company in the process.

Succession planning won’t necessarily be a cure-all for your talent woes. Recognition, respect, autonomy, and communication all contribute to whether a given employee will pull up stakes. Still, succession planning can serve as a solid foundation to build up future talent retention and acquisition efforts within your organization. It demonstrates a commitment to and an investment in your employees’ futures, which can go a long way toward keeping them engaged at your company for the long run.

Infographic of Succession Planning Amidst the Great Resignation

What We Do

Working with owners of successful businesses also requires coordination with their estate plans; our team at Acumen is uniquely positioned to design flexible life insurance plans with both goals in mind.

Interested in learning more? Read on to hear us answer the question, “Can I Change My Life Insurance?”

Business document report on paper and tablet with sales data and financial business growth graph on table background.
Shay Larby

Ensuring Your Bank is Always Protected in a Life Insurance Premium Financing Transaction

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Premium financing creates a unique opportunity for your bank

Properly designed life insurance can be an effective tool for addressing important personal and business planning objectives, including spousal protection, wealth transfer, tax planning, liquidity needs, business succession, key employee retention, and charitable planning.

Financing life insurance premiums can be a great way for a family or business to acquire the amount of insurance they need by borrowing money from a bank to pay the policy premiums.

Premium financing creates a unique opportunity your bank to loan money to strong, established individuals and companies. However, your bank needs to understand how the life insurance polices should be structured to so your bank can protect itself and be fully collateralized at all times, in case things do not work out as anticipated.

Premium-Financing-Transaction-BankingDownload
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Amanda Rogers

What is Bank-Owned Life Insurance (BOLI) and How Can You Benefit?

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Bank Owned Life Insurance (BOLI) is an institutional financial product used by most U.S. banks the first policy was issued in 1983.

BOLI is used to provide benefits to key employees, retain top bank directors and executives, and protect against the loss of a critical employee, in addition to enhancing non-interest income.

The bank is the policy owner, premium payor, and beneficiary the insureds are consenting key executives.

Policies are placed with top-quality insurance carriers and funded on a single premium basis, with cash values growing income tax deferred and death benefits paid income tax-free. 1

Policies with similar characteristics can be used for organizations, families, and individuals to provide protection and enhance current balance sheets.

Who Owns Boli?

Did you know that many commercial banks have more invested in life insurance policies than they do in bank premises, fixed assets and all other real estate assets combined?

As of the third quarter of 2019, nearly 3,800 banks owned $190 billion in BOLI policies. For example, Bank of America owns $22 billion, JP Morgan Chase owns $11 billion, and Wells Fargo owns $18 billion in BOLI assets2.

BOLI is highly regulated by various federal and state banking authorities Regulations allow banks to hold up to 25% of their most vital regulatory capital known as Tier 1 in BOLI policies .3

What is the Purpose of BOLI?

Even though BOLI can be a very attractive place for banks to earn higher current yields on their safest capital, these policies are not purchased for the sole purpose of enhancing non-interest income.

Rather, BOLI is used as a tax-favored asset to increase bank earnings and offset rapidly rising costs of employee benefits, such as sky-rocketing medical, disability, and workers’ comp insurance premiums.

BOLI is also used to protect (indemnify) the bank from the unexpected loss of skilled and valuable executives, often referred to as “key person” life insurance.

Banks also utilize BOLI as a vehicle to finance the cost of providing a deferred compensation plan for key officers.

Download the guide to Bank Owned Life Insurance here:

Acumen-BOLIDownload

How is BOLI Funded?

BOLI is institutionally-priced, permanent life insurance, funded with a single, lump-sum premium.

The premium equals the cash surrender immediately. BOLI products have no-loads, nosurrender charges, and all the income.

How Does BOLI Enhance a Bank’s Balance Sheet?

One of the biggest ancillary benefits is that BOLI policies produce far superior returns than traditional bank investments, such as municipal bonds, 5- and 10-year U.S. Treasurys, and mortgage-backed securities (refer to Chart A).

BOLI generates non-taxable profit and loss earnings equal to the growth in cash surrender value, and any death benefits are paid out are completely tax-free.

In fact, the tax advantages enjoyed by using BOLI are usually absent in other nonqualified retirement packages and benefit plans, which is what makes BOLI such a valuable component of a general deferred compensation program.

To emphasize earnings, BOLI policies are structured to maximize the cash value growth and minimize the expense of the death benefit portion of policy.

BOLI is issued by highly-rated insurance companies, which means that the chance for default, bankruptcy, or other negative situations is remote.

In fact, banks and their regulators are comfortable using life insurance companies to protect their safest capital because they do not use excessive leverage.

For example, if a bank has $1 on deposit, it can lend out up to $10 to borrowers. This leverage can lead to instability and, in excess, bank failure or a “run” on the bank where it cannot meet depositor demand.

However, if a life insurance company has the same $1 on deposit, it may loan out no more than $0.92, and usually only a fraction of that amount, which makes them stable institutions in down economies and a good fit for a portion of banks’ safest capital.

Who is BOLI Policy Owner, Insured, and Beneficiary?

The bank is the owner and beneficiary of the policies. When the insured employee passes away this tax-free death benefit can be used to fill the vacuum left by the death of the key executive, as well as fund other business needs.

Banks typically keep the life insurance policies on retired or separated executives because the rate of return can be even higher when the policies are held until death.

A portion of the death benefit may be shared with insured officers via a supplemental life insurance plan which can serve as a valuable “Golden Handcuff.”

Depending on the insurance companies and amount of premium, if 10 or more executives participate, then in most cases no medical tests are required.

Can Individuals Benefit From BOLI?

Life insurance companies only issue institutionally priced BOLI policies to commercial banks.

However, some carriers allow selected agents to design retail policies with loads and fee structures that are like BOLI. These policies are used to protect families against the loss of breadwinners and to protect businesses, including nonprofits, against the loss of owners and key employees.

Just like BOLI, these policies also generate higher current yields on cash value compared to those offered by other safe, liquid assets, such as CDs, U.S. Treasurys, and bonds (refer to Chart B).

Month revenue of young couple
The Acumen Team

9 Resources to Get You Prepared for Tax Season

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Don’t let tax season overwhelm you. Utilize these nine resources to help you take the stress out of preparing your taxes for Uncle Sam. April really is the cruelest month. But when British poet T.S. Eliot immortalized those famous words in his literary masterpiece “The Waste Land,” he never could’ve known that they would end up ringing true for business owners and entrepreneurs living in 21st-century America. Getting all of your receipts, financial documents and bank statements in order can be an arduous task. But there are solutions so that you can focus more on running your business and less on sifting through mountains of paperwork. Seeking outside help from a trusted accountant or bookkeeper is a great option, and technology has taken the grunt work out of organizing and preparing your own tax records — making April not seem nearly as cruel as it used to be. We asked nine entrepreneurs from YEC to share the resources they use to simplify things and help get their taxes in order.  

1

Track1099

Issuing 1099s was always a slow, costly process that required a CPA or advanced knowledge of Quickbooks. New online services such as Track1099 make processing your business’ 1099s much easier. These services connect to your accounting program, pull the information from the appropriate recipients of 1099s and take care of all the communication with both the recipient and the IRS. Online and cheap. – Diego Orjuela, Cables & Sensors

2

Mint

Mint is a great way to review your business transactions from the past year. It is a mobile finance app you can link to credit cards, bank accounts and investment funds. Mint will automatically tag and categorize purchases to help you identify donations, gifts and other tax-deductible expenses that you’ve incurred over the year. – Adelyn Zhou, TOPBOTS

3

QuickBooks Self-Employed

Intuit recently launched a new offering called QuickBooks Self-Employed (QBSE), which is perfect for small businesses that aren’t ready to jump into the full-service offering that most are used to seeing advertised. QBSE is great for independent contractors and freelancers as it allows a user to quickly and easily detangle expenses that might be intermingled across personal/business accounts. – Corey Eulas, Factorial Digital

4

Xero

We implemented Xero about two years ago, and it is a great cloud accounting solution with superb integration for other platforms so that you have Xero as the heart of your organization. There’s also lots of customization possibilities due to their open API. We are still using a personal accounting firm, but remotely, we use Xero as a cloud accounting solution. – Philipp Mohr, Hashplay Inc

5

A Bookkeeper

The best way to plan for taxes is not to leave everything until the last second. Hire a good bookkeeper and have them take care of your books year round. I’d recommend having them utilize a widely used system like Quickbooks Online, which will give you real-time access to your financials. This will allow you to focus on growing your business as opposed to spending more time on taxes. – Mitch Gordon, Go Overseas

6

Evernote

I like Evernote because I can put all my files, notes and receipts in one place via a cloud-storage format. It just makes it easy when I’m on the go and can save and upload from anywhere. – John Rampton, Due

7

QuickBooks Online

I absolutely love using QuickBooks Online to help keep me organized and my books reconciled for tax time. It has made my life so much easier, and I love their mobile app for ease of use while I’m traveling or on the go. I can actually run payroll off my smartphone — how cool! – Rachel Beider, Massage Greenpoint, Massage Williamsburg

8

Google Sheets

In addition to many of the other well-known tax software products out there, Google Sheets is definitely going to come in handy. Google Sheets is free to use and nearly identical to Excel — with even more benefits. Access your data from anywhere and also share or convert to a different file type with the click of a button. – Zac Johnson, Blogger

9

An Accountant

Outsource your taxes. It’s not going to be expensive if you use an independent accountant that has your best interests at heart. You can make more money in the time (not to mention avoid the headaches) that you’ll save yourself. – Thomas Smale, FE International
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The Acumen Team

How to Find the Best Bank for Your Business

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Business banking isn’t a hot topic — but having a good bank is crucial to your business’s success.

Small business banking is a topic that sometimes gets short shrift. With interest rates only just beginning to rise and business services at big banks closely resembling one another, small business media coverage tends to focus on more interesting topics such as technology, operations and company culture.

Because the banking news is static, it’s easy to forget how critical banks really are in the day-to-day of a small business. However, trying to differentiate competing banks is a difficult task. National banks tend to match one another too closely in the pricing and structure of their small business products, while local banks vary too widely based on local conditions. Still, there are a number of basic qualities that make a bank the ideal choice for a small business:

Active Small Business Lending

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Banks are the main source of funding for many entrepreneurs, providing loans and credit products suited to many different needs. A bank that is serious about pursuing relationships with small businesses will offer financing options for every stage of a small business’s development.

The easiest way to determine which local banks are active supporters of small businesses is to speak with their bankers in person. Brick-and-mortar banks have a significant advantage over online banks or lenders in this respect. If you’re interested in banks that participate in government-backed financing, the Small Business Administration also provides information on the most active SBA 7(a) lenders through its online resources. One example of a highly active small business lender is Wells Fargo, which has $459 million in outstanding SBA loans as of January 2017.

However, smaller banks tend to offer better service than national banks like Wells Fargo because they’re able to concentrate more of their attention and resources in their immediate neighborhoods. Though they may not have as much capital available, you’ll find that local banks tend to be more flexible and accommodating towards your business’s specific circumstances. While online lending has made great strides in recent years, your best chances of getting a competitive loan rate are still with your local banks.

How to Run a Successful Small Business

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It can be easy to start a small business, as there are opportunities to fit almost every budget and skill.
It is often harder, however,to run a small business successfully. Running a successful small business often starts with the planning stage when you are deciding what you will sell and where you will locate your company. It doesn’t stop there, however, as everything from your choice of employees to your accounting practices may influence your potential for success.

1.

Choose the
right business.

Your success in business may be directly related to how well you choose. Select a business in which you can use your skills and talents. For example, if you have artistic talents, a gift basket or floral arranging business may be a good choice. It’s also important to consider the demand for the type of business you want to start. If you want to start a convenience store and there are several in your area, you may have trouble getting customers.

2.

Make a
business plan

Your success in business may be directly related to how well you choose. Select a business in which you can use your skills and talents. For example, if you have artistic talents, a gift basket or floral arranging business may be a good choice. It’s also important to consider the demand for the type of business you want to start. If you want to start a convenience store and there are several in your area, you may have trouble getting customers.

3.

Secure any business
licenses and permits

Your success in business may be directly related to how well you choose. Select a business in which you can use your skills and talents. For example, if you have artistic talents, a gift basket or floral arranging business may be a good choice. It’s also important to consider the demand for the type of business you want to start. If you want to start a convenience store and there are several in your area, you may have trouble getting customers.

4.

Select the right
location for your business

Your success in business may be directly related to how well you choose. Select a business in which you can use your skills and talents. For example, if you have artistic talents, a gift basket or floral arranging business may be a good choice. It’s also important to consider the demand for the type of business you want to start. If you want to start a convenience store and there are several in your area, you may have trouble getting customers.

5.

Watch
your finances

Your success in business may be directly related to how well you choose. Select a business in which you can use your skills and talents. For example, if you have artistic talents, a gift basket or floral arranging business may be a good choice. It’s also important to consider the demand for the type of business you want to start. If you want to start a convenience store and there are several in your area, you may have trouble getting customers.

6.

Choose your
employees carefully

Your success in business may be directly related to how well you choose. Select a business in which you can use your skills and talents. For example, if you have artistic talents, a gift basket or floral arranging business may be a good choice. It’s also important to consider the demand for the type of business you want to start. If you want to start a convenience store and there are several in your area, you may have trouble getting customers.

7.

Stay on top of
your accounting

Your success in business may be directly related to how well you choose. Select a business in which you can use your skills and talents. For example, if you have artistic talents, a gift basket or floral arranging business may be a good choice. It’s also important to consider the demand for the type of business you want to start. If you want to start a convenience store and there are several in your area, you may have trouble getting customers.