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The Acumen Team

Using CUOLI to Fund Section 20 and 21

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Did you know that credit unions have some unique opportunities to invest in products and services that are typically off-limits? NCUA Sections 20 and 21 allow credit unions to contribute to investments that are typically impermissible, including credit union-owned life insurance (“CUOLI” or “COLI”). 

This can be a great way for credit unions to diversify their investment portfolios and grow their assets. In this blog post, we will discuss Sections 20 and 21 in more detail and explain how credit unions can take advantage of these provisions!

The Current Investment Environment 

Today’s investment landscape isn’t promising and is characterized by:

  • Investment return volatility
  • Low interest rates
  • Declining loan demand
  • Concerns about an economic recession

So, what’s the solution for credit unions that are trying to maximize returns? Credit unions must look to investments that minimize volatility, maximize predictability, and maximize flexibility. The solution is using credit union-owned life insurance (“CUOLI” or “COLI”) to fund Sections 20 and 21.

Under Sections 20 and 21 of the call report required by the National Credit Union Administration (NCUA), credit unions are permitted to allocate funds to “otherwise impermissible investments.” This includes credit union-owned life insurance for certain specialized and important purposes.

Let’s talk more about using CUOLI to fund Sections 20 and 21 below.

Sections 20 and 21 of the (NCUA) Act 

Sections 20 and 21 allow credit unions to invest in certain products and services that are typically not allowed. This includes credit union-owned life insurance (“CUOLI” or “COLI”). CUOLI can be a great way for credit unions to diversify their investment portfolios and grow their assets.

There are many benefits to investing in CUOLI, including:

  • Diversification: By investing in CUOLI, credit unions can diversify their portfolio and reduce risk.
  • Asset growth: CUOLI can be a great way for credit unions to grow their assets.
  • Protection from creditors: CUOLI can help credit unions protect their assets from creditors in the event of bankruptcy.
  • Death benefit: CUOLI policies typically have a death benefit that can be used to pay off debts or fund other expenses.

Section 20

Section 20 of your quarterly call report addresses the types of assets a credit union may use to pre-fund employee benefits (i.e. health insurance and executive compensation plans).

With costs of employee benefits rising, however, using these safe and higher-yielding investment options to offset them allows more of the credit union’s assets to go to member initiatives.

Most state regulators allow credit unions to allocate up to 25% of net worth to pre-fund employee benefit expenses in Section 20.*

Section 21

Charitable giving is at the core of most credit union missions. 

Section 21 addresses the types of assets a credit union may use to fund its charitable donation account (CDA). In most states, credit unions can pre-fund CDAs with up to 5% of net worth under Section 21.*

Therefore, charitable donation accounts give your credit union the ability to give more efficiently.

Using Credit Union-Owned Life Insurance to Fund Section 20 and 21

When looking at these assets, credit union-owned life insurance can offer marked benefits, enhance stability, and provide higher yields when compared to the types of assets that regulators consider “otherwise impermissible,” which include:

  • Life insurance
  • Securities (mutual funds, stocks, ETFs, bonds)
  • Annuities

What is Credit Union-Owned Life Insurance?

For those who are not familiar with credit union-owned life insurance, it’s very similar to what has been used by commercial banks for over 40 years. In fact, 86% of the top 50 banks in the United States use bank-owned life insurance (BOLI) as an asset to offset employee benefit costs.

In addition to pre-funding benefit expenses and mitigating key-person risks, commercial banks have used these types of assets as an investment tool that offers a very competitive rate with strong levels of safety and liquidity.

Funding Section 20 and 21 Using Credit Union-Owned Life Insurance

Most state regulators* allow credit unions to place up to 25% of their net worths in Section 20 assets and up to 5% in Section 21 assets, with a number of specific caveats. One, for example, is that no more than 15% can be allocated to a single life insurance carrier when using CUOLI.

Interested in learning more? We’ve just recently conducted a webinar where we:

  • Compared CUOLI vs. Other Alternatives
  • Walked through FASB ASU 2016-01 and Mark-to-Market accounting impacts
  • Discovered how to restructure existing CUOLI policies to increase yields
  • Discussed the flexibility options and liquidity benefits of institutional life insurance policies

Fill out this contact form for more information on the full “Using CUOLI to Fund Section 20 and 21” webinar. Or, check out this blog post, “Section 20 vs. Section 21: What’s the Difference?“

*Check your state’s regulations to verify the CUOLI capacity percentages.

Business Owner Looking Over Executive Compensation Packages
Amanda Rogers

How Non Profits Use COLI to Fund Executive Comp Packages

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Non profits are always looking for ways to do more with less. These organizations are accountable to their Boards of Directors, donors, and to government oversight post submission of their form 990.

All things considered, non profits are held to a higher standard and are expected to use their funds in the most efficient way possible.

One way that non profits can use their funds more efficiently is by using corporate-owned life insurance (COLI) to fund executive compensation packages.

Let’s listen below to David Jacobs, Principal at Acumen Insurance Solutions talk about this more.

What is Corporate-Owned Life Insurance?

Corporate-owned life insurance, also known as COLI, is a type of life insurance, owned by a corporation, where the death benefit can be used to help the corporation pay for expenses such as executive compensation packages, employee benefits, and other business costs.

The Benefits of Corporate-Owned Life Insurance

COLI is a safe and liquid investment that can offer many benefits to corporations. It can help them:

  • Keep pace with executive compensation packages
  • Attract and retain the best employees to fulfill their mission, and
  • Earn better yields to better meet the needs of their community beneficiaries

When used correctly, COLI can be a powerful tool for corporations. It can help them save money and provide many other benefits that can help the business succeed.

A Final Word

Using COLI to fund executive compensation packages is a smart way for non profits to use their funds more efficiently and effectively. It is a win-win situation for both the non profit and the executive, and it can help the non profit fulfill its mission in a more impactful way.

Interested in learning how your organization can use COLI? Read on to learn how non profit organizations achieve their key person acquisition and retention goals by using supplemental executive retirement plans funded with life insurance. Then, reach out to our Acumen team today for a free consultation.

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Amanda Rogers

How Credit Unions Can Improve 457(f) Plans for Executives

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Competition for key talent has never been more prevalent than it is today

Providing a supplemental executive retirement plan (SERP) to key executives significantly enhances an organization’s ability to attract, reward, and retain its most important people.

One of the most popular SERP designs used by credit unions is a 457(f) plan. Before your organization considers installing a traditional 457(f) or if it already has one in place, please consider the following:

What is a 457(f) Plan?

457(f) plans are tax-advantaged retirement savings plans available to certain executives of tax-exempt organizations, including credit unions.

457(f) plans allow executive participants to contribute a portion of their compensation on a pretax basis, up to the annual IRS limit and receive matching or other employer contributions. Employers may also make discretionary contributions to 457(f) plans on behalf of their executive participants.

These plans can be funded with amounts necessary to provide a defined benefit to the executive upon retirement or with periodic contributions over time in agreed-upon amounts.

Upon retirement, the executive is responsible for paying all of the taxes, in a lump sum, at ordinary income rates. In some states, that can mean that more than half of an executive’s retirement benefit will end up going to the government.

The Benefits of 457(f) Plans

457(f) plans offer a number of benefits to credit unions and their executive participants, including:

  • The ability to attract and retain top talent,
  • Tax-deferred growth of investments, and
  • Flexible withdrawal options

Traditional 457(f) Plan Designs

Traditional 457(f) plans can be effective executive retention tools but they have significant drawbacks, including:

  • Offering the organization inferior rates of return on dollars invested
  • Requiring the retiring executive to reinvest remaining post-tax assets in a taxable environment
  • Lack of a death benefit for the executive’s heirs at his/her demise; rather, they receive only what has accumulated in the plan up to that date

Moreover, credit unions should be aware of the potential pitfalls associated with 457(f) plans, such as compliance with IRS rules and regulations, high administrative costs, and the risk of participant litigation.

How Credit Unions Can Improve 457(f) Plans

Credit unions can take steps to improve their 457(f) plans in order to maximize the benefits for both the organization and its executive participants. These steps include:

  • Selecting the right 457(f) plan provider
  • Designing a 457(f) plan that is compliant with IRS rules and regulations, and
  • Implementing 457(f) plan administration and participant communication best practices

By taking these steps, credit unions can ensure that their 457(f) plans are well-designed and well-managed, providing maximum benefits for all involved.

Acumen Insurance Solutions 457(f) Plan Designs

Acumen’s plan designs provide a death benefit or self-completing feature equal to the full value of the executive’s projected retirement benefit. In addition, these designs:

  • Offer a more tax-efficient solution for the executive to receive retirement benefits resulting in 30-40% more, after-tax income
  • Include an investment vehicle for the retiring executive that has historically provided both a competitive return and a principal guarantee
  • Can be implemented with no additional cost or burden on the organization

If your organization is thinking about installing a 457(f) plan, let’s talk! We can help you decide if our customized plan designs are worthwhile, considering your situation.

Moreover, if you already have a 457(f) plan in place, we’re happy to review your current plan and see where you may be able to improve them. Reach out to us!

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The Acumen Team

Why Should a Credit Union Invest in Credit Union-Owned Life Insurance?

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There are many advantages to implementing a credit union-owned life insurance (COLI/CUOLI) program. Here, Scott B. Hinkle, J.D., CFP, and Principal at Acumen Insurance Solutions, talks about why a credit union should invest in credit union-owned life insurance. 

Let’s get started.

What is Credit Union-Owned Life Insurance?

Credit union-owned life insurance (COLI/CUOLI) is an “otherwise impermissible investment” that credit unions often use to pre-fund employee benefit expenses under Section 20. Policies insure the lives of individual executives or groups of key people and are designed to generate competitive current yields on cash values. 

invest in credit union owned life insurance

Why Should Your Credit Union Invest in Credit Union-Owned Life Insurance?

So, why should your credit union consider investing in credit union-owned life insurance (COLI/CUOLI) as opposed to the other options that are available?

  1. It’s Safe: Credit union-owned life insurance policies are issued by life insurance carriers that have been around 100 to 150 years.
  2. It’s Liquid: In the event that you choose to redeploy your capital elsewhere, you have the ability to do so with a credit union-owned life insurance policy.
  3. It Provides Meaningful Rates of Return: These policies are currently earning very meaningful rates of return. In fact, they are currently yielding between 2.5% and 5.0%, depending upon the class of policy selected.*

For all of these reasons, credit union-owned life insurance should be something that all credit unions consider in today’s challenging investment and interest rate environment.

Interested in learning more about why you need to periodically review your existing COLI plans? Read on in “Auditing Existing COLI Plans for Credit Unions.”

*Disclaimer: 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.

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The Acumen Team

Auditing Existing COLI Plans for Credit Unions

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At Acumen Insurance Solutions, we like to say that we “put life insurance to work.” One way that we do this is by auditing existing COLI plans for credit unions. Here, Scott B. Hinkle, J.D., CFP, and Principal at Acumen Insurance Solutions, talks about:

  • The benefits and popularity of COLI within credit unions
  • The importance of reviewing these policies regularly

Let’s dive in.

Credit Unions Using COLI

Many credit unions currently use credit union-owned life insurance as a mechanism to offset benefit expenses under Section 20. This asset class is a tried and true way in which credit unions can achieve several objectives.

These assets are safe, liquid, and they’re producing a meaningful rate of return. However, many credit unions do not review these contracts regularly, meaning that they are likely leaving money on the table. This is where we come in at Acumen.

Infographic for "Auditing Existing COLI Plans for Credit Unions"

Improving Credit Union-Owned Life Insurance (COLI) Performance

So, why do you need to audit existing COLI plans? Improving an existing COLI portfolio can mean:

  • Reducing risk, and
  • Significantly improving earnings over time

It’s important to recognize that over the years, life insurance contracts have evolved, become more efficient, and offer different features and benefits.

In fact, innovation, automation, negotiation, and increased life expectancies have improved the competitiveness of many life insurance contracts. Today’s policies are vastly different even compared to those purchased by credit unions just a few years ago.

This considered, it makes sense for every institution to periodically take a look at their existing credit union-owned life insurance contracts.

How We Help at Acumen

At Acumen Insurance Solutions, we help credit unions analyze and update their existing COLI portfolios to maximize efficiencies and yields.

As your credit union grows in size, so does the opportunity for you to invest in new credit union-owned life insurance. We can help you curate new life insurance contracts that are far more efficient than others available in the marketplace today.

Read on to learn more about why CUOLI is the best “otherwise impermissible investment” for your credit union.

The Acumen Team

Mark-to-Market Accounting and COLI

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For credit unions that are investing in traditional securities under Section 20 of their Call Report — as an otherwise impermissible investment to offset benefit expenses — recent standards require mark-to-market accounting treatment.

Here, Scott B. Hinkle, J.D., CFP, and Principal at Acumen Insurance Solutions, talks about mark-to-market accounting.

Let’s get started.

What is Mark-to-Market Accounting?

Mark-to-market accounting is defined as “an accounting practice that involves adjusting the value of an asset to reflect its value as determined by current market conditions. The market value is determined based on what a company would get for the asset if it was sold at that point in time.”

Why Is This a Problem?

This can be problematic for credit unions as the volatility of underlying asset classes, even if intended to be held long-term, ultimately has an effect on current net income. These institutions might want to consider credit union-owned life insurance as an alternative.

Why Should a Credit Union Invest in Credit Union-Owned Life Insurance?

So, why should a credit union consider investing in credit union-owned life insurance (COLI/CUOLI) as opposed to the other otherwise impermissible investment options that are available under Section 20?

  1. It’s Safe: Credit union-owned life insurance policies are issued by insurance carriers that have been around 100 to 150 years.
  2. It’s 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.
  3. It Provides Meaningful Rates of Return: These policies are currently earning very meaningful rates of return. In fact, they sit somewhere between 2½% and 5.0%, depending upon the class of policy selected, with guarantees against loss and without direct market exposure.*

Lastly, and most relevant to this article, since credit union-owned life insurance is so safe, it virtually eliminates any concern about a negative impact on the current net income statement, as compared to traditional securities.  

If you haven’t given credit union-owned life insurance a look in the recent past, now might be a good time to do so. Read on to learn more about the benefits of credit union-owned life insurance.

*Disclaimer: These policies are not considered securities. Guarantees are based on the claims-paying ability of the 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.

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The Acumen Team

Why CUOLI is the Best “Otherwise Impermissible Investment” for Your Credit Union

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There are three primary impermissible investments in the credit union space today: life insurance, securities, and annuities.

Credit union-owned life insurance (COLI/CUOLI), on the other hand, is considered an “otherwise impermissible investment” for your credit union.

This investment strategy is attractive for credit unions for many reasons. Credit union-owned life insurance is a capital asset that is both secure and liquid compared to traditional credit union investments. This investment also allows for greater portfolio diversification and gives credit unions access to investments that are typically impermissible.

By strategically using CUOLI, credit unions can solve major issues ranging from narrowing margins to employee retention.

Here’s more on why CUOLI is the best “otherwise impermissible investment” for your credit union.

Investment Options for Credit Unions

According to the National Credit Union Administration (NCUA), corporations “have the authority to purchase investments otherwise impermissible if those investments meet the direct relationship requirement and are intended to fund an employee benefit obligation.”

Generally, the types of assets that financial institutions consider otherwise impermissible investments include:

  • Life insurance
  • Securities (mutual funds, stocks, ETFs, bonds)
  • Annuities

Under the branch of life insurance, there is credit union-owned life insurance (COLI/CUOLI), which is arguably the best otherwise impermissible investment for your credit union.

What is Credit Union-Owned Life Insurance?

In general, 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.

Credit union-owned life insurance, in particular, is a life insurance strategy with various benefits. Credit unions can use COLI to balance the cost of employee benefit programs and potentially enjoy higher yields than the typical CU investments.

Similar policies have been used by commercial banks, called bank-owned life insurance (BOLI), for over 35 years.

Types of CUOLI

Life insurance is available in several different offerings, so understanding the options and selecting the right type of policy for your goals and budget is crucial.

Whole Life

Whole life provides lifelong coverage and includes a cash value component. The initial premium is designed so that the policy lasts as long as the insured lives, the death benefit is guaranteed, and the cash value account grows based on a dividend rate. 

Universal Life (UL)

Universal life insurance has a cash value account that grows at a guaranteed crediting rate as well as a current crediting rate, which is typically higher. Cash value projections are based on the current crediting rate, so if the rate goes up, the cash value would grow faster, and vice versa.

Index Universal Life (IUL)

With index universal life insurance, the cash value growth is tied to the performance of a market index, like the S&P 500. Unlike investing directly in an index fund, however, the policy won’t lose money when the market has a downturn. This is because a guarantee or “floor” applies to the rate, insuring it against losses, due to market declines.

One of its most attractive features is its ability to take advantage of stock market-like returns without the similar risk of loss while building up a death benefit.

Variable Universal Life (VUL)

Variable universal life insurance uses separately managed accounts, referred to as sub-accounts, to increase cash value. Subaccounts are structured like mutual funds with various stock and bond options. Cash value assets are held by the sub-account investment managers, rather than by the insurance company.

By separating the savings component from the death benefit component, the life insurer transfers all of the investment risks of the policy.

CUOLI/COLI Design Considerations

When it comes to the design of COLI plans, here are some factors and questions to consider that can affect plan performance:

  • The Pool of Insureds: How old are the insureds? What is their health like? How many are there?
  • Underwriting Alternatives: Are you dealing with a guaranteed issue group, individual medical underwriting, simplified underwriting (no physical), or some combination of the above?
  • Product Allocation Options: 15% of net worth carrier limitation 
  • Contemplated SERP Obligations

A Final Word

CUs can invest up to 25% of net worth in CUOLI policies and up to 15% of net worth with any one insurance carrier under the NCUA’s section 20. Credit union-owned life insurance can provide safety and liquidity with higher yields for your CU. Help your organization earn a higher current yield while acquiring life insurance protection for your key people.

Additional elements to consider:

  • Your credit union will enjoy an annual net yield typically ranging from 250 to 500 basis points higher than similar risk-adjusted assets it currently owns
  • As interest rates rise, so will the yields on CUOLI
  • Death benefits can be paid to your credit union and/or the insured’s heirs
  • Up to 25% of a credit union’s member equity can be utilized
  • Ideal for compliance with FASB ASU 2016-01.

With so many different policy options and carriers to choose from, it can be challenging to navigate the life insurance marketplace alone. Working with an independent life insurance professional like our team at Acumen Insurance Solutions is critical, and knowing the basics will help ensure you make the most informed decision.

Read on to learn more about how CUOLI helps your credit union earn safely.

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The Acumen Team

CUOLI: How to Earn More Safely

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Credit unions typically keep significant liquid, short-term assets on their balance sheets, but the yield on these assets is minimal in today’s low interest rate environment and fails to provide a meaningful impact on current income.

Credit union-owned life insurance (COLI/CUOLI) is an important strategy that can help your credit union earn high yields safely. 

Let’s discuss.

What is Credit Union-Owned Life Insurance?

Firstly, what is credit union-owned life insurance?

COLI or CUOLI is a single premium life insurance contract where the credit union is both the owner and beneficiary of the policy.

Credit unions use this life insurance strategy to offset the cost of employee benefits and executive compensation plans, as well as generate higher current yields compared to other options while preserving safety and liquidity.  

COLI policies insure the lives of your executives and/or key employees. Similar policies, called bank-owned life insurance (BOLI), have been used by commercial banks for over 40 years.

Why Do CUs Purchase COLI/CUOLI?

Credit unions are in search of higher yields without taking unnecessary risk — and have been for decades.

Historically low interest rates have put pressure on credit unions to find yield. However, excess funds and liquidity make finding yield difficult for credit unions. While life insurance has always been a popular asset for banks to have on their balance sheets, credit unions have also been drawn to this asset for CUOLI’s safety, stability, and yield.

So, what’s the solution? Credit union-owned life insurance.

As an asset class, CUOLI can help mitigate interest rate and price risk, providing a less volatile return to the credit union. Additionally, credit unions are finding that returns on CUOLI are higher than other, more traditional options.

Let’s illustrate what this looks like in action.

COLI/CUOLI in Action

Situation: A $4 billion credit union wants to earn more on its cash and short-term investments, and protect itself from the unexpected passing of its key executives.

Action Steps: After considering several options, the board decides to fund institutionally-designed credit union-owned life insurance (CUOLI/COLI) policies, issued by top-quality carriers.

Designed and placed by Acumen Insurance Solutions, the policies hold high cash values while insuring the lives of the credit union’s executives. The program this credit union selected uses two different types of life insurance policies – one with a fixed rate and the other with a floating rate. Both have principal guarantees.

The Results: As a result of implementing a COLI policy, the credit union is now receiving:

  • A 4% annual net rate of return from the fixed policy and a 5% (average) return from the floating rate policy, while preserving safety or liquidity
  • Yields that increase as interest rates rise
  • Additional key-person death benefit protection on the CEO, CFO, and CCO that will be paid to the organization
  • The ability to contribute more in the future to these policies, if desired
  • Compliance with FASB ASU 2016-01

A Final Word

At Acumen Insurance Solutions, we have pioneered “institutional” designs that maximize performance while minimizing the out-of-pocket expenses associated with the acquisition of “retail” life insurance.

We recognize that credit union-owned life insurance is a great way to earn a higher current yield without sacrificing safety or liquidity while acquiring life insurance protection on key people.

Read on for more benefits of credit union-owned life insurance.