Tag Archive for: credit union owned life insurance

Why Do Credit Unions Use Corporate-Owned Life Insurance (COLI)?

Credit unions use the cash value of Corporate-Owned Life Insurance (COLI) as a tool to help them generate higher yields to offset the rising costs associated with employee benefits programs, such as health insurance and retirement. 

The death benefit from a life insurance policy can be used to help the organization shore-up underfunded benefit programs, pay off debts, fund future expenses, or even shared with the insured employee’s family to provide financial security.

Scott B. Hinkle, Principal at Acumen Insurance Solutions and the leader of the firm’s Credit Union practice, explains more in the video.

What is Corporate-Owned Life Insurance?

Corporate-Owned Life Insurance (COLI) is a type of life insurance policy that is owned by a company and pays benefits to the company upon the death of the insured employee. The premiums for COLI policies are paid by the company, making them an attractive way for businesses to provide death benefits to the organization and, potentially, its key employees.

When properly structured, the death benefit from a COLI policy can be received tax-free by the company and policy beneficiaries, making them an effective tool for tax and estate planning.

See another video from Scott and learn more about COLI in our Mark-to-Market and COLI blog.

Reasons Credit Unions use COLI

There are a few reasons why credit unions might choose to use COLI. First, it can be a way to generate additional income for the credit union. This income can then be used to help offset operating costs or to fund other activities. 

Additionally, COLI can also help to diversify the credit union’s investment portfolio. By investing in COLI, the credit union can reduce its overall risk. 

COLI can also provide death benefits to the insured executive’s families as a benefit of employment with the credit union, which can help the organization attract and retain its key people. 

Credit unions may also use COLI cash value earnings to fund executive retirement programs. These programs provide key executives with additional financial incentives to stay with the credit union and continue to perform at a high level.

Takeaways from Scott

The NCUA (National Credit Union Administration) code allows credit unions to invest in financial instruments that they otherwise would not be able to invest in, with the goal being able to offset the rapidly-rising costs of employee benefit expenses. 

The NCUA realizes that the way most credit unions invest with the bulk of their assets is very conservative, and therefore has a historically lower rate of return. For many credit unions, they invest most of their assets in 10 years or less debt securities or bonds, which have a certain yield profile. 

However, under this Section 20 of the Call Report, the NCUA allows credit unions to invest in what are called otherwise impermissible investments, which have the potential to earn more than traditional investments while still maintaining a very high level of safety and liquidity. 

Life insurance contracts are one type of otherwise impermissible investment, and they offer the credit union a higher rate of return, a death benefit, and safety. The goal is for the credit union to use these alternative investments to keep up with the rising cost of benefit expenses.

A Final Word

Credit unions and nonprofits have to provide good benefits, but the ways they are allowed to make money from investments is very limited. Section 20 of a credit union’s Call Report lists the “otherwise impermissible” investments like COLI, where the yields can be higher. They can do this to offset the rising costs of executive compensations (ie: benefits like health insurance and 401(k) matching), which would be too expensive otherwise. 

Read on to learn about how COLI can help fund executive comp packages
COLI can be a very valuable tool for credit unions. To find out more about how COLI can benefit your credit union, reach out to us today!

Close-up of couple signing contract with insurance agent in the office.

Using CUOLI to Fund Section 20 and 21

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.

Person protecting growing leaves coming from a stack of money

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

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.

Employee working on a tablet and reviewing data

Auditing Existing COLI Plans for Credit Unions

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.

Leaves gradually growing out of coins

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

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.

Close up of two people shaking hands

What are the Benefits of Credit Union-Owned Life Insurance?

In today’s interest rate environment and in the face of rising employee benefit expenses, the yield on a credit union’s safest and most liquid assets is extremely low and typically generates little income. Additionally, in order for a credit union to potentially increase the yield on its assets, liquidity and/or safety typically must be compromised.

Using credit union-owned life insurance (also known as “COLI” or “CUOLI”) as a way to pre-fund the increasing cost of benefit expenses, however, can provide significant advantages to your credit union.

Let’s discuss the benefits of COLI.

What is Credit Union-Owned Life Insurance?

COLI is an investment in life insurance that credit unions use to pre-fund employee benefit expenses. Similar policies have been used by commercial banks, called bank-owned life insurance (BOLI), for over 35 years. In addition: 

COLI can produce higher current yields for credit unions than the other options while preserving safety and liquidity.

COLI policies insure the life/lives of executives, where the credit union is the owner and the beneficiary of the policy.

How Can COLI Benefit Your Credit Union?

There are many advantages to implementing COLI. Here are a few:

Increase Yields

Earn a higher current yield (often 50% to 200% higher) compared to other conservative safe/liquid assets without sacrificing safety or liquidity, and acquire life insurance protection on key people. As interest rates rise, so do the yields on these policies. If your credit union already owns COLI, you may be able to improve performance through a policy audit and upgrade to the most efficient contracts.

Informally Pre-Fund Employee Benefit Expenses

Employee benefits are used by credit unions as a way to attract, reward, and retain your employees. The increased yields achieved through COLI can be used to offset the costs of employee benefit plans. 

Comply with FASB ASU 2016-01

COLI is ideally suited to eliminate some of the accounting issues that are the result of recent changes to the Financial Accounting Standards Board (FASB) because COLI minimizes volatility and is backed by some of the world’s strongest insurance companies.

With these strong advantages, COLI is becoming an even more popular solution for credit unions as a means to offset the costs for employee benefits (i.e. healthcare and other group benefits).

A Final Word

If your credit union would like to earn a higher yield on its safest, most liquid assets, own life insurance on its key people, and pre-fund employee benefit expenses, COLI is an attractive alternative to the lower-yielding options offered elsewhere.

At Acumen Insurance Solutions, we specialize in custom-designed life insurance products to fund supplemental executive retirement, business perpetuation, and estate plans, working closely with our clients to uncover their unique needs. If you already have a COLI policy in place, our team can audit your existing plan and ensure you are using the plan to its greatest potential. 

Interested in learning more? Read on for more information on how life insurance protects your key executives.