Tag Archive for: Credit Union

Amanda Rogers

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

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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.
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.

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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.