Tag Archive for: employee benefits

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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.

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The Acumen Team

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

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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.