Tag Archive for: Otherwise Impermissible Investment

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Using CUOLI to Fund Section 20 and 21: A Webinar Overview

Today’s current investment environment 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.

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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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.