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Insurance Company-Owned Life Insurance (ICOLI)

Aug 9, 2016

Insurance companies are continuously looking for investments that maximize yields and tax-adjusted returns with a focus on improving earnings, surplus, and financial strength. These investments must also fit well within the regulatory framework that is imposed on insurers. What if the insurance company could improve its investment earnings and maintain or improve its overall investment structure and financial strength?
 
Insurance company-owned life insurance (ICOLI) is one of the few vehicles that can help improve tax-adjusted earnings, receive favorable Risk Based Capital (RBC) treatment and enhance the investment choices available to insurers.
 
This investment strategy is similar to one that has been historically employed by banks for the last three decades. While an insurance company is highly regulated, it also has more flexibility than banks in its investment structure which allows for more creative solutions when using life insurance in this manner.
 
Today, many life, health and P&C companies use ICOLI to achieve a more diversified investment portfolio, improve tax-adjusted returns, receive favorable RBC treatment, and comply with their surplus investment policy guidelines. The interest in ICOLI has rapidly increased over the last few years as the economic environment has left insurers with fewer and fewer alternatives to improve its investment results.
 
Why Insurance Companies Invest in ICOLI
  • Designed to increase after-tax investment returns
  • Seeks to increase rate of growth of capital and surplus
  • Seeks to increase reported earnings
  • All investment gains are included in earnings (realized and unrealized)
  • No deferred tax liability needs to be recorded
  • Assets may be reallocated/rebalanced without generating taxable income or trading costs
  • Favorable risk based capital (RBC) treatment
  • Customized investment strategy with broader asset class availability and simplified accounting/reporting
  • Asset allocation is flexible to meet investment portfolio objectives
  • No credit exposure to other carriers when using separate account structure (1)
  • Guidance on corporate insurance purchase has been provided by the IRS (IRC §101(j))
 
Insurance Company Balance Sheet and ICOLI Accounting
ICOLI is an admitted ledger asset for regulatory purposes. The asset value is recorded as an Aggregate write-in for “other than invested assets” with the income recorded as an Aggregate write-in for “miscellaneous income.” Income consists of the change in cash surrender value, plus death benefits received in excess of cash value, less premiums paid. The cash value changes are treated similar to investments classified as “trading.”
 
Tax-Favored  Investing
ICOLI can be structured as a private placement variable universal life insurance contract, a general account insurance contract, or a combination of the two.(1) This structure allows the insurance company to invest in equities, fixed income, or other investment strategies on a tax-favored basis, resulting in potentially improved net investment earnings.
 
Broad availability of investment options
The investment strategy for ICOLI can be customized to meet specific carrier objectives. In addition, a wide array of traditional and alternative investment strategies, styles, and managers are available in separate account products, as well as access to a carrier’s declared rate general account portfolio.
 
For more information regarding our ICOLI services, please contact your Newport Group representative.







(1) Variable life insurance policies have certain inherent risks, including the possible loss of principal.  Risks associated with variable life insurance policies include, but are not limited to, liquidity, market volatility, asset default and investor control tax risk.

Additionally, variable life insurance policies’ fees and expenses include, but are not limited to, mortality costs, stable value charges, policy administration fees and asset management fees.

Please refer to your Private Placement Memorandum, Stable Value Agreement and/or Life Insurance Policy for definitions of the terms and/or data included in this report and to better understand the risk and fees associated with these policies.




Disclaimer

Note that the views expressed above are those of Newport Group and do not constitute legal, tax or accounting advice; readers are strongly urged to seek independent accounting, tax, and/or legal advice in applying this information. The information provided herein is based solely on our informal, general understanding of the relevant technical issues as well as the products and plans that may be involved.  This information is not intended nor should it be used as an opinion on accounting, tax, and/or legal issues.

This release is a high-level summary of a complex subject that is intended for Newport Group’s clients and intermediary partners and should not be understood as providing a comprehensive discussion of all issues or requirements under the regulations or as a guide to compliance and is for informational purposes only.

Newport Group Securities, Inc. ("NGS") is both a FINRA-registered broker-dealer and an SEC-registered investment adviser. All securities transactions are provided by the broker-dealer, while all investment advisory services are provided through the registered investment adviser. When offering variable insurance products, Newport Group Securities, Inc. acts solely in its capacity as a broker-dealer. Other insurance products may be offered by Newport Group, Inc. NGS is an affiliated entity of Newport Group, Inc. No guarantee as to investment results. All investments in securities involve risks including possible loss of principal.



 

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Newport Group, Inc. and its affiliates provide recordkeeping, plan administration, trust and custody, consulting, fiduciary consulting, insurance and brokerage services. Fiduciary consulting services are provided through Newport Group Securities, Inc., an SEC-registered investment adviser and FINRA-registered broker-dealer, and InterServ, LLC, an SEC-registered investment adviser. Newport Group Securities, Inc. and InterServ, LLC are affiliates of Newport Group, Inc. All securities transactions are provided through Newport Group Securities, Inc., in its role as broker-dealer. All fiduciary consulting services are provided through the registered investment adviser. when offering variable insurance products, Newport Group Securities, Inc. acts solely in its capacity as a broker-dealer.
Trust and custody services provided by Newport Trust Company, a New Hampshire state chartered trust company and wholly owned subsidiary of Newport Group, Inc.