Dec 6, 2016
Insurance companies are continuously looking for investments that maximize yields and tax-adjusted returns with a focus on improving their earnings, surplus, and financial strength. These investments must also fit well within their regulatory framework.
What if these competing objectives could be addressed in a single investment? Banks have been using bank-owned life insurance
(BOLI) for the last three decades to do just that. The interest in insurance company-owned life insurance
(ICOLI) has rapidly increased over the last few years as the economic environment has left insurers with fewer and fewer alternatives to meet these objectives. While insurance companies are also highly regulated, they have more flexibility than banks in their investment allocations, allowing for more creative solutions when using corporate owned life insurance.
ICOLI can be structured as a private placement variable universal life insurance contract, a general account insurance contract, or a combination of the two. These cost-effective structures allow insurers to invest in equities, fixed income, or other investment strategies on an RBC and tax-favored basis, flowing investment gains and losses to miscellaneous income.
Why Insurers Invest in ICOLI
- Favorable RBC treatment—the NAIC RBC charge for ICOLI is 0% for L/H and 5% for P&C insurers. ICOLI is held as an “other than invested asset,” regardless of underlying investments. A.M. Best and S&P have provided guidance on ICOLI and have adopted BCAR and Capital Adequacy Model charges similar to NAIC RBC treatment.
- Regulatory Acceptance—The insurer applies for and owns policies insuring the lives of certain key employees as codified in IRC §101(j) – “COLI Best Practices” as well as the IRS safe harbors found in IRS Rev. Proc. 2007-61.
- Tax Advantages—All investment gains (realized and unrealized) are tax advantaged when the policies are released upon payment of the death benefit. There’s no deferred tax liability recorded, since the tax and accounting differences are permanent.
- Fair Market Value—ICOLI is held at fair market value of its cash surrender value. Investment gain/loss flows through miscellaneous earnings similar to “trading” securities.
- Flexibility—ICOLI investments can be customized to meet insurer guidelines through the wide array of traditional and alternative investment strategies, styles, and managers. Rebalancing or reallocating investments does not create taxable events nor incur trading costs. Funds may also have preferential fee and liquidity terms inside ICOLI.
- Liquidity—ICOLI is often considered a permanent investment with a permanent tax advantage from the life insurance. However, all structures allow for liquidity of all or a portion of the cash value. The policies also generate tax advantaged cash flows, which under standard mortality assumptions may return the initial investment in 15–20 years.
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.