Articles

Growing Insurer Yield Through Life Insurance Vehicles

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.
 
As with COLI and BOLI, ICOLI can be structured as a variable universal life insurance contract, a non-variable insurance contract, or a combination of the two.(1) 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.








(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 located at 300 Primera Boulevard, Suite 200, Lake Mary, FL 32746 and 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.
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