Giving CUOLI a Second Look

Financial institutions are taking a second look at Credit Union-Owned Life Insurance (CUOLI). Made especially attractive in today’s low-interest investment environment, general account CUOLI has become a staple in the investment portfolios of credit unions as a major source of funding for executive benefit programs.

Offering credit unions the ability to shift current invested assets with low yielding taxable returns to an insurance company’s general accounts with a 3% to 3.5% net ROI, CUOLI offers more than just benefit funding and life insurance protection for your “key people.”

Diversifying your investment portfolio with CUOLI could be a game changer. Here’s why a second look at CUOLI could be more worthwhile than you think:

An ROI of 3% to 3.5%. Unfortunately, a financial institution’s investment portfolio earns less than desired these days – anywhere from close to zero in short-term treasuries and money markets to under 3% after-tax return in municipal bonds, mortgage-backed securities and other fixed income instruments. Typically, credit unions see an uptick in incremental returns of 1% to 1.5%, when comparing the CUOLI yield to the average yield of non-CUOLI investments. A credit union allocating $10M, for example, to a CUOLI program could increase earnings by $100,000 to $150,000 annually, while diversifying their investment portfolio and potentially lowering their investment risk.

Insurance protection for your “key man.” A long-time risk management strategy, CUOLI’s most basic purpose is to fund benefit costs and serve as life insurance for a credit union’s most valuable employees. Sometimes dubbed “key man” insurance, CUOLI insures a credit union’s executives, and the credit union receives death benefits when the employee dies. Interestingly, financial institutions typically keep their CUOLI policies even after employees move on from their organization. Whenever that employee dies – whether the employee is still active or not – the institution receives the death benefit.

Cash value in the CUOLI contract may be used to hedge benefit liabilities from the credit union’s executive and employee benefit programs, providing liquidity in the event that cash is needed.

CUOLI benefits credit union executives, too. Serving as an additional funding source, CUOLI enables credit unions to provide competitive executive benefit and retirement programs. This, in turn, enables credit unions to attract, retain and reward top executive staff. Additionally, in exchange for allowing the organization to be the beneficiary of their life insurance policy, insured executives are typically offered a death benefit as part of the CUOLI program.

Is CUOLI for every credit union? While CUOLI is highly prevalent, it is not without risk and is not a fit for every banking institution. General account CUOLI assets are subject to creditor claims in bankruptcy of the insurance company. Further, CUOLI contracts structured as modified endowment contracts have adverse tax consequences if liquidity is required. There is a 10% excise tax on gain above basis accessed from MEC CUOLI cash value. Some financial institutions choose to utilize taxable investments or dedicate disposable assets to their loan portfolio as opposed to a CUOLI program.

The risk reward drives the desired purchase. CUOLI allows credit unions to diversify their investment portfolios from potentially higher-risk investments like mortgage-backed securities, real estate and corporate bonds into the general account of highly-rated insurance companies with equal or higher yields. This value proposition is significant to credit unions.

Over 70% of large financial institutions have CUOLI programs. The Office of the Comptroller of the Currency limits a financial institution’s CUOLI holdings to no more than 25% of their Tier I capital. While many credit unions have CUOLI programs, many more have the opportunity to expand those programs and/or shift to better quality and higher returns with alternative insurance companies.

Today’s low interest investment world makes CUOLI’s far-reaching benefits significant. Taking advantage of this strategy now means CUOLI will insure much more than just your key man – it can be an investment for your credit union for years to come.

David Hauptman is a managing director for HUB International.