For a variety of reasons, corporate-owned life insurance is more important than ever to American businesses.
The demand and market for COLI is brisk, having undergone dramatic changes in recent years. This pace of change will accelerate even more in the next five years, making it imperative for financial service providers and insurance brokers to have the depth, expertise, and flexibility to meet companies complex and changing needs.
It is important to distinguish the traditional uses of COLI as a funding source for executive benefits from the use of leveraged COLI or what has been nicknamed and criticized by the media as “janitors insurance.” For a brief period up until 1996, “janitors insurance” had tax advantages that led a handful of companies to purchase insurance on all employees, without obtaining written consent for the coverage, and borrow the policy proceeds. These inappropriate practices are no longer taking place, though many of the policies remain in effect.
COLI, in its traditional form, serves many important functions for executives, companies, and shareholders. Most notably, it can be used as a financing vehicle for supplemental retirement plans, which enable companies to attract and retain key executives, typically the top 3%-7% of a companys staff. COLI can be used exclusively or in conjunction with mutual funds and “self-funding,” i.e., the company will pay the benefits out of future earnings on a “pay as you go” basis as these obligations come due.
Over the last 30 years, supplemental retirement plans have become a vital component of executives retirement income because of significant limitations on what they can contribute and receive from qualified retirement plans.
Rank-and-file employees are usually able to receive 70% or more of their final pay from qualified 401(k) participation, pensions, and Social Security. Experts generally agree this 70% benchmark is necessary to maintain ones lifestyle at retirement.
Yet executives and key employees will often receive less than 30% of their final pay from qualified retirement plans because of the limitations on contributions and disbursements. Nonqualified, supplemental retirement plans help to bridge the gap.
Given the decline in stock options and continuing volatility in the equity markets, a growing number of executives want to diversify their personal finances with fixed-rate returns that can be provided with COLI products. This is important for financial planning and relieves some of the fixation that executives must have on quarter-to-quarter earnings and the impact it has on the companys stock price, stock options, and an individuals net worth.
To capitalize on opportunities in the COLI market and serve companies most effectively, brokers and financial consultants should be aware of 10 palpable trends. All of these are driven by clients expectations. It should also be noted that with any client, there are two customer segments: 1) the company officials responsible for overseeing and administering the plan; and, 2) the executives who are actually covered by the nonqualified benefit plan.
These are the 10 trends:
Technology is Key. Clients today demand real-time access to account values. They expect to be able to obtain such information from their personal computer and to have these account values viewable with other retirement portal data. Having a large information technology infrastructure, whose costs are spread among many clients, best drives down the costs involved in providing sophisticated technology.
Diversity of Product Offerings. Brokers and consultants must be able to provide a wide array of institutionally priced fixed and variable return products, particularly highly rated ones. They must be able to identify products that best fit with clients existing qualified plans and executive benefits strategies.
Commitment to Research and Development. COLI and the nonqualified benefits business do not lend themselves to “commoditization.” New ideas, better ideas, and more creative solutions are more important than ever. Clients want to continually adopt and refine products, and look for suggestions from brokers and consultants that will fit their needs.
Quality of Service Staff. The administrative and service team that will help serve a client after the plan is implemented must be highly educated about COLI and nonqualified plans. Advanced financial degrees and certifications are today a plus, if not an outright necessity.
Education and Training are Paramount. Due to a consistently changing regulatory environment, and tax and accounting issues, it is important that those involved in the sales and administration of COLI products have continuous, topnotch training. Otherwise, the products and services will no longer fit clients objectives and they will turn elsewhere for service.
Track Asset/Liability Differentials. While COLI assets offset the nonqualified retirement plan liabilities, they do not exactly track these liabilities. In some cases the COLI assets may be in excess of the liabilities; other times the opposite occurs. Plan providers need to have the systems and resources to regularly track this differential in order to minimize the asset/liability mismatch risk.
Staying Power is Critical. Supplemental retirement plans are integral to many companies senior executives financial planning–including CEOs and CFOs. COLI providers must be able to demonstrate to clients that they will be around for the long-term and have the capacity to continue administering plans well into the future.
Accommodate Corporate Restructuring. As a result of mergers, acquisitions, and divestitures, many companies are consolidating their executive ranks. Often, executives from different areas of the company have been covered by different nonqualified benefit plans.
COLI providers need to be able to mesh varying plans, creating a common benefit structure with common performance objectives and incentives. Whether the companys aim is to encourage retirement by executives at a certain age–or reward executives for exceeding financial benchmarks–clear and targeted benefit plans are imperative.
Assess the Financing Alternatives. Astute COLI providers recognize that companies often want to take a diverse funding approach to their nonqualified plans–using a combination of both mutual funds and COLI. In many cases, it may make sense to layer a fixed-rate return from an insurance product on top of variable insurance products or mutual funds. Being able to gauge these alternatives, and make appropriate recommendations, is critical.
Size Should Not Distinguish Clients. Privately held companies as well as smaller publicly held businesses expect the same quality of products and services as do large public companies. By having depth of staff and information technology systems, COLI providers can cost effectively serve these clients.
While the COLI marketplace remains brisk, it will be important for COLI providers to invest in and expand their businesses to meet clients complex and changing needs. Companies that provide these services, and work with a network of brokers and financial consultants, will benefit and prosper, as will the clients and executives they serve.
is president and CEO of The Todd Organization, an executive benefits consulting firm headquartered in Greensboro, N.C. He can be reached via e-mail at email@example.com.
Reproduced from National Underwriter Life & Health/Financial Services Edition, June 24, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.