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.