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Life Health > Life Insurance

Expanded Sensible Options For Business Owners Using COLI

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At the 50th annual meeting of the Association for Advanced Life Underwriting, held recently in Washington, AALU president Dermot Healey delivered a message on “doing the right thing.” He showed a moving Korean television commercial, produced by Prudential and tracing one man’s journey through life. It brought a tear to the eyes of the meeting’s attendees as it reminded them of the reason they got into the life insurance business: to help provide financial protection.

That is the one objective that never changes in our business, and the evolution of new and better solutions for helping our clients to save and protect is what keeps the life insurance industry exciting and vital for those of us who practice within it.

In today’s aggressive business environment, baby boomers are leaving the workplace in unprecedented numbers, and young talent is more highly prized than ever. Supplemental executive retirement plans (SERPs) and deferred compensation plans can go a long way toward achieving several important goals. They can provide employers with an important edge in their search to recruit and retain qualified executive talent. Just as important, these plans are excellent vehicles for encouraging retirement savings in the private sector.

SERPs and deferred compensation plans have fallen in and out of favor over the years, largely as a result of economic fluctuation, stock option accounting, negative press, and some regulatory ambiguity. But the clarity brought to corporate-owned life insurance by the COLI Best Practices Act and the new 409A regulations, combined with a favorable market outlook, make this an ideal time to consider expanding or implementing a new plan.

For many companies, the COLI Best Practices Act created a uniform framework by requiring employee consent and notification and defining who could be covered while ensuring favorable tax treatment. The 409A regulations further clarified issues regarding benefit plan eligibility. These clarifications gave our industry the flexibility to design programs that better meet the objectives of both employers and their key executives. As a result, the hesitations that once existed regarding these plans have given way to an increased demand for nonqualified executive benefit plans, including SERPs and deferred compensation arrangements.

Today, COLI products remain an efficient vehicle for satisfying the informal funding needs for all nonqualified plans. Employers with a focus on earnings are quick to appreciate the cost neutral or accretive aspects of COLI funding when combined with the cost of benefit plans. COLI contracts provide an offsetting asset on the corporate balance sheet for accrued liabilities generated by nonqualified plans. And they can help business clients avoid a big bite into retained earnings in the early years of the contract using cash value enhancement riders and other features not found in individual retail policies.

Significant improvements also instituted recently make COLI products easier to acquire as informal plan funding vehicles. This is particularly true for companies with fewer than 25 lives–and in some cases, fewer than 10–as progress in guaranteed issue underwriting has made COLI simpler to implement for smaller companies.

Care should be taken in selecting products that offer maximum flexibility. Some, for example, offer a significantly wide range of variable investment options–as many as 70 or more equity investment options covering various asset classes and risk profiles–an important feature in the current market.

Variable universal life insurance contracts increasingly offer flexibility with such features as optional target term insurance, competitive compensation, guaranteed issue, and pre- and post- death benefit scheduling. This flexibility allows advisors to adapt the product to meet the needs of a wide range of clients, including small community banks and other small- to mid-size businesses.

Taken together, these benefits ensure that our industry is once again prepared to be “doing the right thing.” Great products, favorable market conditions, consumer confidence, and the inherent benefits to both employers and employees make this an opportune time for companies of all sizes to consider new non-qualified plans funded with corporate-owned life insurance.


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