The insurance industry is seeing a resurgence in the company-owned life insurance, or COLI, market. This revival is primarily driven by new growth in multiple, specialized industries such as medical, construction and technology.
With growth comes opportunity — including the opportunity to hire new employees. Companies today need a tool to help attract top talent and stand out from competitors.
At the same time, competitors have similar opportunities. So it’s important to also retain key employees who may be subject to poaching.
Part of retaining key employees includes helping senior executives fill the retirement gap created through Social Security and qualified plan limits, which may be too low to meet the long-term retirement needs of this group of employees.
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These nonqualified benefit plans can be either unfunded or informally funded. If unfunded, the benefits will have to be paid out of future revenue, which creates uncertainty for the company and the executive.
Because of the available tax and cost recovery advantages, life insurance is a popular option for most large companies. Historically, companies have used variable universal life (VUL) as the funding mechanism. Recently, there has been a shift to indexed universal life (IUL) due to its:
- Lack of direct downside market risk
- Lower volatility
- Potentially lower internal costs
What is IUL?
IUL provides for upside potential based in part on the upward movement of a stock market index, subject to certain limitations, while offering protection against the impact of market downturns.
IUL has the potential for interest crediting up to the stated cap rate, which could range from 10-12 percent, depending on the crediting strategy selected. IUL products also include an interest rate “floor,” which is typically set at zero percent, protecting against loss.
If there’s a period in which the market index yields negative returns, the interest credited will never be lower than the floor, and there’s no recovery time within the IUL policy before positive crediting can resume. When the crediting period that follows a negative market index return ends, it resets index performance so any subsequent recovery in the index results in positive crediting. IUL products offer the right balance of flexibility, accumulation potential and protection to work well in the COLI market.