CUNA Mutual Group’s Fred Palmer explains business-owned life insurance and how it can work as an investment for credit unions in Episode 59 of the CUES Podcast.
Employee benefits expenses are now 50 percent of many credit unions’ total expenses. Alternative investments, including business-owned life insurance, can help to offset this expense, according to Fred Palmer, executive benefits specialist with CUNA Mutual Group, Madison, Wis., a CUESolutions platinum provider based in Madison, Wis., in Episode 59 of the CUES Podcast.
BOLI (also known as CUOLI, corporate-owned life insurance, bank-owned life insurance and institutional life insurance) began in the banking industry in the early 80s and really started to catch on when it became possible to offset the costs of employee benefits using this alternative investment, Palmer explains in the episode.
NCUA followed suit with rule 701.19 in 2003, which allows credit unions to purchase BOLI and other alternative investments as a general cost offset for employee benefits.
“BOLI is built just the opposite of retail insurance,” Palmer says. “When we buy insurance, we’re looking for family protection. We’re looking for policies with the highest death benefit with the lowest premium. BOLI as institutional life insurance is built to build cash value, not death benefit.
“Credit unions typically choose a group of key executives to put the insurance on, … and in some cases the credit union may also endorse over a portion of the death benefit to the insured executive as a benefit,” he adds.
Credit unions usually buy “general account” BOLI. With this type of insurance, the carrier places the premium in a general account which is invested in government securities, high quality corporate bonds, commercial mortgages and, to a small extent, equities. The carrier looks at its investment yield in the general account and, on an annual basis typically, gives the credit unions a gross crediting rate based on the actual return in that general account.
The insurance carriers make spread income just like a credit union does, Palmer explains. A credit union takes in deposits, makes loans to make spread income, and then gives the members a rate of return on share account. Insurance carriers take the premium, invest in the general account, take out their expenses, and then take a spread and give you a gross crediting rate.
“Where you pick up additional yield from a carrier is … they are investing further out in the yield curve than a credit union can,” he continues. “That gives a huge rate advantage. Where credit union are investing three to five years out on the yield curve, insurance carriers are typically six to 12 years out. Where a credit union may be yielding in the mid-ones today, the insurance carriers are yielding in the mid-fours in their general accounts.”
This episode also includes information on:
- What earnings can be predicted for a credit union that invests in BOLI
- How BOLI compares to other investments credit unions can make
- When BOLI isn’t the right move and whether these policies are good for any size credit union
Be sure to tune in for all the details!
The CUES podcast is an audio program hosted by James Lenz, CUES professional development manager. James talks to credit union and cross-industry experts for their perspectives on trends and topics that matter to you.