Many businesses use the policies to increase executives’ retirement benefits.
Nationwide already has about $26 billion in corporate-owned life insurance assets, and it wants more.
The Columbus, Ohio-based mutual insurer recently announced that it has shifted to a simpler, more affordable cost structure for the variable universal life policy at the heart of its COLI program.
Many employers use COLI to power executive retirement benefits, and, in spite of all of the recent uncertainty in the U.S. economy, “the COLI market is actually doing really well right now,” Jessica Dowdy, a Nationwide vice president, said in an interview.
Dowdy is hoping life insurance agents, financial advisors and other financial professionals will think of Nationwide when they spot an employer that could use a COLI policy. Agents in the individual market may be able to team with an experienced COLI producer to help set up and manage a COLI case, she said.
What It Means
For some of your corporate executive clients, COLI is a major retirement benefits engine.
COLI and Nonqualified Deferred Compensation Plans
Employers can use COLI to fund post-retirement health benefits for all employees, executive benefits other than retirement benefits, and other benefits or activities.
The market for using COLI as a funding vehicle for nonqualified deferred compensation plans is getting more attention because of rapid growth in the NQDC market.
NQDC plans give highly paid executives a chance to defer federal income taxes on more of their income than they could if they were sticking solely with 401(k) plans.
The number of participants in the plans increased to 702,000 in 2022, from 640,000 in 2020, and, for tax and legal flexibility reasons, about 83% of the plans are classified as being “informally funded,” according to a plan recordkeeper survey organized by Mullin Barens Sanford Financial.
The average plan participant balance was $265,000.
About 42% of all nonqualified deferred comp plans included in the survey were funded with COLI, and 41% of all nonqualified deferred comp plans in the survey were funded with bare mutual funds.
The Mullin Barens Sanford survey results imply that, if the plans funded with COLI were similar to the other nonqualified deferred comp plans, COLI might account for about $80 billion of the $186 billion in nonqualified deferred comp assets included in the survey results.
Many employers use life insurance as the plan funding vehicle — rather than bare mutual funds — to take advantage of the ability of value to build up in life insurance without producing taxable income.
Employers also like their ability to collect policy death benefits free from income taxes and to deduct interest on financing used to pay for COLI from taxable income.
Banks, credit unions and insurers tend to be heavy users of specialized types of COLI because regulators treat COLI as a relatively safe asset when evaluating regulated companies’ assets.
Nationwide has been selling COLI for about 25 years. Competitors include many other large life insurers, including New York Life, Equitable, Prudential Financial and Principal Financial.
Nationwide has about 66,000 business life insurance policies in force, with an average of about $400,000 in assets per policy and about 50 people on the business solutions unit team.
The company has private, proprietary survey data from IBISWorld indicating that it’s the top COLI provider.
Employers could use indexed universal life policies as well as variable universal life policies in COLI arrangements, Dowdy said.
In typical cases, she said, employers that meet a minimum case size can get the coverage provided on a guaranteed-issue basis for all executives and other covered employees actively at work, with the price depending on factors such as the employer’s industry, the employees’ average age and the percentage of participants who smoke.
In the late 1990s and early 2000s, the rules governing COLI arrangements were looser, and members of Congress complained about insurers providing what they called “janitor’s insurance.”
Critics questioned whether employers had a real insurable interest in the lives of all of the workers covered by the policies.
Congress included COLI rule changes in the Pension Protection Act of 2006 that, in effect, limit employers to insuring only employees who rank in the top 35% in terms of compensation.
The U.S. Treasury still includes proposals for narrowing the scope of the deduction for COLI-related interest expenses in the “green book,” or detailed description of administration tax proposals.
But overall, in recent years, “the climate has been pretty stable,” Dowdy said.
Jessica Dowdy. (Photo: Nationwide)