Credit unions are looking for alternative investments as a result of extra cash on their balance sheets, persistently low investment yields, and the need for income predictability.
One of the alternative investments that many credit unions of all sizes are using is credit union-owned life insurance (CUOLI). In credit unions, CUOLI is normally used in two ways:
- To offset employee benefit costs
- To provide income for charitable donation accounts (CDAs)
In this article, we’ll discuss how CUOLI can benefit your credit union through reduced risk, increased yield, providing for charitable contributions, and offsetting employee benefit expenses.
What’s the Need?
The benefit of CUOLI is that it generally offers a stable yet higher yield than typical credit union investments (i.e. bonds).
This alternative asset is permissible to use as an investment for credit unions in specific instances. Those instances include: offsetting the rising costs of employee benefits, offsetting the expense of deferred compensation arrangements, and funding Charitable Contributions Accounts.
Now, what does the credit union movement look like today? Credit unions, as a whole, still have a ton of cash on their balance sheets, and they’re looking for yield in a very low-yielding environment.
What’s the Solution?
Credit union-owned life insurance is a typically higher-yielding and stable alternative investment compared to typical credit union investments. It is not like a typical, consumer life insurance policy.
CUOLI is institutional in nature, which means:
- There are not a lot of internal expenses to the policy
- There are not excessive commission structures on the policy
Lastly, there’s as little death benefit as possible under various IRS guidelines. This is because the primary goal of a CUOLI plan is to generate a current and consistent return for the organization – not provide a massive windfall in the event of an insured’s death.
An Example of CUOLI
As mentioned above, CUOLI insurance policies are institutionally priced and not designed like “typical” insurance policies. An institutional CUOLI investment starts accruing value on day one.
For example, if you were to put $500,000 into a traditional, consumer life insurance policy, on day two the cash value of that policy could be as low as $250,000.
Conversely, with an institutional CUOLI policy, if you were to put $500,000 into the policy, on day two the value would sit at $500,000 plus a little bit of interest which the credit union gets to recognize as income.
Why Did Credit Unions Start Using CUOLI?
Before we move on, let’s discuss why credit unions use CUOLI in the first place.
Credit unions typically have limited options for investment.
Historically, credit unions successfully used mutual funds and stock investments to offset employee benefit costs and fund CDAs. Then, they were hit with mark-to-market requirements per Accounting Standards Update 2016-01.
These assets became very volatile to the income statement once accounting rules changed under the updated accounting standards.
On the heels of that change, more and more credit unions have been exploring various forms of credit union-owned life insurance for its stable yield characteristics and the excess return it can provide.
For federally-chartered credit unions, there are two avenues in which credit unions get additional authority to use these alternative assets.
- If they’re offsetting a benefit expense under section 701.19 (which can include deferred compensation for key executives)
- Or, they’re using these assets within the structure of a CDA (under section 721)
*For state-chartered credit unions, many states have parity with federal regulations; however, the credit union would need to check local rules/guidelines.
When compared to the return profile of typical credit union investments, CUOLI stands out for generally providing a higher yield along with month-to-month stability.
According to the most recent update to the NCUA Examiner’s Guide, a credit union can invest up to 25% of its net worth without this type of asset being considered a material concentration of net worth.**
How Would I Go About Using CUOLI?
Here’s how an interested credit union would proceed in exploring CUOLI:
Talk to a Firm
Talk to a firm that can work with the widest variety of products a credit union might use. At Newcleus, our size and tenure allow us to provide our clients and advisors with the best products, services, administration, and regulatory compliance support available in the marketplace today.
Sizing the Transaction
Next, we ‘size the transaction.’ This means determining what might be the most appropriate path to take based on the financial status of your credit union, its employee structure, and what your credit union is trying to accomplish.
Evaluate and Compare
Evaluate and compare the different available products that could be used.
Design Ancillary Benefits
Next, we’d design any ancillary benefits (for example, a death benefit only, or DBO, plan if it’s being used to enhance key employee benefits).
The credit union approves the policy and program. Then, operational documents are executed and the policy is put to work. The credit union begins booking income immediately.
How Newcleus Helps Your Credit Union
At Newcleus, our continual focus on innovation means that we never rest on what exists today—we are always looking around the corner to see what new capabilities we can develop to bring better solutions to our clients.
With our collection of expertise and a range of solutions we’ve developed in-house, we work closely with your credit union to uncover your unique needs and design the financial solution that’s right for you.
If your credit union would like to earn a higher yield on your excess deposits and potentially provide additional life insurance to your key people, CUOLI could be an attractive alternative for your consideration.
Read on for FAQs about CUOLI.
**State-chartered credit unions must refer to their specific state guidelines. States may vary but typically follow NCUA. The sections of federal code that allow this investment are sections 701.19 and 721.