Driving Stronger Financial Results with ICOLI

The Tax Cuts and Jobs Act[i] enacted in 2017 included several provisions impacting the insurance industry that likely influenced their long-term investment and financial management strategies. Yield and income are critical components for insurers, and they have suffered during the extended low interest rate environment. Insurers could now face higher tax liabilities with the Biden administration’s tax proposals*.

Similar to banks, insurance companies invest heavily in fixed income products to generate yield.  Many have diversified their overall risk/return profile over the last decade to increase earnings which is why insurance companies have consistently been adding ICOLI (Insurance Company Owned Life Insurance) to their portfolios. ICOLI policies are attractive due to their tax advantages, long durations and yield enhancing tax-deferred income.

Recent legislation (Consolidated Appropriations Act[ii]) included a positive development for cash value life insurance that provides purchasers with an earnings boost. The insurance interest rate used to calculate the definition of a life insurance contract has been reduced. For new policies, the net effect is a significant reduction in death benefit for ICOLI (and BOLI[iii] and COLI[iv]) policies and greater accumulation of the values in the investment accounts which translate to improved after-tax earnings for insurance companies.

With ICOLI the insurance company has total discretion over the use of gains. Immediately accretive, policy gains can be used to defray the increasing cost of employee benefit programs, provide an executive benefit to key employees, or improve the financial strength of the company.

The insurance company has sole control over the investment portfolio and can use the separate account investment offerings to improve the overall risk/return profile. Investment managers can increase exposure to asset classes that reflects their overall investment philosophy and tax-efficiently reallocate asset classes. Statutory and GAAP accounting[v] treat ICOLI as an insurance policy rather than as an investment, carrying a reduced statutory risk-based capital charge than direct alternate investments. The charge is 0% for a life company and 5% for a property and casualty company.

ICOLI, already a valuable risk-based management asset, may provide improved after-tax yields. Initial and additional purchasers can benefit from waiting and drive stronger financial results.

Author Notes: Kristine Kopsiaftis Lampert is a Senior Vice President, Retirement at OneDigital Company. Based in Delray Beach, Florida, Kristine has in-depth experience in all areas of Corporate Owned Life Insurance (COLI) programs, including insurance chassis design, investment options, and regulatory and compliance issues.

[i] Tax Cuts and Jobs Act: https://www.congress.gov/115/bills/hr1/BILLS-115hr1enr.pdf

[ii] Consolidated Appropriations Act: https://www.congress.gov/bill/116th-congress/house-bill/1865/text

[iii] BOLI: Bank Owned Life Insurance

[iv] COLI: Corporate Owned Life Insurance

[v] Statutory and GAAP Accounting: https://content.naic.org/cipr_topics/topic_statutory_accounting_principles.htm (Discussion of the differences in Statutory and GAAP (Generally Accepted Accounting Principles) accounting principles.