As the tight labor market has employers investing in benefits to attract and keep executive-level employees, there’s a great opportunity for businesses to also evaluate the strategies they’re using to fund those benefits. One important solution in this space is corporate-owned life insurance (COLI).
To find out more about how COLI can help organizations improve their benefit offerings, we sat down with David Mohr, Head of COLI Sales and Distribution at Massachusetts Mutual Life Insurance Company (MassMutual).
PLANADVISER: Why is now a good time for companies to reevaluate their benefit programs and consider COLI as an informal funding vehicle?
David Mohr: Many companies are reviewing their benefit offerings now, particularly because of what’s going on in the labor market with “The Great Resignation.” Any time benefits are being evaluated it’s important to take a holistic approach and also think about how they’re funding those benefits. In a competitive labor market, as we find ourselves, companies are reviewing the needs of their senior-level and highly compensated employees, or HCEs, and are finding that they need to supplement the retirement goals of this class of employees through non-qualified deferred compensation, or NQDC plans or company-paid Supplemental Executive Retirement Plans, or SERPs. These plans allow HCEs to defer current income taxation at time of deferral and receive tax-deferred growth as the plan balance grows. The plan benefits aren’t subject to income taxes until money is distributed to the HCEs from the plan. These types of benefit packages can be potent retention strategies in competitive markets.
Where COLI comes in is not as a benefit itself, but as a tax-advantaged mechanism to offset the unfunded liability of these types of executive benefits.
PA: What are the benefits to plan sponsors of COLI?
Mohr: There are several benefits, such as the tax-deferred growth of the cash surrender value, or CSV; tax-advantaged withdrawals; and a tax-free death benefit.
NQDC and SERP plans are not required to be financed but setting aside assets allows for you to make the most of your executive benefit plan. Common financing options are COLI, mutual funds, and corporate stocks and bonds, and while each has its own benefits, COLI has unique informal funding benefits that the others don’t. For example, in a COLI policy, CSV accumulates efficiently with deferred tax treatment, which minimizes tax impact to the company. In addition, upon the death of the insured, the plan sponsor receives the policy’s death benefit tax free and can use it to recover the costs of the plan.
PA: What should advisers make sure that their plan sponsors know about COLI?
Mohr: Advisers need to communicate with their clients the separation between COLI as a company benefit, and the benefits that employees receive. COLI is not a direct benefit for employees, although it indirectly benefits them. These are benefits-driven plans, rather than product-driven plans. The company receives the benefits from implementing the COLI policies, but it doesn’t translate to a benefit that the participant would receive, as the insureds have no interest in the corporate asset.
For the company, COLI is a commitment, but it’s also a tax-advantaged benefit that can very efficiently fund employee benefits, making the commitment worthwhile. You must commit to funding up to a certain level to get the maximum benefit for the corporation. That’s where a good adviser can come into play. The adviser can model different scenarios and stress test the benefit to help the employer make the best selection.
PA: Are there companies for whom COLI might not make sense?
Mohr: Given that it is a tax-advantaged asset, the company needs to be a taxpayer to reap all its benefits. COLI may not be a good fit for a company that has loss carry forwards.
Another situation where COLI is not the best alternative is if you’re looking for short-term funding only. Advisers can help plan sponsors look at this on a case-by-case basis, to help companies determine the potential benefits for their situation.
PA: If a plan sponsor decides to move forward with COLI, how can an adviser help it select the best carrier?
Mohr: You start by looking at the strength of the carrier. S&P Ratings, AM Best rating and other markers of financial strength are important. Second, you want a carrier that’s committed to the COLI marketplace with a true institutional product.