To help advisers get up to speed on these important benefits, PLANADVISER spoke with Mark Laramee, Managing Director of Corporate Owned Life Insurance Sales, Institutional Solutions, at MassMutual. He detailed the way corporate-owned life insurance, or COLI, may be used by companies to informally fund and even offset their rising employee benefit costs—including those tied to key executives and managers.
PLANADVISER: Why should the retirement planning audience learn more about COLI and the role it can play in funding employee benefit programs?
Mark Laramee: COLI is, to put it simply, a very tax-efficient vehicle for employers to use to help fund and offset their rising employee benefit costs. With today’s low unemployment rate, particularly at the level of senior management and the executive suite, employers have to consider adding supplementary benefits to effectively attract and help retain top talent. The low unemployment rate among senior managers and executives puts an emphasis on such benefits as nonqualified deferred compensation plans (NQDC), an important addition to any exceptional benefits package. NQDCs can help highly compensated employees [HCEs] mitigate their income taxes, and can be funded tax-efficiently with COLI. Participants don’t pay federal income taxes on that portion of their compensation in the year of deferral. In many plans, employees are entitled to the value of their contributions plus any investment growth. COLI provides a tax-efficient funding vehicle because earnings within the policy generally grow tax-deferred.
Employers find COLI attractive because properly structured life insurance can help employers manage the business risks associated with the death of highly compensated key employees, at the same time it has a neutral effect on their balance sheet. The long-term policy proceeds may be used to fund various employee benefit programs that a company may not otherwise be able to offer.
PA: How can advisers begin to incorporate expertise about COLI and nonqualified deferred compensation into their practice?
Laramee: To get started, advisers should collaborate with specialists and third party administrators in the COLI marketplace; it is a nuanced space and requires specialized knowledge. At MassMutual Life Insurance Company (MassMutual), we are committed to the COLI marketplace. With over $6 billion in COLI assets in force1, we have been providing institutions life insurance solutions for 31+ years. It has been extremely gratifying to see the positive reaction of the marketplace, including our peer competitors—they know that when MassMutual moves into a marketplace, we are committing for the long haul.
One of the most important things for advisers to consider, when utilizing COLI is the importance of selecting a carrier/manufacturer that will be in this business long term, our high financial strength can help ensure that. At MassMutual, we have followed a prudent strategy for more than 168 years and our continued financial strength supports the value of our products and services. Financial strength ratings are a key indicator of a company’s ability to meet its financial obligations. We’re proud to have financial strength ratings among the highest of any company in any industry.2
PA: Why does MassMutual excel in the COLI marketplace?
Laramee: We’re involved in studying and solving the most complicated financial needs of employers and individuals and live up to a customer-centric service model. We’re also making a tremendous investment in technology to improve the employee benefit experience, at the adviser level and at the client level.
PA: Tell us more about the benefits to the employer that come from offering tax-efficient ancillary benefits such as nonqualified deferred compensation plans.
Laramee: It’s all about the employee evolution—recruit, reward, retain, restore and retire. If employers aren’t offering attractive benefit programs, their employees may go out and find other companies that are. Just as important, deferred compensation plans can help answer the question, ‘How do we help our top talent prepare for and enter the retirement phase in an orderly fashion?’ Senior leaders are often the most expensive individuals on the balance sheet, from a benefits perspective as well as from a compensation perspective. Efficiently funded deferred compensation plans can help employers skillfully manage turnover at the highest level of the organization.
1. As of March 31, 2019
2. Financial strength ratings are as of January 15, 2020: A.M. Best Company: A++ (Superior; top category of 15); Fitch: AA+ (Very Strong; second category of 21); Moody’s: Aa3 (High Quality, fourth category of 21); Standard & Poor’s: (Very Strong, second category of 21). Ratings are for MassMutual (Springfield, MA 01111-0001) and its subsidiaries, C.M. Life Insurance Company and MML Bay State Life Insurance Company (Enfield, CT 06082). Ratings are subject to change. Financial strength ratings do not apply to the separate account or the variable investment choices offered under a variable universal life insurance policy, nor do they imply any promise of investment performance.
The information provided is not written or intended as specific tax or legal advice. MassMutual, its subsidiaries, employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.
Insurance products issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001