In the complex world of finance, insurance carriers often employ sophisticated strategies to optimize their portfolios and enhance their financial standing. One such strategy gaining prominence is the utilization of Corporate-Owned Life Insurance (or ICOLI). This unique financial instrument provides insurance carriers with a myriad of benefits, making it a compelling financial vehicle to use within their investment strategies. In general, insurance carriers are increasingly utilizing ICOLI for one or more of the following key reasons.
Tax-Deferred or Tax-Free Earnings
One of the primary motivations behind insurance carriers' adoption of ICOLI lies in the attractive tax benefits it offers. Policy cash values within ICOLI grow tax-free, providing insurance carriers with the opportunity to generate enhanced earnings. Unlike traditional investment vehicles, there is no taxation on investment reallocation, allowing carriers to strategically adjust their portfolios without incurring additional tax burdens.
Moreover, ICOLI allows carriers to defer taxation on policy gains until surrender, providing flexibility in managing tax liabilities. Importantly, if held to maturity (death of each insured), ICOLI offers tax-free benefits, further amplifying the attractiveness of this financial instrument.
Regulatory & Capital Improvement
Insurance carriers operate in a heavily regulated environment, and ICOLI provides them with some regulatory and capital advantages. The Risk-Based Capital (RBC) risk charge associated with ICOLI is favorable, with life carriers facing a 0% RBC charge and property and casualty (P&C) carriers subjected to a modest 5% RBC charge.
Additionally, ICOLI is considered an admitted asset, further helping to strengthen the capital position of insurance carriers. These regulatory and capital benefits make ICOLI a strategic choice for carriers looking to help optimize their balance sheets and adhere to regulatory requirements.
Investment Strategy
ICOLI offers insurance carriers a diverse and flexible investment landscape. Beyond traditional investment options, carriers can allocate funds to registered funds and explore alternative and specialty investments such as hedge funds, real estate, private equity, and private credit. This expanded investment strategy allows carriers to diversify their portfolios, manage risk, and pursue higher returns.
The ability to venture into non-traditional investment avenues positions ICOLI as a dynamic and adaptive financial instrument for insurance carriers seeking to maximize their investment returns.
Executive & Supplemental Benefits
Beyond its financial advantages, ICOLI serves as a funding tool for providing executive and supplemental benefits like deferred compensation and long-term incentive plans. Insurance carriers often utilize ICOLI as a funding vehicle to help generate tax-efficient earnings, which can be used to offset benefit accruals for benefit plans. This approach also helps carriers recover costs associated with executive benefit non-qualified plans and supplemental benefits, contributing to overall long-term financial strength of the carrier.
Evaluate ICOLI
Corporate-Owned Life Insurance (ICOLI) has emerged as a sophisticated and multifaceted financial instrument for insurance carriers to evaluate. The four key reasons (1) tax-deferred or tax-free earnings, (2) regulatory & capital improvement, (3) investment strategy, and (4) executive & supplemental benefits – collectively make ICOLI an attractive choice for carriers looking to optimize their financial positions and navigate the complexities of the insurance industry. As the financial landscape continues to evolve, ICOLI stands out as a strategic tool for insurance carriers seeking a competitive edge in the market.
Schedule a call with our team to learn more about ICOLI.
This information is for general and educational purposes and is not intended as legal or tax advice. Nor is it intended to provide specific advice or recommendations for any individual or entity. To determine what is appropriate for you, please get in touch with a TRC Financial Professional. Information obtained from third-party sources is believed to be reliable but not guaranteed.
Securities and Investment Advisory Services Offered Through M Holdings Securities, Inc., a Registered Broker/Dealer and investment Adviser, Member FINRA / SIPC. TRC Financial is independently owned and operated.
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