The New Challenges Of Financial Anxiety

Today’s Private Placement BOLI/COLI Solutions

Now is the time for a closer look

by Vince Jenkins

Mr. Jenkins is Senior Vice President with NFP. Visit www.nfp.com.

The market for Bank Owned Life Insurance (BOLI) and Corporate Owned Life Insurance (COLI) is large and growing, with more than 85% of the 50 largest US banks and 75% of Fortune 1000 companies using these products to help fund employee benefits programs. That said, many in force policies – especially those sold 10 or more years ago – are very different from the BOLI/COLI solutions that exist today.

Over the past five years, the universe of available asset allocation opportunities within these products has expanded dramatically, offering better earnings, greater diversification, and improved risk management. That’s good news for investment advisors, many of whom are well-positioned to help C-suite decision-makers take a fresh look at their legacy BOLI/COLI plans and, when warranted, replace under-performing separate account or products with the new and improved.

The Upside of Private Placement

Much of today’s innovation in BOLI/COLI solutions comes from increased access to private asset classes. By using a BOLI/COLI chassis, clients can partner with advisors, consultants, and asset managers to expand the universe of investment options available, including private equity and private credit. These private assets increase diversification and have the potential to offer much higher returns than their traditional counterparts. They are also less volatile than public assets, while often delivering very high single-digit to low double-digit returns. As with all BOLI/COLI products, investments within a private placement chassis enjoy tax advantages, allowing assets to grow more quickly.

Historically, BOLI/COLI programs were tied to the needs of funding a specific benefit plan and purchased as a one-size-fits-all registered life insurance product. Organizations bought a plan and held it for 30 – 40 years. Today, the market has evolved to private placement contracts, which are customized to the investment goals, tax structure, and regulatory needs of each client. Based on personalized models, these private contracts offer an optimal risk/return mix of public and private investment options.

Early Adopters and the Next Frontier

Most early adopters of private placement solutions have been large banks, insurance companies, and corporations with access to sophisticated asset management expertise. Today, more private equity and credit asset managers participate in the BOLI/COLI market, democratizing access to the investment strategies available within private placement contracts. Over the past five years, there has been an uptick of more than 15% among insurance companies opting for this version of ICOLI (Insurance Company Owned Life Insurance). The market is also seeing a steady growth in interest and adoption among middle market banks and corporations.

For advisors, the private placement model spells opportunity. Every C-suite executive at middle market banks, insurance companies, and corporations is a potential buyer – as is every legacy owner of BOLI/COLI products interested in upgrading their programs to achieve better performance.

Broken Legacy Products

This opportunity is strengthened by the fact that much of today’s legacy product is broken. Many older products are limited by the four corners of a standard insurance contract, trapping dollars within traditional variable life fund line-ups, which are less than adequate for institutional investors. In addition, many legacy fixed account products aren’t keeping pace with the rising interest returns seen in private credit markets.

Today, the market has evolved to private placement contracts, which are customized to the investment goals, tax structure, and regulatory needs of each client...

That’s important because the size of existing BOLI/COLI assets is significant and should be treated and managed as meaningful investment dollars. A key question that advisors can ask clients is this: “Why treat these dollars differently than you would other assets on your balance sheet?” Just as financial executives diversify and rebalance other assets to adapt to market conditions, so too should they be able to allocate BOLI/COLI dollars to a broad, flexible menu of investment options.

Improved Participant Experience

In addition to having a better risk/return profile, today’s private placement contracts offer participants an improved service experience. Just as the new generation of BOLI/COLI contracts gives CFOs access to a broad range of highly performing public and private assets, so, too, do they offer executive benefits participants the ability to invest their deferred compensation and retirement plan dollars in a diverse range of funds. This broadening of investment options, coupled with an improved risk/return profile, gives participating executives a truly special benefits experience, when informally aligned with an NQDC plan, for example.

In today’s competitive labor market, this enhancement can be a strong recruiting and retention tool.

The Complexity Myth

As a result, now is a good time for advisors to have a BOLI/COLI conversation with their C-suite clients and prospects.

One obstacle that sometimes stands in the way is perceived complexity. Because private placement contracts are customized and can offer a broad menu of strategies, they can appear more complicated than legacy products. This complexity, however, is handled by a team of consultants and asset managers, who work to create a seamless program, from design through implementation. Advisors simply need to open the door by asking clients and prospects a few key questions. Do they have legacy BOLI/COLI products? Are they interested in a new solution that allows them to manage BOLI/COLI assets more like the rest of their investment portfolio? Are they interested in adding private assets such as private equity and credit to their investment options to reduce volatility and increase performance?

Like most insurance and investment products, BOLI/COLI plans – whether legacy or private placement contracts – operate within a changing tax and regulatory environment. These changes ebb and flow less quickly for BOLI/COLI programs than for retail investments, but it’s important for advisors and clients to work with partners who have deep tax and regulatory expertise.

Revisit Current Policies and Consider Private Placement

While BOLI/COLI programs have been around for decades, legacy products have evolved from standard insurance policies to private placement contracts, which expand the range of investment options to include private assets. With increased diversification comes greater investment performance, since private assets are typically less volatile than public assets and often have a higher earnings potential (i.e., often single- or double-digit returns).

That said, today’s private placement contracts are not significantly more complex than legacy BOLI/COLI programs. Once an advisor identifies a C-suite decision-maker looking to evaluate and enhance their existing BOLI/COLI contract, a team of benefits consultants and asset managers handle the modeling and private placement fund selection. All advisors need to do is get the conversation started – a conversation that will likely unlock significant balance sheet value and executive satisfaction.