ICOLI—A Tax Advantaged, Low Risk-Based Capital Investment Alternative

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ICOLI—A Tax Advantaged, Low Risk-Based Capital Investment Alternative

April 2020

Insurance Company-Owned Life Insurance (ICOLI)

Low interest rates and unfavorable Risk-Based Capital (RBC) treatment for many traditional investments has led a growing number of insurance companies to consider ICOLI as a portfolio diversification tool. Shown below are key ICOLI features:

  • Tax-deferred asset growth
  • Tax-free death benefits
  • RBC weight of 5% for P&C and 0% for Life & Health, regardless of underlying assets
  • Diverse investment options, including traditional and alternative investment classes
  • Fixed rate options with guaranteed minimum crediting rates and no mark-to-market

How It Works

The insurance company purchases life insurance on a group of key employees. The company is the owner and beneficiary of the policies, although it has the option to share a portion of the death benefits with the participants. Assets grow tax-deferred, and are ultimately received tax-free as insurance proceeds.

ICOLI policies often offer over 100 investment options, and new funds can be added over time. Assets can be reallocated between the available investment options on a tax-free basis over time to meet the intended investment mandate.

The Gallagher Advantage

Gallagher offers a resource team with deep knowledge of the ICOLI market. We assist clients with critical elements of their due diligence process, including product and carrier review, investment options analysis, credit risk management, and negotiating cost-effective, flexible contract terms. We would welcome the opportunity to discuss how ICOLI can be a high- quality, tax-advantaged addition to your company’s investment portfolio.

Regulatory Guidance

  • IRC Section 7702 – establishes that life insurance asset earnings are not subject to current taxation, and that death benefits can be received on a tax-free basis
  • IRC Section 101(j) defines the requirements and tax treatment of COLI
  • SSAP 21 – COLI is an admitted asset, accounted for at its cash surrender value
  • ASC 325 (FASB 85-4) – COLI is shown as “Other Assets” and “Other Income” on financial statements. Changes in cash surrender value flow through the income statement.

 

Andy Kuchera leads Gallagher’s Institutional Insurance Practice with a specific focus on ICOLI (Insurance Company Owned Life Insurance). His team assists insurance carriers by providing regulatory and tax relief on capital and surplus. He also helps clients design, implement, communicate, and fund Executive Benefits programs, with a focus on Non-Qualified Deferred Compensation Plans. He specializes in assisting owners with succession and retention strategies; the primary focus being to protect their profits and equity interests. Contact Andy

 

 

Gallagher Benefit Services, Inc., a subsidiary of Arthur J. Gallagher & Co., (Gallagher) is a non- investment firm that provides employee benefit and retirement plan consulting services to employers. Securities may be offered through Kestra Investment Services, LLC, (Kestra IS), member FINRA/SIPC. Investment advisory services may be offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Certain appropriately licensed individuals of Gallagher are registered to offer securities through Kestra IS or investment advisory services through Kestra AS. Neither Kestra IS nor Kestra AS is affiliated with Gallagher. Neither Kestra IS, Kestra AS, Gallagher, their affiliates nor representatives provide accounting, legal or tax advice. For institutional use only. Not for public distribution. Kestra LCN 345277 Exp (03/2021).