By Kristie Hartmann
What is CUOLI?
Credit Union Owned Life Insurance—or CUOLI—is a type of insurance that a credit union typically implements utilizing the lives of one or more of its executives. While participating executives must consent to the placement of life insurance on their lives, the primary purpose of a CUOLI investment is to offset the general costs of employee benefits.
Generally, CUOLI comprises a portfolio of fixed insurance products that generate a modest, yet steady, rate of return. Those earnings are used to offset the credit union’s benefit expenses, including Health Insurance, Pension Plans, and executive benefits delivered through 457(f) Deferred Compensation. In fact, a large CUOLI investment on a credit union’s 5300 Call Report is usually an indicator that 457(f) Deferred Compensation, or something similar, is in place at that credit union.
However, in today’s interest rate environment, credit unions with, what they consider to be, “below market” CUOLI holdings are reviewing the options and seeking solutions to boost investment earnings.
Should credit unions surrender a portion or all their CUOLI holdings in favor of higher yield opportunities?
The key to understanding if CUOLI remains of value to your credit union is multi-faceted. Whether or not to maintain your current CUOLI portfolio, surrender it, either in whole or in part, or acquire new policies needs to be evaluated holistically and not just in a silo that focuses solely on comparing current CUOLI earnings against the wider credit union portfolio.
The skyrocketing of interest rates, coupled with liquidity challenges, have certainly put pressure on the fixed interest returns of traditional CUOLI investments. Credit unions in a position to lend at 5.00%-7.00% are rightfully assessing the opportunity cost of retaining CUOLI currently earning 3.00%, are questioning its value in the portfolio, and even considering the assets for liquidation and deployment elsewhere.
At its core, fixed return CUOLI is intended to be a long-term, stable investment that can almost always find a place in a diversified earnings strategy, even in a high interest rate environment. Building upon a diversified earnings strategy, we have seen credit unions expand their CUOLI holdings between traditional fixed return products and indexed return products. This stratification improves the overall yield opportunity for the CUOLI portfolio, while maintaining the stability and long-term predictability that credit unions appreciate and rely upon. Innovatively, credit unions have also begun to pursue the possibility of repurposing their CUOLI holdings to support other strategic endeavors. For example, many credit unions utilize Split-Dollar plans to retain key executives to the organization. We have recently helped a credit union repurpose a portion of their existing CUOLI by incorporating one or more CUOLI policies that already insure the life of the participating executive into a Split-Dollar arrangement. In doing so, the Split-Dollar arrangement benefits from the use of a seasoned life insurance policy, while the credit union’s upfront capital outlay is significantly reduced.
While opportunities exist to retain CUOLI holdings, the reality is that certain credit unions will opt to surrender some or all their portfolio, due to opportunity cost concerns or in response to significant liquidity problems. Although this may be the best choice for the credit union, it is important for the credit union to be aware that the surrender of substantial CUOLI holdings is not without repercussive risk. To start, the number of insurance carriers providing CUOLI products has steadily declined over the last decade. This is partly due to the high risk of policy surrender that the insurance carriers face by providing a fully liquid investment vehicle for tax exempt organizations. A flurry of surrender activity in response to the high interest rate environment will undoubtedly put additional strain on the relationship between credit unions and CUOLI-providing insurance carriers, potentially leading to reduced product availability in the future and less favorable terms for the products that do remain. In fact, we have learned of an insurance company who has stated they will deny any future relationship with a particular credit union due its recent surrender activity.
What is the best decision for your credit union?
Whether your credit union is looking to make a new CUOLI investment, surrender underperforming CUOLI or repurpose existing policies, the first question to ask is, “what is driving our decision-making?” Then, “what is the ultimate goal?”
If liquidity issues are driving the decision and there is a financial need to surrender a portion or all your CUOLI portfolio, we strongly suggest talking with your servicing agent or CUOLI vendor first. Engaging with your servicing agent or CUOLI vendor will assist you navigating the surrender process, while helping to preserve the insurance carrier relationship, which will enhance the credit unions ability to recommence or add to its CUOLI holdings in the future.
If the credit union is simply seeking increased earnings potential, options should be considered, including repurposing the CUOLI policies for other insurance-based plans (like Split-Dollar) or diversifying into an indexed based product with higher return potential. Regardless, a full opportunity cost and options analysis should be conducted utilizing the help of trusted vendors experienced in CUOLI design and administration.
Realistically, credit unions have varying experiences with CUOLI. Some have utilized CUOLI for years, while others are still being introduced to CUOLI as a beneficial way to offset ever increasing employee benefit expenses. Of course, CUOLI is not a one-size fits all solution, but it most certainly has its place, even in challenging interest-rate climates and can be structured to be a valuable component of a credit union’s diversified earnings strategy.