BOLI: An Alternative Way to Fund Benefits
What if your credit union could take advantage of a product that offered expanded investment choices and a competitive, consistent yield with strong crediting rate guarantees? Then, what if you could use the potential income you earned from it to offset and recover expenses of employee benefits programs?
It’s not too good to be true. It’s business-owned life insurance (BOLI), and it could help your credit union continue to offer the compensation and benefits that attract and retain top talent in your organization. BOLI is a type of insurance policy you take out on a group of key executives, with a goal of building cash value. If your credit union purchases general account BOLI, the carrier invests the premium. The carrier looks at its investment yield in the general account and, typically on an annual basis, gives the credit unions a gross crediting rate based on the actual return in that general account.
Think of it as taking out a $1 million loan for working capital, except it comes with a competitive, consistent yield and strong credit rating guarantee.
Here are some other reasons using BOLI can benefit credit unions:
- Pre-funding can help soften the blow if health care expenses continue to rise
- It can help diversify your credit union’s overall investment portfolio
- It may help you establish or enhance a charitable giving program
- Fees and costs are embedded into your net returns; there are no separate investment fees
- It is a low-risk and low-cost way to generate additional revenue
To illustrate the last point, let’s compare taking out a $1 million BOLI policy to building and maintaining an equal-sized auto loan portfolio. Assuming an average loan size of $20,000, it takes 50 loans to build your $1 million loan portfolio. But building the portfolio is just the beginning. Assuming an average duration on your auto loans of 30 months, you would have to make 150 loans in five years just to maintain your $1 million portfolio. That’s not including costs associated with replacing auto loans, such as acquisition costs, staff to monitor the loan portfolio, loan loss reserves and charge-offs.
“In a declining interest-rate environment, BOLI can be a powerful investment tool,” says John Pesh, executive benefits director for CUNA Mutual Group. “The carriers have mature portfolios with locked-in long-term yields, so BOLI delivers higher rates with minimal market risk.”
If BOLI sounds intriguing, check with your CUNA Mutual Group executive benefits specialist to see if this funding solution is right for you and what you need to be aware of when vetting BOLI products.