Archive for November 10th, 2007
Wouldn’t it be great as an employer if you could offer the best benefits packages available to your employees and not spend a dime……….eventually.
Corporate Owned Life Insurance, COLI, and Bank Owned Life Insurance, BOLI, are life insurance products designed for that purpose. While their uses can be expanded and are often expanded well beyond that, in the simplest form, the employer would own and be the beneficiary of a life insurance policy, usually on key executives, that would pay back the institution for the often astronomical cost of benefit, retirement and incentive packages.
Because this is insurance to offset the cost of expenses, the premiums paid are allowable deductions for the institution. So, while often a little on the pricey side, it often becomes justifiable when you balance the deduction and the eventual tax free pay back of deducted expenses in the form of benefits. It it sounds like there may be some sweet spots in this program, well , you’re right.
Most COLI and BOLI is done with permanent cash value insurance, either universal life or whole life. Again sounds pricey, but again, throw these few ideas on your scales and see what you think. The premiums are deductible and the cash value in the policies grow tax free. In larger institutions this can add millions in cash assets to the balance sheet generated through tax deductible premiums.
And how about this. With millions sitting there, should the institution decide to, they can borrow cash value from the policy. We’ve all heard the upside for borrowing cash value from a life insurance policy. If the policy is paying 4% on the cash value fund and they charge you 6% on money you borrow from it, you effectively borrow the money at 2%. Even though you borrow from the policy, the cash really doesn’t come out of the policy, it comes from the insurance company. So while you’re paying 6% on the money you borrowed, you are continuing to earn 4% on the same money.
Take this to the bank level and it really gets sweet. A bank can borrow cash from the policy at a net 2% just like I can, but they are deducting the premium and now they also get to deduct the 6% interest they are paying on the loan as a business expense, so their net, not even takiing into consideration the deducted premiums is 4%.
Bottom line. For large, stable companies and institutions, these programs can make great sense. It must make sense to someone. In an article in National Underwriter last week they reported “bank owned life insurance aassets of $108.6 billion, up 11.1% from….the first half of 2006″.
November 10th, 2007
What if you had a large membership payment due, a one time payment, that was due and payable the day you die? What if that payment was substantial, say $150,000.
That’s the membership fee at the Alcor Life Extension Foundation, an organization devoted to the freezing of it’s members brains, to be preserved for some possible point in the future when it can be thawed out and used again.
Now, I don’t mean to make light of this, as foreign as it seems to me. Those people who are members and potential members have found some hope and comfort in knowing that their mind will survive their physical death.
Anyway, before I dig myself in to deep, the answer to the membership cost question is that the person can take out a life insurance policy with Alcor as the owner and the beneficiary. Because Alcor doesn’t want to be put in the position of potentially having to pay premiums, this is generally done with a single premium universal life policy. One payment and the policy is turned over to Alcor for their use upon your death.
By the way, at least with Alcor, once you’ve taken out this policy, you can change your mind (keeping it rather than freezing it). Alcor does have a policy of returning ownership to the insured with 30 days notice should they decide to go a different direction upon their death.
Bottom line. Just when you think you’ve seen every use for life insurance…….
November 10th, 2007
I threw out a question to some colleagues the other day concerning the state of in force universal life policies. The question was, what percentage of all universal life policies will lapse before the insured was led to believe it would, even though they have made all the required premium payments? Keep in mind that almost every policyowner believes their universal life policy is good forever at the premium level they are currently paying.
The real cruxt of what I was trying to get to is an idea of how many people are really aware that their universal life policy is failing, as opposed to how many either have a no lapse guarantee or are adequately funded, therefore making them safe from a surprise price increase or lapse.
In previous posts I have stated that I believe more than 50% of all universal life policies in force today will fail because they were sold as underfunded, non guaranteed policies.
My colleagues agreed with that assessment, with the caveat that 50% was probably on the low end of the spectrum of the problem. One suggested that if you separate out the newer no lapse guarantee policies, the percentage of the other polcies that are in trouble would probably be something more like 75%.
The problem is huge. Most people who are depending on their universal life policies are in for a shock. It may not happen this year or next year, but left alone, the policy will implode and either lapse or require far more money to keep it in force.
The good news is that a large percentage of the policies that will ultimately die before you die have cash value that can be transferred into a new universal life policy with a no lapse guarantee. This is a 1035 tax free exchange. Your new policy will be guaranteed to last until you need it and, in many cases, it will cost you less than you are currently paying. If there isn’t any cash value, you are better off in most cases, simply replacing the old policy with a new no lapse policy anyway.
Bottom line. Do yourself a favor and have your universal life policy analyzed for you by an agent other than the one that sold it to you. Why another agent? Well, if someone sold you something that is messed up, do you think they are a good person to address how messed up it is?
November 10th, 2007
