Insurance Company Owned Life Insurance (“ICOLI”) is a form of corporate-owned life insurance (“COLI”) in which life insurance policies are issued by one insurer (the “Issuing Carrier”) and purchased by another insurer (the “Investing Carrier”) on the lives of a group of the Investing Carrier’s employees, often senior executives or other key employees. Issuing Carriers are life insurance companies, but Investing Carriers may be life insurance companies or companies dealing in other types of insurance such as property & casualty insurance or reinsurance.
Just like other forms of COLI, ICOLI is primarily used as a long-term, tax-advantaged investment vehicle that can informally fund non-qualified benefit plans or other company obligations.
ICOLI as an Investment Vehicle
ICOLI offers a unique investment opportunity for Investing Carriers as it enables access to Insurance Dedicated Funds (“IDFs”) in a variety of asset classes at a lower Risk-Based Capital (“RBC”) charge than the Investing Carrier would otherwise experience.
Some of the world’s leading asset managers, including alternative asset class managers, structure IDFs to comply with tax and regulatory requirements that allow the investment earnings inside the insurance product to grow tax deferred, and ultimately to be paid completely tax-free to the Investing Carrier when each insurance policy matures at death. Managers create IDF product offerings with differing underlying investment strategies and levels of customization, although there are strict “investor control” rules that prohibit the Investing Carrier from directing the investment decisions in the underlying IDF. Portfolio strategies IDF managers may use in an IDF include private equity, real estate, private credit, and more. Due to the nature of the underlying investments, IDFs tend to be “illiquid” relative to traditional separate account portfolios offered in traditional COLI policies. Many IDFs have minimum “lock-up” periods and liquidation restrictions and are typically valued only once per quarter. Since IDFs are not registered with the SEC, Investing Carriers must demonstrate they are Qualified Purchasers (e.g., having at least $25M in investable assets) before they can invest in IDFs. .
Regardless of the investment strategy, the IDF structure allows Investing Carriers to benefit from institutional-quality investment management while preserving the favorable tax treatment of the insurance contract.
Understanding RBC Ratios
RBC is a method used by insurance regulators and other industry stakeholders, including investors, to measure the minimum amount of capital that an insurance company needs to support its overall business operations. RBC is designed to ensure that insurers hold enough capital to remain solvent and meet their obligations to policyholders regardless of market conditions.
An insurance company’s actual capital is compared to its calculated RBC requirement to produce an RBC Ratio, which is then used to assess an insurance company’s financial health. The RBC framework typically divides an insurer’s risks into four broad categories, each with its own “charge” and formula for calculating such charge:
- Asset Risk: The risk of default or fluctuation in the value of an insurer’s investments, such as bonds, stocks, real estate, or mutual funds. Riskier investments carry higher RBC charges.
- Underwriting Risk: The risk that premiums will not be adequate to cover claims and expenses; essentially, the risk that actual losses will differ from expected losses.
- Credit Risk: The risk that reinsurers or other counterparties will fail to meet their obligations.
- Business/Operational Risk: Miscellaneous risks not captured above, like general business risks and off-balance sheet exposures.
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However, insurance companies that acquire ICOLI policies receive an asset risk RBC charge of 0% — 5% even if the underlying investments are in alternative asset classes. Therefore, ICOLI may be advantageous for insurance companies seeking to avoid significant RBC charges while also making long-term investments in certain funds. ICOLI policies offer tax free death benefits provided all applicable criteria are met. |
About Karr Barth
For over 45 years, Karr Barth Administrators has helped clients optimize the size and structure of COLI to reduce costs while also providing end-to-end client support by developing customized executive benefit plan designs, determining appropriate funding strategies, effectively installing plans, and continuously administering the plan with white-glove service for plan participants.
Learn more about how COLI can be used as an investment vehicle, or to implement a plan that attracts, rewards and helps retain top talent by contacting us at (800) 459-1989 or PlanAdmin@KBAdmin.com, or by visiting KBAdmin.com.
