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BOLI can be used to boost a CU’s bottom line or charitable contribution.
National Credit Union Administration reports show the average credit union return on assets stood at a mediocre .78 percent as of September 2016. As a result, every credit union must actively search for new and inventive ways to improve its bottom line.
CUs’ investment yields are a dismal 1.4 percent. Rates have begun to rise slowly, but remain at near record low levels. Increasing at a faster rate, however, is employee benefit expense. In addition, in keeping with their social purpose, CUs continue to increase their charitable contributions.
Fortunately, NCUA now allows CUs to offset employee benefits with higher yielding investments than CUs were previously permitted to make. This is often called “benefits pre-funding”. CUs also are allowed to offset charitable donations with such investments.
A way to do make these previously impermissible investments is through business-owned life insurance. BOLI has been used by CUs to fund executive retirement plans—including 457(f) and split-dollar arrangements—for years. NCUA 5300 reports show that a high percentage of billion-dollar CUs take advantage of these plans to provide benefits for senior-level employees and charitable donation accounts. Smaller CUs may want to do so as well.
The difference in the investment potential of traditional investments and investments through BOLI (which essentially allows CUs to invest in an insurance company’s investment portfolio) is significant. In the following example, shifting an investment to life insurance doubles the credit union’s revenue.
Compared to the average CU investment yield of 1.4 percent, current BOLI crediting rates are 3 percent. Instead of $14,000 per million/year, BOLI could easily yield $30,000 per million. A $10 million investment could increase net income by $160,000. This crediting rate fluctuates annually and nearly always exceeds investment yields.
It takes some effort to initially set up a BOLI and requires life insurance on a key or several key executives—possibly at higher benefit levels than those executives have now. Executives often hesitate to suggest such plans as it may appear self-serving. For that reason, directors may need to take the lead in suggesting investigation of BOLI. BOLIs may be used to replace—and increase at no cost—the amount of life insurance on the executive, while increasing the bottom line. This is an example of a true win-win.
Life insurance companies are highly regulated and required to retain high levels of capital, but a few have failed. Credit unions looking to invest in BOLI should review the financial strength of institutional insurance providers and deal only with those that are well capitalized and understand financial institutions—especially credit unions.
Experienced, specialized vendors will assist credit unions through the BOLI pre-purchase and post-purchase analyses per NCUA guidelines/regulations. They also will help a credit union periodically monitor financial ratings of the institutional life insurance carrier to ensure the ongoing quality of the BOLI portfolio investments.
In today’s environment, credit unions must seek creative alternatives to improve their strategic advantage. BOLI can provide substantially better investment yields. As with any investment, however, credit unions must do their own research before purchasing.
William J. (Bill) Rissel is the former CEO of Fort Knox Federal Credit Union. During his 23-year tenure, the credit union consistently achieved a ROA of over 1.3 percent. Though retired, he still assists credit unions in income improvement, strategic planning and governance. Reach him at wjrissel@gmail.com.
