How Corporate-Owned Life Insurance Helps Business-Owner Clients
When volatility returns, COLI can add stability.
The last few years of economic turbulence have left Americans reeling — but no one has been affected quite like U.S. business owners.
Still dealing with the impacts of COVID-19, facing continued economic headwinds and struggling to attract and retain talent in a still tight labor market, business owners are increasingly concerned about economic and labor conditions in the U.S.
In fact, according to Nationwide’s 2024 Economic Impact survey, half (51%) of mid-market business owners rate the current condition of the U.S. economy as poor or fair.
Additionally, persistent inflation and rising interest rates continue to impact them, with 58% of mid-sized business owners citing inflation as their most significant challenge.
Economic headwinds aren’t the only challenges employers are facing either.
Although the labor market is showing signs of cooling, employers are still struggling to attract and retain talent.
The latest data from the U.S. Chamber of Commerce shows hiring rates have outpaced quit rates since November 2020, meaning Americans are seeking — and finding — better opportunities with new employers and in new occupations and industries.
Additionally, losing valued employees can also be costly for business owners.
Replacing an employee can cost up to 400% of a departing executive’s annual salary.
Now is the time for advisors and financial professionals to step in and talk with their business owner clients about solutions that can help solve for current challenges and help them feel more confident in today’s turbulent environment.
One of these potential solutions — corporate-owned life insurance (COLI) — is a lesser-known type of life insurance policy taken out on critical employees, with companies paying the insurance premiums and receiving the death benefit if a covered employee passes away.
Here are a few ways COLI policies can help solve current business concerns.
1. It can Informally fund benefit promises made to employees.
COLI policies can help your business owner clients meet obligations from non-qualified deferred compensation (NDQC) plans — an offering that can attract and retain employees in today’s labor market.
However, when businesses promise future compensation to their employees, this can create a liability that can grow over time.
For example, if your business owner client allows their corporate executives to defer a part of their income until their retirement, and then also offers to match a portion or all of that deferral, your client is creating a new liability as they will need to ensure they can make these future payments.
While some companies set aside cash, securities or hard assets to meet promised payments, the most tax-efficient informal funding tool is cash-value life insurance policies like COLI.
Since the cash value of these policies equals or nearly equals the cash paid in premiums, there won’t be an immediate change to business owners’ balance sheets.
Additionally, COLI policies used to back benefit offerings are good for employees, too, providing added reassurance that the company has secured their deferred income.
2. It can bolster financial business strength.
In today’s turbulent economy, your business owner clients are looking for solutions that can help provide stability and growth.
Investing in a COLI policy can offer businesses cash flow flexibility, allowing business owners to access the cash value of the policy through loans or withdrawals to assist with liquidity needs or investments.
COLI policies can also contribute to a company’s balance sheet, improving financial ratios and creditworthiness.
Additionally, they can protect against key person risk.
If a critical executive or employee passes away, the death benefit from a COLI policy can help cover financial losses and facilitate business continuity.
3. It can offer stability in succession planning.
This year marks the beginning of the largest surge of Americans turning 65 in history — a trend business owners should have on their radar as they work through succession planning.
When a business owner leaves the business, COLI can help ensure a seamless transition of ownership.
It can provide funds to buy out the departing owner’s interest, safeguarding the business’s continuity and stability during critical ownership changes.
Additionally, COLI can insure key employees critical to the business’s success.
If they leave, the policy can provide a financial cushion for hiring and training replacements.
Your business owner clients count on you to help them address financial risk.
By engaging in conversations about lesser-known solutions like COLI, you’ll solidify yourself as an indispensable partner, empowering them to make informed decisions and feel more secure about their business’s financial future regardless of market conditions.
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