Rethinking Corporate-Owned Life Insurance (COLI) for Credit Unions

Two things are happening at once in the credit union world right now, and most institutions haven't connected them yet.

‍

‍

Why This Conversation Is Happening Now

‍

Rates moved, and a lot of COLI didn't. Much of the COLI credit unions bought before 2020, when cash was flush and rates were near zero, were structured to earn a steady but modest 3%. In today's rate environment, that yield looks much less attractive relative to other options, and many institutions view it as “trapped” capital rather than a useful tool. Industry-wide, this has driven a wave of banks and credit unions to review and reposition older COLI/BOLI holdings, including 1035 exchanges into better-performing contracts and structured surrender-and-redeploy strategies,rather than simply holding legacy policies at their original crediting rates.

‍

Credit unions still haven't solved for institutional philanthropy. Most credit unions carry "community impact" or "member well being" somewhere in their mission statement. However, very few have a functioning donor base or an active foundation to back it up, and the ones that do have foundations often struggle to fund them consistently beyond an annual gala or golf outing.Meanwhile, tools like charitable donation accounts (CDAs) and donor-advised funds (DAFs) have become a well-established,low-overhead way for institutions to direct charitable giving without the operational burden of running a full foundation, which is worth understanding even if your credit union isn't ready to formalize a foundation of its own.

‍

Put those two things together, and a straightforward opportunity emerges:  reposition the COLI you already hold (or thoughtfully add new COLI) into better-performing, institutionally structured products, preserve the commitments already made to your insured employees, and direct the excess death benefit toward a permanent source of charitable funding.

‍

That's a very different conversation than the one most institutions have been having about COLI. Here's the fuller picture.

‍

‍

A Quick Refresher: Why Credit Unions Hold COLI in the First Place

‍

Corporate-owned life insurance is a series of life insurance policies purchased and owned by an institution, not an individual, on the lives of key employees, with the institution (and often the key person insureds heirs) named as beneficiary. Credit unions use it because employee benefit costs (health insurance, retirement, executive retention packages) keep climbing, and COLI is one of the few tools regulators allow them to use to help offset that cost with a better-than-typical yield.

‍

Under NCUA guidance, credit unions may make investments that would otherwise be impermissible when those investments are directly tied to funding an employee benefit obligation. The regulator has been explicit about this: federal credit unions investing to fund a benefit plan obligation aren't bound by the usual investment limitations that apply to the rest of their portfolio, provided the investment is tied to that benefit obligation and can be held as long as the obligation exists.

‍

That's the origin story for most COLI holdings - a compliant, well-understood way to earn a better return on money that's already earmarked for benefit costs.

‍

‍

The Part of the Story Most Institutions Never Get To

‍

Here's what tends to get lost: every COLI policy carries two separate assets, not one.

• Cash value — what shows up on the balance sheet, growing slowly and predictably.
• Death benefit — the amount paid out when an insured passes away, which is almost always significantly larger than the cash value covering it.

The difference between the two is often referred to as the "excess" or"net amount at risk." As a rough rule of thumb, every dollar of cash value tends to support two to three dollars of death benefit. That excess exists in nearly every COLI policy in the country, and in most institutions, no one is thinking about it strategically. It's simply the mechanism that makes the product work, not something anyone has been asked to direct on purpose.

‍

Historically, that excess has defaulted to the institution, framed loosely as "key person protection," but for a member-owned, mission-driven institution, it can be a missed opportunity. That death benefit doesn't have to just sit there as an abstract balance-sheet cushion; rather, it can be directed, intentionally, toward the causes your credit union already cares about.

‍

‍

What "Better Structured" Actually Means

‍

Not all COLI is structured the same way. Broadly, credit unions encounter three types of products:

• Universal life / whole life — steady, low-volatility, interest-rate-driven. Predictable, but modest returns in today’s environment
• Indexed products — tied to market performance with a floor (protection against loss) and a cap (limit on upside), offering more room to grow than traditional universal life without full market exposure.‍
• Institutionally-priced or hybrid products — often restricted by the carrier to a limited group of advisors with the scale and relationships to access them, these can offer higher return potential in exchange for a modest downside buffer instead of a hard floor.

The point isn't that one product is inherently better than another; it's that most institutions have only ever been shown the first option, because it's the version of COLI available to most every advisor. Institutionally priced products are designed specifically for organizations like credit unions and require a different level of carrier access.

‍

‍

The Compliance Backbone: Why This Isn't a Gray Area

‍

Any conversation about directing excess death benefit to new purposes has to be grounded in how employer-owned life insurance is regulated. Under IRC Section 101(j), enacted as part of the Pension Protection Act of 2006, death benefits on employer-owned policies are only received tax-free if the employer met written notice-and-consent requirements before the policy was issued - the employee must be told the policy is being purchased, told the employer will be a beneficiary, and must consent in writing. This isn't new or obscure; it's been the law for nearly twenty years, and any credit union that's purchased COLI since 2006 has already been operating inside this framework.

‍

Restructuring or repositioning a policy doesn't change that foundation; it just means updating documentation to reflect current insureds and reconfirming how any death benefit will be allocated going forward.

‍

‍

The Takeaway

‍

COLI isn't a new idea, and neither is charitable giving being part of a credit union's mission. What's changed is the lens: instead of treating COLI purely as a benefit-offset tool and charitable giving purely as a budget line, the two can be connected. The excess death benefit that's already built into these policies, i.e., money that was never really "for" anything specific, can become the funding engine for a permanent endowment, without new capital, without disrupting existing employee coverage, and without touching the operating budget.

‍

For an institution whose mission statement already addresses serving its community over the long term, that's not just a portfolio adjustment. It's a chance to make good on that promise in a way that outlasts any single budget cycle, or any single leadership team.

‍

Interested in what this could look like for your credit union? Acumen Financial Advantage works with institutional leaders to evaluate existing COLI holdings and structure long-term charitable strategies at no cost to the institution's balance sheet. Let's talk.

‍

‍

Sources & Further Reading

‍

NCUA — Funding Employee Benefit Obligations With Life Insurance

Acumen Financial Advantage — Why Do Credit Unions Use Corporate-Owned Life Insurance (COLI)?

National Insurance Guide — Bank-Owned Life Insurance:2026 Market Overview

Insurance & Estates — Bank-Owned Life Insurance(BOLI): A Comprehensive Guide for 2026

Dean Mead — New Tax Treatment of Certain Employer Owned Life Insurance

Members Trust Company — Alternatives to Donor-Advised Funds: Charitable Giving Options for Credit Union Leaders

The Credit Union Connection — Unlocking a Source of Charitable Giving Capital for Your Credit Union

‍

Note:  Figures cited (yield ranges, market growth rates, death-benefit multiples) reflect general industry ranges and illustrative examples reported in the sources above. Any figures used in client-facing materials should be validated against current product illustrations before publication.