Jay Rogers shares why credit unions invest in life insurance for top executives and a strategy to optimize life insurance-based benefits.

Credit unions commonly use life insurance-based executive benefits, such as collateral assignment split dollar plans to retain key talent. One of the original intentions has always been to leverage these benefits to incentivize an executive to stay in place in exchange for receiving life insurance coverage and tax-free income throughout retirement. However, what happens when the original goal of these benefits changes; for example, when an executive considers leaving the organization sooner than expected or when interest rates rise, and credit unions must hold a loan until the executive’s death?

Despite floating maturity dates and decreased yields, in these scenarios, credit unions have historically been forced to keep a less desirable asset on their balance sheet—until now.

Jay Rogers, senior executive consultant and director of business development at Stearns Financial, shares how credit unions can now use a new strategy to create adaptive life insurance-based benefits plans that are attractive to credit unions and executives. For over 40 years, Stearns Financial has worked with credit unions in succession and yield planning, retention, and balance sheet optimization. The firm was also a pioneer in creating the loan regime split dollar plan. This streamlined feature funds a loan immediately rather than over several years, effectively locking in the loan’s rate.

How Can Credit Unions Improve Life Insurance Benefits for Executives?

The current pain point credit unions face when using traditional life insurance-based executive benefits is the floating maturity date of the loan. In traditional plans, benefits are paid until an executive passes, which could span varying interest rate environments and organizational transitions among the credit union’s leadership and board members. This duration risk can cap a credit union’s net worth, making it difficult for credit unions to fund benefits for incoming executives and create long-term plans.

To help eliminate this duration risk, Stearns Financial has developed what Jay calls “the strategy” for proprietary purposes. The strategy allows credit unions and executives to sell their life insurance assets to an investment group in exchange for a guaranteed annuity tied to a fixed maturity date while maintaining the tax-free nature of the plan’s payments.  

How Can Credit Union Executives Benefit from Selling Their Life Insurance Assets?

There are many advantages to credit unions and executives if they choose to sell their life insurance assets. For example, while interest rates are currently spiking, life insurance companies’ dividends are lagging, affecting the executive’s benefit amount. Using the strategy, the executive can transfer the dividend risk to the investment group and receive a guaranteed annuity. They still get the same non-taxable payments with the added benefit of receiving fiduciary care from the investment group and having more convenient access to their funds.

How Can Credit Unions Benefit from Selling a Life Insurance Policy?

Credit unions can step back from a situation that may no longer be appropriate, adapt to the current economic environment, control the loan duration, and get paid back before an executive’s death. Jay shares example scenarios to demonstrate the long-term effects and benefits of selling life insurance assets and proactively building the strategy into future life insurance-based benefit plans for added versatility. Stream the episode to hear the most common reasons credit unions and their executives may consider the strategy, plus:

  • How the strategy can help solve immediate pain points for credit unions and decrease the rising opportunity cost of these plans
  • The process and various avenues Stearns Financial takes to purchase a life insurance asset to monetarily benefit all parties—and why CUOLI policies are selling the quickest
  • Situations in which an executive wouldn’t want to sell their policy

Hear the in-depth conversation to learn more and how your credit union or company can partner with Stearns to use the strategy.

Jay Rogers and Stearns Financial are not affiliated with or endorsed by ACT Advisors, LLC.

Audio Transcription (pulled from the podcast)

Doug  (00:00)
My guest on today’s podcast is Jay Rogers. Jay is a Senior Executive Consultant and Director of Business Development at Stearns Financial. In this episode, we discuss a new strategy for credit unions to be able to sell their CUOLI, credit union owned life insurance products, and split dollar policies. To buy out these policies with a strategy that Stearns has developed. It’s interesting to think about how in this interest rate environment old CUOLI policies might be updated to higher rates and collateral assignment may be used in a completely different way than you’ve seen in the past. Listen in.  

Jay, welcome to the show. We’re delighted to have you join us and to get to talk a little bit about the work that you’ve been doing with executive benefits.

Jay (0:59)
Thanks, Doug. It’s great to be here. I appreciate it.

Doug  (1:01)
So tell me about your work with Stearns, what you’ve been doing and what you’ve been specializing in, and then what you’re here to talk to us about today.

Jay (1:10)
Yeah, absolutely. So, Stearns, our background goes a lot further back than myself. We’ve been working with credit unions for about 40 years now, focusing on retention, succession and yield planning, right. So, building out different methods and ways to retain your key people to plan for succession and to do it in a way that optimizes the impact on the balance sheet. So, whether that’s minimizing the cost or maximizing the yield of the loan type that’s used, where we’re working to, with the credit union, to come to a conclusion that that optimizes everything they’re looking to accomplish. We always say mission driven goals and intent. And we have to figure those things out with a credit union, what is their long-term goal? Sometimes we go to a credit union, and they’re telling us, hey, this is the end result that we want. And we have to take a step back and say, Okay, why? What is the long-term mission that you have? What is the long-term goal that you have? And because if they’ve not articulated that, it’s going to lead to more challenges down the road? So, we want credit unions, especially when they’re talking with us about how do I retain the CEO that I love? Or how do we retain the CEO we just hired? That’s a conversation you’re having, typically somewhat of a honeymoon phase, right? Where you like the person a lot? Well, what happens when things aren’t going as well, what happens when there’s somebody considering leaving, right? Those types of things. So, we want these plans that are designed to retain your key people to be versatile, and to be adaptive, and to be essentially a living document that can work and be active in all sorts of scenarios. So that’s what our bread and butter is on a daily basis. That’s what we’ve been doing for decades now.

Doug English  (3:05)
And now, you have a dramatically different economic environment, right? The credit unions don’t have the deposits that they used to have. And the interest rates are dramatically higher. So, you have an effect all over the place on, you know, if it’s a traditional loan arrangement with the amount of the tax that’s potentially due on that loan. So, what have you guys been doing at Stearns to try to adapt to these times in executive benefits?

Jay (3:39)
It’s a great question. You know, you touched on a really key point here. So as credit unions look, especially when utilizing collateral assignment split dollar plans, one of the things that have made these assets so desirable is the ability to lock in the rate on these plans. I’ll give you a little bit of background on myself because it’s an important point. I’ve worked with a few firms that do this over my career, I started at New York Life, just as an advisor right out of college, ended up becoming a partner managing a team of young advisors there, and ended up moving from there to MassMutual. And it’s there that I got introduced to a firm that worked closely with credit unions. And after working with several firms that work closely with credit unions, I realized that a gentleman by the name of Eric Stearns, seemed to be the most forward-thinking person that I had met in this space. And I saw that from something he had already done. And also, the things he was focused on that didn’t make sense to most other people. So, what he had already done was credit unions had been funding collateral assignment split dollar plans for a long time at that point, but they had been funding them year by year. And Eric figured out, okay, what if we funded these all at once? How could we do that? And that was about a decade ago, now. Maybe a little more where credit unions started to look at this, and instead of 10 separate loans, each year that a premium was due, we figured out that we could fund these immediately on day one. And once you do that, you can lock in the loan using the long term applicable federal rate, which is getting really granular here. So, I apologize if it’s if it’s a little too much, but when you use the applicable federal rate, you lock it in, and that is the no matter what rates do from that point on, you are no longer participating in a below market rate loan if the credit union is booking that rate or higher. And so, because the credit union back in 2020 put a plan in place, and they lent out $4 million to make the plan work. And that rate, that loan was booked at 1.01%, they were allowed to put in the smallest amount of money possible to make the plan work because they’re charging so little on that loan. And the executive does not have to pay a tax for participating in a below market rate loan. So, there’s the least drag coefficient on the plan possible. And that was something that wasn’t possible until Eric figured that out many years ago.

Doug (6:21)
I’m going to stop you for a second, I want you to continue with that thought. But I want you to understand from my standpoint, how that filtered through is when we are doing credit union executives’ financial plans that don’t have what you described, and what I believe you just described as called loan regime, split dollar, right? So, when they did not have loaners, even when they had the forgivable interest model, I would have to model that out in someone’s lifetime financial plan. And it’s all based on interest rates, which of course, you know, 12 months ago were vastly different to what they are today. And you had to guess at tax rates, you had to guess at interest rates, and you had to guess at longevity. And the expense could be humongous. If interest rates went up a lot, which of course, they now have. So, I am delighted that I don’t have anyone that I currently am aware of in the credit union space that has the forgiving interest model any longer. Loan regime is all I see. So, thank goodness for Eric’s innovation in that area. 

Jay (7:31)
Yeah, yeah. And so, I saw that I thought that was an unbelievable measurable value add. And then I saw that he was asking questions all the way back in 2016, and 2017. And the question was, really to me, it was a question that nobody in this space wanted to ask, because from a vendor standpoint, from a company selling these assets and these plans standpoint. It was a question that could quote unquote, stop the gravy train. Right. It was a question that could make the sale of these plans less likely. And the question was, how are we going to get these off the books of the credit union early? What are we going to do when new boards have plans on executives who are no longer there? They never met the CEO from two generations ago, that CEO, CFO, he or she is in retirement? I’ve never met this person, we’re in a different direction now. And I’ve got to leave a $5 million loan out there that’s accruing interest. 

Doug  (08:43)
And you’re capped out on your net worth. I have credit unions that I work for right now, in that situation. 

Jay (08:49)
Exactly. And so that question we’ve been talking about for a long time. And I would say in 2019, we started developing what I’m going to refer to in our discussion here as the strategy. And the reason for that is we want to be protective of what we’ve developed here. But I’ll get into as much detail as I can. But the strategy is a method that we have developed to get credit unions out of their collateral assignment split dollar loans much sooner than death, even if they were not designed to do so. And I’ll go a little bit deeper here. So, we have developed a group of investors that are interested in these assets, as an investment play over the long term. And so, we are looking, along with that group of investors, to buy credit unions out of their life insurance assets. 

Doug (9:46)
So, Jay, first let’s set up for why credit union would want to get out of the split dollar arrangement they made to retain their executive is because maybe they’re capped out on net worth and need to retain a new generation of talent. What are the other reasons why they would want to make a change in that way?

Jay (10:07)
Yeah, so I think before that, the bigger question is why did they do it? Right. Again mission, driven, goals and intent. What was the intent of This collateral assignment split dollar plan? The intent was to retain this key person in as cost-effective manner as possible, right? And so, if a credit union has collateral assignment split dollar on their balance sheet, it’s because they had looked at a few options. And this was deemed to be the most cost-effective way to get to the desired goal, right? When you take a step back and say, okay, everybody’s trying to develop something better, right? What is the next thing that’s going to be more efficient? Well, for us, this was a really efficient solution. It’s just there were a couple of caveats that if we could crack the code on, it would make them much more desirable long term? And so, for us, why did they do it, they did it to retain this key person. They did not do it so that they could participate in a loan that pays them 1% a year until the unknown date of a person’s death. Right? That was the negative, right? The negative in the plan. And funny enough, a lot of credit unions, we put these plans in place at an AFR of 3%, 2.75%, whatever it was, and that was a very desirable rate at that point in time, they would say in 2019, and 2020. You know, wow, this is great, thanks for this rate. And so, times have flipped quickly. And as far as what we’re trying to accomplish here, we did not plan on this, we’ve been developing this strategy for two years, we brought it to market in the spring, we’ve been speaking with credit unions on a very selective basis. And we did not plan on interest rates spiking as they have. But it has made our strategy even more desirable because a credit union, the opportunity cost that they’re participating in, the spread on that opportunity cost is increasing. And what they’re participating in is less and less desirable, but there’s nothing they can do about it. So, they don’t lose much sleep over it. Now that there is something they can do about it. Now that they can take a 1% loan that they’re going to have on their balance sheet, they can get out of it much, much sooner. There’s concern, right. It’s solving an immediate pain point is what I would say,

Doug  (12:45)
Well, it’s freeing up the credit union capital to do whatever needs to be doing at this time, whether it’s, you know, loans to members or different executive benefits. So, I can imagine there is certainly a market need. Again, I’ve spoken with credit union CEOs that have told me themselves that they’re capped out on a net worth basis, so they can’t do traditional executive benefits. I’m sure that the need is there, then I guess the question becomes, to the degree that you can tell us, how does it actually occur? Like, what’s the process as far as you can tell us?

Jay (13:26)
Yeah, so what I’ll say is, we’re going to a credit union, we’re asking them if we can buy this asset off of their balance sheet in exchange, depending on the current structure of the plan, which we would run an analysis on, to see to you know, look at the strength of the plan as it is, what was it forecasted to do? What was it built to do? How has it performed? How has the insurance company’s dividend performed? What insurance company is it with? What is the benefit done since putting it in place? Right? If we’re talking to a credit union, who put a plan in place, I’ll give you an example. Right? Maybe that’s the easiest way to do it. Let’s say somebody’s got a plan in 2016, with MassMutual. Okay, and the plan was designed to give their executive $150,000 in retirement for 20 years, and the credit union is paying that loan at once. Let’s say it was a $4 million loan. And they’re booking they did it in 2016. So, they’re probably booking 2.35%. We’ll call it 2.5% To be round. Okay. So, this is on their balance sheet. They’re accruing interest 2.5%. Every year. Over the last few years, they have done one of a couple of things. They have had meetings, either they have a bad advisor, and they have not had meetings and they don’t know what has happened, but let’s assume that they have. They have been made aware that MassMutual’s dividend has decreased on several occasions over the time period of 2016 to 2022. That being said, MassMutual is one of the best companies out there. And that’s not a major concern long term, but if you put a plan in place in 2016, it is not forecasting to do what you were shown in 2016. So many scenarios we see the executive is now being shown, hey, that $150,000 benefit for 20 years, you’re we’re going to get, we now need to, it’s now forecasting to be 120. Or we’re now forecasting 17 years of the benefit, or the credit union came in, and this is what a lot of our clients did. We met with them. And when the applicable federal rate was dropping, which it did, especially in 2020. We then worked with them to refinance that loan, as we did an amended promissory note. And so now the credit union went from booking 2.5, to booking 1.75. 

Doug  (15:58)
I saw a lot of that happen all over the industry. 

Jay (16:01)
Yeah. And that’s, that’s a good thing. And that brings us back to what was the intent? Why would a credit union lower the rate, they’re booking on a loan that’s out there that they don’t have to? It’s because of the intent, right, the intent was for the executive to get $150,000 for 20 years, they want to make that happen. So that’s what they did. So, let’s assume that the credit union lowered it to 2%. Right, and that that was able to help it. So now it’s at 150,000. So, the executive now has experienced what I call the risk weight within this plan, the risk in these plans lies on the executive, the risk to the into the yield from the dividend to the performance is to the executive, if the dividend is decreased, it comes out of the executive’s benefit, not the credit unions, promissory note loan plus interest, right. So, that’s where the risk lies. What we’re doing is we’re going to a credit union, now we’re saying we’d like to buy you out of this plan. And depending on how badly you want to get out of it, we’ll determine the direction that we take. So, a credit union could say, hey, we would go to them, we would run an analysis and we would say we can tie this to a fixed maturity date, we are removing duration risk, right. So now they have an asset that will pay at the death of the this executive, we’re taking it and we’re saying, Okay, if you want to continue booking 2%, we can give you a fixed maturity date that 20 years now, you know, it’s going to be 15 to 20 years, something like that, depending on the asset, then we’ll say okay, well, if you booked, if you’re willing to lower that to 1%, and now you’re booking 1%, we can lower that to 10 years. Okay, if you’re willing to lower that to 0%, we can lower that to call it six years. Right? And again, I don’t know exactly, we would have to run an analysis, but we are able to now manipulate this arrangement to where the credit union gets paid back at a fixed maturity date that they are in control of. And with an increasing opportunity, cost spread. That is that is powerful, right? That is a major impact to the long-term planning of the credit union. Now they can say, Okay, well, you know, what, Sheila, our CEO here, was going to be retiring in seven years, we want to do 0%. Because if we get this off our balance sheet in seven years, we can put a plan in place for the new CEO that’s coming in. Does that make sense? 

Doug  (18:39)
Yeah, it does. It’s very interesting for the secondary market, if you will, the market of existing policies, I think, has a lot of interesting ideas. And then I also want you to talk to me about like, if you were designing a new plan, how would you incorporate this design into it right from the beginning?

Jay (18:59)
Yeah, we would? That’s a great question. Before we move on to that, though, I want to touch on one other thing, because we only talked about the credit unions piece of that experience there. So, the credit union is able to control their duration through this strategy. And they’re able to improve their duration significantly. The executive, what we are able to do with the executive in this engagement is we want to buy them out of their asset, which is the life insurance policy. And so, they’re going to need some assurances to want to do that. Right. But the things that they are getting, by doing this is we’re saying we’re going to transfer your risk in this plan from you to the Investment Group. Right. And so, we’re giving them a fully paid-up guaranteed annuity, that typically is going to be in the neighborhood of 105 to 110% of their originally promised benefit. So, let’s say there’s somebody out there who’s had to decrease their benefits three times, two times whatever it may be. We’re able to come in with this strategy and restore their benefit. We can also build in a death benefit to it. So, if they said, Look, I appreciate the benefit, I need to make sure my family is taken care of, if I take all 20 benefits, I was going to get $300,000 still. I don’t want to lose that. Fantastic, we can build that in so that they have a death benefit. And their relationship now is with the investment group, it’s not with the credit union. The reason that’s actually a good thing is the investment group has a fiduciary responsibility to the owners of these guaranteed annuities and the owners of the death benefit, which are these exact executives at that time.

Doug  (20:51)
All right, so this is an area I want to dig into a little bit. So, the executive was going to get a, let’s call it annual withdrawal or loan from the policy, which would be tax free, until it was no longer safe to have a withdrawal, usually 20 or 25 years and the illustrations ride the map drawn to be completely tax free. And then there’d be an illustrated death benefit, after the credit unions paid off when the executive passes away. So, correct it if they go through this transaction with you and they end up with a paid up annuity, is it not the executive direct to the insurance company, that’s not the relationship, it’s a third party relationship? 

Jay (21:43)
There is a direct relationship that the executive will have with the insurance company, I’ll also say that the benefit is still nontaxable, unless we go above and beyond, and we’re giving more than they were originally promised, if and if that same executive who was going to get $150,000 a year, if we’re able to provide them with $170,000 a year, then they’re going to get $170,000 a year, and they’re going to have to pay taxes on $20,000. And I have not yet met somebody who is upset by that arrangement.

Doug  (22:12)
I should think not. And then is the length of the guarantee period in line with what it was originally? 

Jay (22:20)
It would be designed to do the same thing that their plan was built to do. So, it would be designed to pay them 20 payments of $150,000. The benefit to the executive here, the way that I see this is for the credit union, it’s a fantastic play, there is really not a negative to the credit union. For the executive, it’s a really good play, there are scenarios where they wouldn’t want to do it, I’ll give you an example. We have an executive who has a special needs child that they are planning to have cared for throughout the child’s life, no matter how long the executive lives. And so, their asset is really not, it’s no longer about a benefit to them. It’s about life insurance, and that life insurance is going into a trust that will be there for the child. And so that’s an example where life insurance is more important than the benefit. And so that’s one that we would not buy out. Right. So, if the benefit is what’s really important to the executive, then we’re able to remove the risk in the plan, provide them with an equal to or slightly greater than benefit in retirement, and dramatically improve the convenience of accessing their assets. What I mean by that is any executive who’s in retirement now is calling the credit union, asking the Board to approve their distribution. Then the board calls the vendor, then the vendor calls, the insurance company gets an illustration. That means they run an analysis, they say, hey, everything’s good. We can do this now, then they have to sign a document from the insurance company for the distribution. Right? I’ll give you a little bit of background color into some of the components of how we’re doing this. But one of the things is they’re taking a loan from these insurance companies, right? No longer doing that has an impact. Right, people would ask how is this possibly advantageous for this investment group? Well, these plans that are now no longer touched on are able to generate a lot of growth. And so yes, we’re giving the executive an asset, but now we have an asset that we are not planning on utilizing in the same way. We have a new intent for that asset. And it’s to leave it alone, frankly, in a lot of ways.

Doug  (24:46)
So, then the executive is going to get a nontaxable and it is a guaranteed amount and for a guaranteed term, or is it illustrated and projected?

Jay (24:59)
It is a guaranteed annuity. Let’s talk about what that means. I’ve had people ask, what is the risk in that? Okay, well, right now, and one of the things that we’ve talked about is, well, let’s pick the company that you want to use. Who do you trust? Do you have a split dollar plan with MassMutual? Right now? Okay. Why don’t we use MassMutual? Why don’t we buy a guaranteed annuity with MassMutual? Your risk profile now is the same?

Doug  (25:21)
Or you could buy three of them, right? You could spread it around.

Jay (25:24)
Yeah, sure. Absolutely, you could spread it around. And this is something that’s important too because an executive needs to know this, one of the benefits of a split dollar plan is the flexibility you have in retirement with that asset. The difference here is you have that flexibility, but you need to decide at the onset, because at the design, when we buy these assets, you then lose the ability to get super creative with how you take it. Right. So, we could buy a few different types of annuities. We could buy a life only one life only we could buy one that has a death benefit to your spouse, right? It’s about you maximizing the income that you get out of this plan. Is that helpful?

Doug  (26:07)
Yeah, it’s very, very interesting. Obviously, I agree with what you said, I can see on the credit union side, of course, the devil is always in the details, right. But it seems like in these times, it would be an interesting analysis on the credit union side, that can be pretty compelling. If nothing else, just have flexibility, to have the ability to unwind a situation that is no longer appropriate. And then adapt to new times. But then from the executive standpoint, you retain the tax-free nature of the payments, which from my chair is mission critical. You know, when you have that 50% of your income coming from a tax-free source that lets me get you qualified for Obamacare, potentially, lets me do Roth conversions and have you pay almost no taxes on them, let’s me harvest capital gains, 0% tax rates. It gives us all these other lever points that folks generally don’t know about. And the whole critical part of that is that you have a substantial tax-free income stream. So, it still retains all of that. But now you’ve got an insurance company guaranteeing the payment stream instead of illustrating the payment stream. That right? 

Jay (27:26) 
Correct. I mean, in a lot of ways, with a life insurance policy, it’s still the insurance company guaranteeing a payment stream, you just don’t know how much of it is going to be there. It’s dependent on their dividend performance. That’s not the case with a guaranteed annuity. Right. So again, this is the executive, somebody would say, oh, well, you know, why does the executive want to do this? Well, they’re transferring risk, they are no longer in the position of carrying the risk, the credit union never has been—the credit union’s risk is duration risk. And that’s where we come in and actually solving that for the credit union as well. Another cool feature here is these are two separate assets. The credit union owns a promissory note, the executive owns a life insurance policy, either of these parties could actually transact this without the other one doing it. So, if an executive said, I don’t want to do that, we would say okay, totally, we understand the credit union can still sell their promissory note. And so, we can solve that problem as well.

Doug  (28:28)
The executive can stay right where they are. Now, I want to talk about how you would think about designing new policies with these tools. 

Jay (28:36) 
Sure. Yeah. Well, I think, again, whenever you have a conversation with a credit union about who they’re looking to retain, what is their succession plan that they’re looking to put in place for the credit union, right, we help credit unions put in place what we call program policies, what is the policy of the credit union? When it comes to a person at exposition, when would they get a plan? Right, those types of things? So, looking at the institution itself, and what are their goals? What is their vision? What is their intent behind these plans, and now that we have a tool to control duration risk, within a split dollar plan, it impacts the design. And so, we are now designing these plans, with the focus that they’re not going to sit on the balance sheet of the credit union for X number of years. Right? It is for and then it’s a number, right? We have removed this floating maturity date. We always tell credit unions; you have multiple levers that you can pull on when designing these plans. Typically, the two levers are time and money. And those have impacted until now, the executives benefit. Right? That’s specifically what those two levers have impacted the executives’ benefit. It’s also impacted the loan amount that needs to go into the plan. Now, it is now it’s time, money, and duration. Right. So, there’s a third lever here that we’re playing with all three of which impact the executives benefit and the loan amount. I’ll also say this, the strategy has directly impacted credit union’s ability to finance these plans. And the way in which they would go about doing that. So, if a credit union, whether it’s a, you know, $50 million credit union, who has a small net worth cap, and they want to stay under it, and they in the past, they wanted to do three plans, but they couldn’t. Now, they might be able to do three plans, those three plans may, in total cost $6 million, but the credit unions only having to put in 1.2. Because the other portion is financed, right? In addition to the executive side, their plans are being designed, where they’re not the executive is not taking their nontaxable benefit in the form of a loan against the policy. So, it impacts a lot about how we design these plans and what are the parties that need to be considered in the design. Does that make sense?

Doug  (31:17)
It does. It’s really interesting and it’s kind of open. Got to really ponder it a bit to understand all the impacts because I’m imagining when you’re sitting down at the table and you’re initially designing a program now knowing that you can predict on exit points, not exit commitments correct me if I’m wrong Jay, but exit options.

Jay (31:41)
Well, if it’s in design, right, if we’re talking about at the onset, we’re designing this to function a certain way. I wouldn’t call it an option, it’s the credit union gets paid back at X date, they have a fixed maturity date.

Doug  (31:57)
Or they could choose not to they can do a traditional structure?  

Jay (32:01) 
It is always more advantageous for a plan to be designed with the strategy in mind than to not and then go to the strategy later. Because if we’re building it with that in mind, we’re building it with some of those key components built into it. Does that make sense?

Doug  (32:08)
Yeah. Yeah, it does make sense. 

Jay (32:19)
But you could build a traditional plan. Again, this is another thing that strategy solves here. How was the credit union going to do that today? A lot of the people we work with are not even considering split dollars anymore. Are they going to put out a loan at 7%? Yeah, the executives are going to pay the credit union 7%. For the life of the loan, it’s not happening. So another thing that the strategy has allowed us to do is to remove the need to tie the rate, tie the loan to the current rate. And we’ve eliminated the tax burden to the executive through the strategy. So even if the credit union were to not book, the AFR, the executive’s benefit is not structured so that they’re paying this massive tax now for participating in a below market rate loan. We have some credit unions coming to us wanting to put their plans into the strategy because they have a tax burden that the credit union has promised to pay for every year. And where that tax burden was call it a spread of 1%, 2%. Now it’s a spread of 6%. Right? Where the difference between what they’re booking and what the market rate on that loan should be, is much, much higher now. Does that make sense? 

Doug  (33:42)
It makes total sense. Yeah. It’s just sort of reacting to the massive change in interest rates. And that has increased that opportunity costs, as you said earlier?

Jay (33:52)
The strategy is focused on buying credit unions out of life assets. Okay. And so that’s not only collateral assignment split dollar. I would say the most interested group currently  in working with us are credit unions who own CUOLI. So, credit union owned life insurance, or some everybody calls it something different, right, bank owned life insurance, credit union owned life insurance. But at the end of the day, what it’s focused on is yield to the credit union. It’s categorized under the credit unions 701.19 otherwise impermissible investments to quote unquote, offset employee expenses, right. And so, this is a credit union borrowed an employee’s life. And typically, the employee is getting nothing or a small death benefit as a thank you. But it’s designed solely for all of the income generated out of that plan to go towards the credit union’s balance sheet. And over the last call a decade, that’s been what I would call a decreasing spread. The yield curve on a CUOLI product in a declining interest rate environment is one that becomes more and more advantageous for a credit union. That relationship is flipped on its head when the interest rate environment starts to rise. And so now, everybody has this asset on their balance sheet. That was something that they really like. And now it’s either something that they like, or they don’t like. And they don’t know what they’re going to do with it. Because with CUOLI You can liquidate it to the company. Right. You can liquidate it to the insurance company unless you’re in a surrender charge period, and even then, you could still do it. What the strategy has developed is a marketplace to sell that asset rather than liquidating it. And so, we’re going to credit unions who have credit union owned life insurance and we’re saying we would like to buy that asset from you. And what we are providing you with is a fixed maturity date, where we will pay you the lump sum plus interest and your new interest rate. I’ll give you an example. Most of the credit unions doing this with us are signing up for a 15-year maturity date. And we are providing them with a guaranteed SOFR 30 plus 360 basis points. So, the secured overnight funds rate average of last 30 days plus 360 basis points. So, it’s floating, and it’s moving with the interest rate environment. Right now, that rate is about 6%. So, they would go from I know these plans fairly well. Every single plan out there is getting somewhere, netting, I’ll say netting somewhere between 2.2% and 4.2%. So, to take that type of investment, and I know credit unions with over $100 million in this. And to be able to sell that asset in exchange for an asset that you’re getting. Now, immediately you’re getting 6% on is advantageous. Now people say, oh, what if rates go down, then yes, your rate will come down. But do you know what else will come down? Is your CUOLI yield? So you have to compare it to the asset that you currently hold.

Doug  (37:19)
Is the rate of change between those two instruments the same, the CUOLI yield and the strategy yield?

Jay (37:25)
No. And that’s what we’re able to take advantage of in this current moment. The reason that the spread was attractive in a declining rate environment is because a life insurance companies yield, their dividend, decreases at a slower rate. The reason that those products are not attractive right now is because they are increasing at a slower rate. Right. So, while rates are going up, up, up, up up, the dividend hasn’t gone up at all yet. And we’re assuming it will next year as a response to the rising interest rate environment. And I mean, assuming something, I don’t know what would have to happen to cause it not to right, it should, but it’s going to go up slower.

Doug  (38:15)
The executive benefits specialists, I think, are very challenged to explain traditional split dollar to a board to get that across to the board. And to and to help them remember what they did and why they did on at least an annual basis. This additional level of complexity must be quite interesting to work with a board on. Have done that yet? I know this is brand new. 

Jay (38:44)
Yeah, yeah, no, we have. So, I’ll tell you, currently, we have $50 million committed to the strategy in life assets. And we have approximately 300 million in due diligence. And so things have been going very well. We get the board’s involved very quickly, because, frankly, these are board members that have typically had some turnover. So almost every board meeting I’ve had with a credit union has a board that has new board members, who are kind of we’re now educating them on what they bought. If that makes sense.

Doug  (39:21)
It makes a lot of sense.

Jay (39:22)
And, then we’re educating them on what they can do with the asset they have. What does the current interest rate environment, what does the current credit union environment, mean to the asset that you currently hold? And are there ways to leverage this asset for additional yield? Or decreased duration? Right?

Doug  (39:47)
Yeah, that makes sense. I imagine that, as I said, it’s just a complicated topic to be able to get all the way through.

Jay (44:12)
Yeah, and when you throw a lot of other things into this, and I know we can’t get to everything, but you throw in NCUA guidance on net worth caps, you throw in NCUA guidance on concentration risk, right? We have credit unions all over the country that are out of compliance when it comes to concentration risk and in our experience, the NCUA is more concerned about concentration risk than they have been about net worth cap risk, right? So, when looking at a net worth cap, you can sometimes go higher if  your vendor is able to provide additional due diligence on the companies where the assets are placed. Concentration risk, it’s not the same if you put x dollars into it One company, and that is in excess of 15% of your net worth capital, you are out of compliance. And so, the strategy immediately solves that.

Doug  (40:52)
Very, very interesting, Jay. Talk to me about any questions you’ve heard from credit unions or creative strategies or who should be listening to this podcast and then emailing you? Like you said, the CUOLI folks are the ones that are going the quickest. And that’s where they used the life insurance policy to get at that higher interest rate of the general account of the insurance company and that is now a lagging asset, do what’s changed and interest rate spreads. And so, they want to get that off their balance sheet. And you’re offering them a method of liquidity, right, that that would be who’s coming to you the fastest right now?

Jay (41:35)
Yeah, it’s anybody who is concerned about the rising opportunity cost of a life insurance asset, either owned, or a promissory note tied to a life insurance asset. And if you have thought to yourself, Man, I wish I could get more yield. Man, I really wish that this split dollar portfolio had a fixed maturity date, I really wish I could get this off of the balance sheet when the executive retires instead of when they die. I really wish that my CUOLI portfolio, which was great two years ago, but now is not keeping up. I really wish there was a way to pivot the return on that investment from a lagging response to a yield that is tied more closely to the interest rate environment. Right. Any questions like that, if you’re asking yourself that we should talk. Another thing I’ll say here. Look, I’ve worked with a lot of companies in this space. Eric and I are like minded in this way. We’re designing this to work with other vendors. We want to work with other vendors on what we’ve built here. If you’re a vendor, and you have a credit union that could benefit from some of the solutions we’ve described here. We will work with you.

Doug  (42:55)
Very interesting. So, if you are not someone that is working with the Stearn’s group, you can still, you know, participate in offering the strategy to credit unions that you work with.

Jay (43:08) 
Yes, yeah. And we already have several firms that are taking advantage of that. And we have NDAs and agreements in place. And they’ve been awesome. Their goal is to serve their clients as best as they possibly can. And what we have developed enables them to do that in a more complete way. And so, they didn’t put that, you know, frankly, it was more of a pride thing, it would be the reason that they wouldn’t, right. We’re working in a way where they’re benefiting from it monetarily, we’re benefiting from it monetarily. The credit union is benefiting from it monetarily. The executive is benefiting from it monetarily. Right. So, we’re excited to work with them on these things. And we’re happy to work with anybody who is interested.

Doug  (43:57)
Jay, very, very interesting content today. Let’s give our listeners your contact information. In case they want to learn more about the strategy.

Jay (44:07) 
Absolutely. So again, my name is Jay Rogers. That’s ROGERS and my email is the letter jrogers@stearns.financial.There is no.com after that, and my direct contact number is 864-787-6624. 

Doug (44:35) 
Awesome, Jay, thanks so much.

Jay (44:40)
Absolutely. Thank you.

Doug (44:41)
Listeners, be sure to check out part 2 of this interview in our next episode. Jay and I will be joined by Eric Stearns and together we’ll talk about use cases for how you might use the strategy that Stearns has developed and take a deeper look at how some credit unions have benefited. 

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