Should Credit Unions Fund Split-Dollar Plans With Whole Life or Index Universal Life Insurance?

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Should Credit Unions Fund Split-Dollar Plans With Whole Life or Index Universal Life Insurance?

At ACT Advisors, the split-dollar plan is one of the most powerful executive compensation tools we encounter when delivering meaningful benefits to executives. The reasons include relatively reliable returns, lower risk, and their non-taxable nature in most cases. Before a credit union offers a split-dollar plan, however, it must evaluate how to fund it, typically with a whole life or index universal life (IUL) insurance policy.

In this episode, Doug is joined by guest Matt Haid, area vice president of split-dollar and executive benefits within the benefits and HR consulting division at Gallagher. As a licensed life and health insurance agent, Matt has over 30 years of experience helping credit union leaders design, fund, and implement split-dollar life insurance, non-qualified benefit, and pension plans. In the conversation, the pair discusses the key differences in the life insurance options when funding a split-dollar plan and the complexities credit union boards and executives should first understand. 

For example, Matt explains how little control credit union executives have over their returns, which cannot be affected by simply altering their investments. With whole life plans, executives are at the mercy of the insurance carrier providing dividends, while with IUL, they’re subject to the stock market’s performance. Other factors may help a credit union better determine which type of funding option to choose. Matt explains these factors, as well as:

  • Why whole life involves much less risk along with much higher funding requirements
  • Why running a multitude of projection illustrations may be confusing and unrealistic
  • How he helps credit unions solve the challenge of underperforming projections
  • Why credit unions may consider IUL over a whole life option if dividend rates continue to drop
  • What historical data can tell us about the floor and caps built into these policies

Stream the full episode to hear Matt’s valuable insight about using split-dollar plans to attract, retain, and reward top executive talent and why working with a professional specialized in these plans is critical to their success. 


Matt Haid and Gallagher Executive Benefits are not affiliated with or endorsed by ACT Advisors, LLC. 

Audio Transcription (pulled from the podcast)

Doug (00:03):

Hello credit union executives. Welcome to “C.U. on the Show,” where we give you up-to-date information on how you can reduce risk, keep key talent, and take a strategic approach to your personal financial wellness. Hosted by me, Doug English, a CERTIFIED FINANCIAL PLANNER™ and former credit union insider with Act Advisors. My guest on today’s podcast is Matt Haid, area vice president of Gallagher. Matt has over 30 years of experience working in executive benefits. He is responsible for consulting on all aspects of split-dollar life insurance, including the initial design, ongoing projections fulfillment, and reporting. In today’s episode, we talk about the complexities in split-dollar plans and how the credit union movement can make the best use of this important tool. Matt, I’m glad to have you on the show today. Tell me, how did you get started working with the leaders of the credit union movement?

Matt (01:05):

Doug, pleasure to be here. So believe it or not, I started my career as an actuary, but soon found out that I had way too much personality to fit in with that crew.

Doug (01:12):

No actuaries on this podcast, Matt, sorry.

Matt (01:16):

I think I’m okay with that. I then went to work for a for-profit company providing non-qualified plans to executives; did that for many years. And then I went to work for a very underserved market, which is the credit union industry. They’re underserved because they’re not for profit. And there was so much opportunity to provide services to these credit unions to help them attract and then reward their executives. Competition is fierce for talent in the credit union industry. And there needs to be a way to maintain your most valuable assets, which are your employees.

Doug (01:54):

Yeah. The credit union industry, like all others, is aging. I think the average credit union executive is suddenly around 60 years of age. Right?

Matt (02:05):

I believe that. Yeah. That’s definitely aging and folks who’ve been there for a long time. Yeah, absolutely.

Doug (02:10):

Yeah. So keeping your key talent in place is an important consideration and that’s kind of what leads us to our discussion today. So when an executive chooses to use a split-dollar plan as a part of their executive benefits system, from my chair as a financial planner, when I build out their financial plan and sort of look at the success of the projections, the split-dollar plan is the most powerful component to that plan. Sidebar: We do not sell split-dollar plans at Act Advisors, so I’m not trying to sell anybody a plan. My point is that it makes a massive difference in an executive’s financial outcome, much more so than I’ve seen in any other form of plan. So on this podcast, we’re trying to really understand the complexities around those instruments and how the credit union movement can make the best use of them. So Matt, tell me about when you’re working with an executive team that’s considering a split-dollar plan. Talk to me about the process of figuring out how to illustrate the return or the return expectation for the instrument. How does that work? What type of plan is usually made up? Kind of walk us through that from a layman’s level all the way up.

Matt (03:32):

Sure. And, Doug, you hit the nail on the head there, that there are a lot of moving parts and the fact that these are such powerful plans and as you know, the reason why they’re so powerful is because the benefit that’s delivered is not subject to tax in most cases. And so it provides these executives with really 40% more than what they can get out of other types of plans. The plan design, as far as illustrations, is targeted to have a very modest type of return. This is a different type of investment where if you’re in a 401(k) plan or a 403(b) plan, it is really trying to maximize the return each year and build a big pot of money. These plans target a more level type of return, not trying to knock it out of the park. And so we get asked a lot of times to run the illustrations for a lot of these plans, which are financed with life insurance.

Matt (04:28):

And we get asked a lot of times by both credit unions, by boards, and by financial advisors to run different scenarios of returns. The issue that I see when we’re doing that as well, that can affect the amount of benefit that is ultimately provided by these plans, what it cannot do or what a financial advisor cannot do in these plans is actually change the rate of return or target the rate of return by all-terrain investments. The investments that are most often used in these plans are either an indexed universal life product, which again, involves an index that is going to provide you the return that you get. You have no control over that index. The other type of plans use whole life insurance, which provide dividends from the life insurance company. And again, you have no control over that. When we see requests to run a lot of different illustrations, it kind of becomes more confusing even because sometimes you see a number and you get fixated on that number, but you have no control over what that number is going to be because you’re at the mercy of the market. You’re at the mercy of the whole life carrier who’s going to provide you with that.

Doug (05:46):

Let’s go a little deeper on these two options. You’re a credit union, and you’re trying to figure out how to fund your split-dollar plan. And you’re a whole life solution versus an index universal life. Help us to understand the difference between the two and why some of your customers choose one over the other. 

Matt (06:08):

Actually, that’s a great question. And we do see that a lot. The whole life solution, you are at the mercy of the carrier who is going to provide a dividend at the end of each year. Most of the mutual companies out there that are providing whole life products have been providing a dividend over the last a hundred years since they’ve been in business. So they tout the fact that there’s a lot less risk. You will see some type of (inaudible). However, you will pay for that risk. Typically, you’re going to see that those plans are about 30 to 40% more.

Doug (06:41):

I want to stop you there and make sure I understood when you said 30 to 40% more expensive. So if we’re going to put a million dollars into an executive benefit plan, we’re talking just 300, $400,000 more going into whole life, right? That’s to provide this same benefit.

Matt (07:00):

That’s correct, to provide the same benefit. And that’s the key. First we determine the benefit, whatever that benefit stream is likely to be. And then how much do we need to fund it now? And if we needed a million dollars to fund it now in an IUL product, indexed universal life, we probably would need about 1.3, 1.4, to fund it in a whole life product.

Doug (07:20):

So if you’re a huge credit union with a massive deposit base that you have a lot of capital right now, do you see credit unions with more cash choosing the whole life more frequently? Because eventually the credit is going to get their money back, right? That’s going to happen. So the whole life, yes, you have to put more money into it, which you get back with interest. So what’s the thought process you’re used to there?

Matt (07:48):

We don’t see that necessarily based on the size of the credit union, because typically a bigger credit union is going to have higher paid executives. And so there still are some costs of capital that they have to take into consideration when funding these plans, the dividend plans. The whole life plans are a little bit harder, especially in today’s environment to, I will say, provide a targeted benefit because as the dividend rate has been coming down a little seven, eight years in. If I ran a plan seven years ago and the dividend rate was 7% and now it’s down to 6%, in order to average 7%, now I have to get that dividend rate all the way back up to 8%, even if rates move much slower than the market. Now, for the IUL, where you may have one or two down years in a 10-year span, you’re also going to have seven or eight up years in that. It’s a lot easier to recover in an index universal life plan, to the rate of return that was being targeted. And so we don’t necessarily see bigger credit buying the whole life product. They need to understand that there is still risk of a dropping dividend or a decreasing dividend rate in those whole life products. So that’s a very important topic that is really rearing its head right now. And mutual fund companies are cutting their dividend rates.

Doug (09:12):

When you have that kind of situation occur, your company or another one that put in a product where the dividend was illustrated higher than reality has proven to be, what do you do about that? What’s the solution? Do you add the money to the contract or reduce the death benefit? What are the choices?

Matt (09:31):

So the solution is one, to deliver a smaller benefit, which is probably the least favorable solution. 

Doug (09:38):

That wasn’t an option.

Matt (09:42):

It is an option, but it’s not a very good one. So the option there is to discuss with the credit union, do they still want to target the same benefit? One of the options is to go and put in a new plan and we have seen that or the executive that will make up that shortfall.

Doug (09:59):

Okay. So you add a new plan to make up for the shortfall potentially. What percentage of the business that’s out there is whole life versus the index universal life. Do you have a good feeling for that?

Matt (10:13):

I would say that at our company, we have about 10% whole life and about 90% index indifference. At our company, we have been very vigilant in taking over plans that are not being serviced by folks that did sell 7, 8, 9 years ago, plans that were financed with whole life and they are just giving up on it. And we’ve had a lot of credit unions come to us and have us help them with the solution. And so we’re saying that in other consulting firms, that percentage is much higher. That’s probably in the 50 to 60 to 70%, whether they’re funding those plans with whole life insurance.

Doug (10:55):

And when they’re not getting service and you guys come in and kind of take over that, the solution, obviously getting up today, making sure you understand the data, making sure that you understand the policy is probably where you start with, then your ability to change things is pretty limited, right? The only real fix is usually adding an additional policy or decreasing benefits. Is that kinda what it usually comes down to?

Matt (11:21):

Those are two. And again, we can exchange those underperforming policies and perhaps add a new IUL policy if that makes sense with the client. And so in that case, that can be a solution where they go into a different product. Now that does involve, I don’t want to get too technical, but it does involve new underwriting. And if a person is 10 years older, then the costs would be prohibitive; if they’ve started smoking, if they’ve had any other medical issues, then the cost could be prohibitive. But that is something that we look at as well to get them into a product that we feel is going to provide a more likelihood of delivering that benefit. 

Doug (12:00):

All right. So 90% of what you see is index universal life.

Matt (12:05):

And at our company, that’s correct. 

Doug (12:07):

So, when a credit union gets into an index universal life plan, I’m used to seeing that they have a variety of choices of indexes, right? Can you talk us through the index choices and add your thoughts?

Matt (12:20):

Sure. So the index choices, there is a variety. The carriers that we use typically offer three to five different indices. Some of them based on the American markets, the S&P 500, for example, some of them based on the Russell 2000. We have companies that base their indices on Euro stocks. So you do have some options there. They all have what we call floors and caps in the index marketplace. And because of those floors and caps, typically, if you look at historical returns, which Doug, we all know doesn’t guarantee a future performance, if we look at 30-year histories based on the floors and the caps that are involved in an index universal life, what we see is about a 30 to 40 basis point difference in the indices. 

Doug (13:13):

Wow, that’s so close to what you just said that between these different options, your historical differences, which don’t predict the future, but the interesting data point, the historical differences are within or less than a half a year.

Matt (13:27):

Absolutely. That’s correct. And then, so that plays into our earlier conversation of requesting illustrations or projections at rates that just aren’t reasonable; a 4% return going forward for the next 35 years in an index product doesn’t make sense. It just, if that was the case, our entire economy would be in shambles. And honestly, Doug, I’d be out of business. Now, I’m not saying that’s a guarantee that it won’t get down there, but the floors and caps are there; these index products are made so that it doesn’t get that down that low. It’s never going to provide a 10% return. But again, that’s not the goal here to provide that level of return.

Doug (14:11):

And within index universal life, I’m used to seeing a few of these and I believe there’s no negative years, right?

Matt (14:19):

That is correct. When I talk about the floor, we’re talking about a 0%, meaning that if whatever industry you’re tracking goes down, then you don’t receive a negative credit. You just receive a 0% credit. And it’s very important to understand that if it does go down, then going forward in the new year, we’ll start at that lower number. And so you don’t have to crawl out of the hole and they give you a real quick example. If the S&P was at 4,000, dropped to 3,500 in an index universal life product, as we talk about you would receive a 0% credit. If you didn’t have index universal life, you would have to start at 3,500 and crawl all the way back up to 4,000 in order to break even. Pretty simple, right? In an index universal life product, your next starting point is that 3,500. If the S&P were then to go up to 3,700. Now you’ve just gained 200 points out of 3,500. If I was better at math, I can tell you what percentage that is, but that’s around a 7% return. And so we didn’t have to climb all the way back up to that 4,000 to get a positive return. That is so powerful.

Doug (15:33):

Let me ask a couple of details around that. And that was a great example. So what I hear you illustrating is the point to point nature of the indexes. What I want to understand is a credit union. You know, often they fund these things over 5, 7, 10 years. Do they have five different sort of annual calendars going depending on when the money is put in? How does that work?

Matt (16:01):

So another great question. Typically when you’re funding with life insurance, you’re going to fund at the same date each year. And so while they only have one premium in the first year, it will be in a month to month, say for July. The second premium will also come in July the following year. So they’re still going to be on that July to July segment. And so, no, typically you’re only in one segment. There is the option to spread that out over 12 months, if you so choose to spread those premiums and take 1/12th of the premium each month and spread it out so that you’re in all 12 segments. But typically we see that you’re in the same month to month from year to year segments. So July to July each year, and then as the new premium comes in, it’s going to come in in July. And so you’re still in that July segment.

Doug (16:49):

Interesting. So as a credit union, you could effectively choose if you wanted to be in one indexing period per year or more. Is there data around why one outcome would be better than the other? And what’s that data look like?

Matt (17:08):

Again, we have the historical data on that, and it has been proven that one is not better than the other. What it does allow for the credit union in an index universal life product, you’re waiting exactly one year to realize any positive return or any negative. So from an accounting standpoint, you have three negative quarters, and then potentially one positive quarter. If you do decide to spread it out over the 12 months, while each credit is going to be a little bit smaller or 1/12th smaller, it does smooth out the accounting treatment of the plan. And so while one may not provide a higher return, it provides you with each quarter or each month, a little bit of a positive return. So you’re not waiting a whole year to get that.

Doug (17:55):

Interesting. So that’s the effect from an accounting standpoint. It seems to me like from an investing standpoint, it’s a little bit of a dollar cost averaging effect. If you were to do 12 of them or some higher number versus just one, since you are investing in a variable instrument, what are your thoughts about that?

Matt (18:17):

That’s exactly what it is. It is dollar cost averaging. And so that’s what you’re doing when you’re spreading it out over 12 months. As you’re doing dollar cost averaging again, historical data has shown that does not necessarily provide a higher return. If July provides the highest return for the year and you were in a July segment, then you’ve lost if you have dollar cost average. And vice versa, if July was the worst and you were in the other 11 months, you’re going to do better and it’s going to fluctuate year by year.

Doug (18:47):

Interesting. So when you do these index universal life illustrations, and you’re projecting a number, I see a lot of things in the area of 6%. Can you give us any feeling for kind of what the illustrated values usually are? What have you seen?

Matt (19:07):

We see, and you’re correct, typically around 6%. We try to illustrate what we consider to be conservative terms based on past performance, based on working with an actuary. So there you go. I’ve used actuary twice in the same podcast. We’ve worked with actuaries in the past, too, to help determine what the rates should be. The lower the rate, the more concerned, and then obviously the higher the funding requirement, but a lot of credit unions err on the side of conservatism. So we definitely see rates anywhere between, I would say five and a half and six and a half percent. We’re starting to see them come down a little bit, closer to the five and a half percent, when we’re designing new plans because of the interest rate environment that we’re in right now. But we still feel very comfortable with our plans that were originally funded at six and a half.

Doug (19:58):

Yeah, five and a half to six and a half seems like a reasonable place to illustrate the plan.

Matt (20:07):

Absolutely. We feel confident in that.

Doug (20:09):

Very good. Well, Matt, any final thoughts for our listeners on how to make best use of these tools and any kind of philosophy that you can bring that they can use in their effort to provide a good value for their executives?

Matt (20:26):

Absolutely. So again, there are many different instruments out there to deliver meaningful benefits and being able to deliver additional income to the executives. It is very important to work with a consultant that understands the nuances behind split-dollar plans, all of the moving parts that are involved in there. How do you provide the greatest probability of returning a benefit to that executive that was designed. It’s very important on the administrative side to have someone who understands the nuances of the plans; provides you with proper documentation of how the plan works going forward, where you are in your plan, what does it look like in the future; and understands all the moving parts, because as we know, executives of credit unions are very busy and don’t have a lot of time to focus on this, while it is important to them. It is our job as consultants and all the consulting companies to provide the best service out there and provide explanations.

Doug (21:31):

That is an excellent point. And I want to table that for another podcast, because I think the executives look at these plans, figure it out, put it into place, but then there’s some requirements and some things to watch for on an annual ongoing servicing basis. And of course you also have employee turnover. So let’s talk about that in our next podcast, what their requirements are, how to meet them, and how to evaluate your employee benefits provider with their ongoing long-term service model in mind. Thanks, Matt.

Matt (22:06):

I have a lot to talk about on that subject, so thank you very much for having me, Doug. It’s been a pleasure talking with you. Thank you.

Doug (22:15):

That’s all the insider credit union knowledge we have for this episode. Are you enjoying the conversation? Be sure to subscribe and share your thoughts with other credit union leaders by leaving us a review. See you next time on “C.U. on the Show”.

Speaker 3 (22:34):

The opinions voiced in this material are for general information only, and are not intended to provide specific advice or recommendations for any individual security. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Economic forecasts set forth may not develop as predicted. All performance references are historical and are no guarantee of future results. Indexes are unmanaged and cannot be invested into directly.


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