arrive at this moment with the overleveraged corporate sector about to face the prospect that new-issue bond markets may seize up, as they did last week, and that even seemingly sound companies will find credit expensive or difficult to obtain. Credit spreads have a long way to expand. BBB bonds could easily reach a spread of 400 basis points over Treasurys while high yield would follow suit with BB bonds at 750 basis points over and single B bonds at 1,100 basis points over. The risk is that it could be worse. As for stocks, technical analysis suggests that there should be support around 2,600 on the S&P 500, but in a recession scenario a level closer to 2,000 could be the ultimate outcome.

The only silver lining is that you should have some gains in the bond portfolio. But now what? Unless you have a robust loan pipeline, where do you go with maturing bonds or to invest the cash from loan payments?
 
Bank-Owned Life Insurance or BOLI is used by over 4,000 financial institutions with over $180 BILLION of capital invested in it. What makes BOLI so attractive?
 

• Guaranteed minimum crediting rates of 1% - 4%. You are reading that correctly.
• Current yields (after cost of insurance) of 2.75% - 3.5%, depending on purchase size and insured demographics. Tax-effect that, and it compares with some new loan rates.
• No mark-to-market risk. With general account or hybrid account BOLI, a change in market rates has zero impact on the balance sheet value.
• There are even products with an “index” crediting rate that could deliver far more yield than traditional BOLI.

 
Call or email us today. Let’s talk about the vital role that BOLI can play on your balance sheet and let us help you with the next BOLI purchase.

Consult with a professional advisor about your particular situation.

Are insurance benefits provided to board members considered taxable income? The answer is largely “yes,” but also, “it depends.”

“The general rule under the tax code is something provided in return for services rendered is taxable income to the recipient (board member),” says R. Scott Richardson, JD, CLU, ChFC, president/CEO, IZALE Financial Group, a CUES Supplier member in Elgin, Illinois. “However, insurance benefits can be treated differently.”

Richardson explains that while the value of accident and health insurance is not taxable for employees, it will likely be taxable for board members. 

“There are narrow exceptions where it would not be taxable income,” so consulting a tax advisor is worthwhile, he says.

In the case of life insurance, rather than take out a formal policy, credit unions can promise to pay a benefit (out of pocket) upon a board member’s death, in which case the beneficiaries would report the amount as ordinary income. The CU is essentially acting as its own insurance.

However, in the event of a policy paid for by the CU, Richardson reports there is a choice: “Either the board member reports the ‘economic benefit’ of the coverage as income each year, resulting in an income-tax-free benefit, or the board member does not report economic benefit, resulting in a benefit subject to ordinary income taxes.”

Life insurance is generally income-tax free except when someone else pays for it, in which case there’s some “economic benefit” to the board member, he explains. If the board member owns the policy but premiums are paid by the CU, the premiums paid by the CU equal the economic benefit and are taxable income. If the CU owns the policy and allows the board member to designate a beneficiary, then the right to designate the beneficiary is the economic benefit. If the board member reports the value of that economic benefit each year as taxable income, then death proceeds received would be income-tax free. If the board member does not report the value of the economic benefit each year, then death proceeds would be subject to ordinary income tax.
With long-term care insurance, Richardson notes that any benefits received under a qualified policy are not taxable, though the premiums likely would be. “Since board members are not employees, they would be treated as ‘self-employed’ for income-tax purposes.”

Jim Patterson, partner with Minneapolis-based law firm Sherman & Patterson, similarly notes that directors are under different tax rules than employees. “… directors are not subject to some of the tax benefits that employees get,” he said. “In the case of long-term care insurance, for instance, if that were provided to an executive employee of the credit union, it can be done so on a tax-free basis. But for directors, who are not employees, that would be considered taxable income.”

Even if these benefits are taxable, Richardson says there are still advantages for both the board member and the credit union. “First, paying taxes on $1 of reportable income requires much less cash flow than paying the $1 of premium out of pocket. Second, there are pricing discounts and underwriting concessions available to groups that can be the difference between being affordable and attainable versus not.”

Richardson concludes with advice to consult with tax professionals “to understand the full implications.”

Diane Franklin is a freelance writer based in Missouri. This article published with expressed permission from CUES