In the midst of that, however, we are hearing how credit unions have stepped up to help, whether through helping the Federal government distribute some of the $3 trillion it has injected into the economy (and the ever-changing rules that came with that!) or by offering their own assistance to their members. And you had to do that while figuring out how best to work remotely yet serve members and keep your own employees safe. The work that has been done thus far is nothing short of amazing.

As credit unions know, there is a cost, however: we’re hearing from many clients who have revised their budgets for 2020 to reflect a substantial drop in net income. Several are even forecasting very lean earnings for 2021. All are looking for ways to enhance earnings, and there is also a focus on reducing expense.

One area that is often a target for tightening during these times is compensation and benefit expense. It does, after all, represent one of largest expense categories on the P&L. At a time when you have asked so much more from your team – and by most accounts they have delivered - we caution you to carefully consider those decisions and review some of the ways we’ve helped clients adjust their budgets while valuing their people.

Here are some of the ways that IZALE has helped clients this year:

• Client A, a $1 billion FCU, has used BOLI for several years to offset the cost of all employee benefits. With deposits up, loan demand tempered, and traditional yields down significantly, they allocated additional money to BOLI and immediately (with no market risk) boosted earnings by over $140,000.
• Client B, a multi-billion FCU, had an established 457(f) for several executives. We helped them evaluate the merits of continuing that plan vs. using a split-dollar loan structure, deciding the latter met their objectives. The client recaptured more than $5 million of prior expense while offering more net cash flow to executives.
• Client C, a multi-billion state CU, needed a program for senior executives. They have a rational process for first quantifying how much of a benefit they want to offer. The board, with input from the CEO, evaluated 457(f), split-dollar loan, and Restricted Executive Bonus Arrangements (or REBA), and decided that a combination 457(f) + REBA most met their objectives.

While there is no one best way for every institution to value their people or improve earnings, we believe you should evaluate all options and choose the one (or ones) that check the most boxes for the institution and executives (not vendor). Our examples above describe ways we’ve assisted larger institutions, but we helped clients in all asset sizes implement programs appropriate for their budget. IZALE has never charged for evaluating plans, and we welcome the opportunity to share what we’ve learned from helping to design (or redesign) over 1,100 executive benefit plans over the past 20 years.

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

Despite lower corporate tax rates and a narrower spread between traditional bank-eligible investments and Bank/Business-Owned Life Insurance, BOLI continues be a powerful asset for your balance sheet. The earnings are competitive for the risk and accrue without any tax provisions. The book value is stable - rising interest rates won't result in mark-to-market adjustments like with bonds. At its core it's still life insurance and we've seen firsthand how the life insurance proceeds have provided invaluable benefits to an insured officer's family as well as to the institution.
 
BOLI crediting rates have remained somewhat stable since the beginning of 2018, and programs that deliver 3% or more yield out of the gate are readily available. While those rates have remained stable, market rates have moved generally upward even if in fits and starts. As of March 25, the 10-year Treasury bond was a mere 3 bps higher yield than the 13-week Treasury bill (with an inversion with shorter duration); the result is about 75bps-100bps of spread between 10-year Treasuries and BOLI. That's down from the historical average of over 200bps. That narrow spread has many institutions re-evaluating their inforce BOLI or delaying their next purchase of it. The thought goes that until there is greater reward for the risk of going longer, stay short.  
 
Ignoring the immediate lost earnings from staying on the sidelines, trying to time entry to the markets is challenging to say the least. What if instead of measuring your BOLI returns against fixed-income assets like bonds, you could measure them against an equity-index? Before you get too far on the ledge - we're not talking about exposing cash value to an index; cash values will always have stable book value treatment. What we're talking about is a transparent way to determine the crediting rate by measuring the change in an index, most commonly the S&P 500.
 
"Indexed Universal Life" or IUL has been available on a retail basis for more than 20 years, and in 2018 IUL accounted for almost 30% of permanent life sales. While widely available on a retail basis, it wasn't until recently that IUL became available with a single-premium, 100%-beginning-cash-value design associated with BOLI.

With IUL, the carrier offers a "floor" or minimum crediting rate (along with full book-value treatment) and a "cap" or maximum crediting rate that can flow from the change in the index.  

• If the index is negative or below the floor, your crediting rate is the floor.  
• If the index is greater than the cap, your crediting rate is the cap.  
• If the index is in between, your crediting rate is the index.

While your crediting rate from month-to-month will vary between the floor and the cap, when back-tested against 50 years of actual S&P performance, IUL has impressive results. The table below shows the current floor and cap for two carriers that offer IUL BOLI. One is decidedly more conservative than the other in its design, however, the expected rewards may be worth the "less conservative" design.