Executive benefits and the assumption of risk

Did you know…

You may be taking large risks with your supplemental executive benefit plan. Are you aware of all the risk you may be taking?

As an executive covered under a supplemental benefit plan, how much risk are you willing to take? Most executives have risks tied to their 401(k), real estate—whether personal residence or retirement property—and to their jobs if the organization doesn’t perform well. When you consider your risk exposure, why would you want to assume more in your supplemental plan?

There is nothing wrong with taking calculated risks and receiving the rewards if the risks are well understood. Executives of financial institutions are well acquainted with the risks of stock and bond markets and understand that with proper asset allocation and diversification, those risks can be mitigated over time, however, the risks associated with insurance products are less understood and many of the most popular Executive Benefit Plans are tied to underlying insurance products.

Many deferred compensation plans are funded using life insurance. Split Dollar plans have been popular in credit unions for many years. With this popularity comes the need for sales people to be “creative” in order to stand out among the crowd.

Unfortunately, with this creativity comes risk. We have seen a proliferation of the use of “current assumption” life insurance products that transfer most of the risk from the insurance company to the executive. These products come with few, if any, guarantees. The premiums, death benefits, cash values, and minimum non-forfeiture values are all not guaranteed.

This lack of guarantees translates to the assumption of risk for the supplemental benefit plan by the executive and the credit union.

When substantial guarantees are available and proper plan design is utilized, it is much easier to predict a successful outcome than when no guarantees exist and only risks are used.

So why are so many practitioners using these products when alternatives with guarantees might be more attractive to the executive and to the credit union? The truth is, no one knows, but here are a few possibilities.

It may be that the companies being used don’t manufacture a life insurance policy with guarantees. It could also be a compensation issue, or a lack of understanding on the part of the practitioner regarding the real risks associated with the products being sold.

A main concern for regulators is the issue of “safety and soundness.” In a case where significant guarantees are offered versus the assumption of risks by the executive and the credit union, it isn’t hard to imagine where they would stand.

The second significant concern the regulators have is whether or not the Board of Directors understood what they were approving. In the race to be “creative,” some plan designs have gotten so complicated it’s hard to believe anyone truly understands them.

If the insurance company has the right to raise the cost of insurance over time and those increased costs reduce cash value accumulations, is that a risk the executive or the credit union should take—especially considering there are a number of other risks as well?

When it comes to retirement income security, there is nothing wrong with the assumption of risks, as long as the risks are well understood.

When it comes to your supplemental executive benefit plan, wouldn’t you rather be given a choice between the assumption of risk and the transfer of it?

To learn how SWBC Executive Benefits can provide your credit union with creative, compliant solutions click here.

Dan Balogh

Dan Balogh

Dan Balogh joined SWBC in 2007 as part of the SWBC Executive Benefits team. He is a chartered life underwriter and an executive benefits expert, who brings more than 30 ... Web: www.swbc.com Details