Financing Split Dollar plans (in a volatile market)

Does anyone else feel like you have been riding a roller coaster trying to balance a raw egg?  Over the last several months, the volatility in the market has caused some executives concern for their Split Dollar benefits.  It is important to understand the type of insurance used in your plan and how each product works.  

For the majority of Split Dollar Plans, life insurance is the natural choice for funding.  Although the decision to utilize life insurance is fairly straight-forward, the type of product best suited to accomplish the objectives can be a different story.  There are two types of insurance which are most commonly used; Index Universal Life and Whole Life. Each type has key features which help mitigate risk while maximizing flexibility and efficiency.

Whole-Life vs. Indexed Universal Life (IUL)

Two main features that could be critical from a risk mitigation standpoint are:

  1. How interest is credited to policy values 
    • Whole-Life (WL) – Policies credit interest based upon the guaranteed interest factor at policy issue, and the non-guaranteed Dividend Scale. Most WL carriers have strong track records of paying dividends every year dating back more than a 100 years in some cases. Although dividend rates can be attractive, the net impact to the policy values is somewhat offset by relatively higher insurance expenses, especially in the early years. The higher expenses are necessary to provide the underlying guaranteed cash value and death benefit found in WL policies.
    • Index Universal Life – These policies do not credit interest in the form of dividends. The main earnings driver of the policy is the performance of Index Accounts, which are based upon the performance of well-known indices (i.e., S&P 500), typically over a one year period (commonly referred to as a segment).  Each Index Account has a floor and a cap (or participation rate).
  1. Required premiums and death benefits 
    • Whole Life – The policy provides significant guarantees as long as the required premiums are paid. Although many over-funded WL policies utilize paid-up additions (PUA’s), which can be partially surrendered and provide more flexibility, the overall structure is less flexible than its universal life counterpart and typically requires 30% to 40% higher premiums to provide the same level of benefits to an executive.
    • Universal Life – This product chassis separates the insurance component from the earnings component, which allows for more flexibility post-issue. Not only can the premiums and death benefits be adjusted, if necessary, the lower level of guarantees reduces the overall cost of the policy long-term.

When designing a Split Dollar plan, a future earnings rate (either dividend or Index Credit) assumption must be made.  Certainly, there are no guarantees that a policy will earn that rate each year, or even over the life of the plan.  Over the past several years, we have seen Whole Life carriers begin to decrease their dividend rates.  Therefore, a plan design that used a dividend rate assumption from say 2016 has seen a steady decrease in rates. In order for that plan to be able to provide the original projected income to an executive, the dividend rates not only have to begin to rise, they must rise above the original assumed rate in order for the plan to have an average dividend rate that will equal the original assumed rate.

Similarly, many IUL carriers have begun to reduce the Index Credit cap in recent years.  While this is not ideal, the underlying floor of the Index Account, which is typically 0% or 1%, has a more powerful impact on future earnings.  Should the underlying market index (i.e. S&P 500) go down during a segment, the policy will be “protected” by the floor and receive either a 0% or 1% credit, as opposed to a “negative” credit.  Additionally, and more importantly, the following segment will begin its measurement period using the lower value of the market index.  This allows the policy to credit positive performance, even if the market index does not return to its original high point.  See below for an example:

Year Starting Value Ending Value Growth Floor Cap Index Credit
2019 2,800 2,500 (10.71%) 0% 10.50% 0.00%
2020 2,500 2,700 8.00% 0% 9.50% 8.00%

While the market index did not return to its previous level of 2,800, the policy still would have received an 8% Index Credit for 2020. This phenomenon can allow a plan to “overcome” the down years, and still achieve the overall expected returns over the life of the plan. Additionally, while caps have come down, it is not an indication of expected market performance.

When choosing a financing vehicle, it is important to understand the long term effect of how interest is credited.  Using a Whole Life product can reduce volatility; however, it can also reduce the chances of achieving long-term assumptions during a decreasing dividend rate environment.  Opting for an Index Universal Life product can provide wider swings in crediting rates, however, the floor associated with an Index Account can help smooth out returns and increase the probability of achieving original projected crediting rates.



This material was created to provide accurate and reliable information on the subjects covered, but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation.  

Consulting and insurance brokerage services to be provided by Gallagher Benefit Services, Inc. and/or its affiliate Gallagher Benefit Services (Canada) Group Inc. Gallagher Benefit Services, Inc., a noninvestment firm and subsidiary of Arthur J. Gallagher & Co., is a licensed insurance agency that does business in California as “Gallagher Benefit Services of California Insurance Services” and in Massachusetts as “Gallagher Benefit Insurance Services.” Investment advisory services and corresponding named fiduciary services may be offered through Gallagher Fiduciary Advisors, LLC, a Registered Investment Adviser. Gallagher Fiduciary Advisors, LLC is a single-member, limited-liability company, with Gallagher Benefit Services, Inc. as its single member. Certain appropriately licensed individuals of Arthur J. Gallagher & Co. subsidiaries or affiliates, excluding Gallagher Fiduciary Advisors, LLC, offer securities through Kestra Investment Services (Kestra IS), member FINRA/SIPC and or investment advisory services through Kestra Advisory Services (Kestra AS), an affiliate of Kestra IS. Neither Kestra IS nor Kestra AS is affiliated with Arthur J. Gallagher & Co., Gallagher Benefit Services, Inc. or Gallagher Fiduciary Advisors, LLC. Neither Kestra AS, Kestra IS, Arthur J. Gallagher & Co., nor their affiliates provide accounting, legal, or tax advice. GBS/Kestra-CD(3340646)(exp112021)

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Matt Haid

Matt Haid

Matt Haid is a financial professional with nearly 30 years of experience working in executive benefits, including nonqualified benefit plans, pension plans, corporate owned life insurance, and split dollar life ... Web: Details