Permanent life insurance as an asset class

Credit unions often use permanent life insurance to fund Supplemental Executive Retention Plans (SERPs) to accomplish several goals. One, to retain an executive for a certain period, anywhere from five-years up to as many as 20 or more years. Two, to reward an executive for their tenure at the credit union by providing an income stream in retirement, much like the pensions of old. A third reason is that, SERPs can provide an accruing asset to the credit union if structured properly, as well as key person insurance should an executive pass away.

One area that gets discussed, but perhaps not in enough detail, is how the credit union’s portion of the cash value growth inside of the SERP (i.e. the growth that will pay back the loan plus interest) impacts the overall asset allocation of their otherwise impermissible investments.

Different types of permanent life insurance products can invest in different types of asset classes, and some can invest in an entire asset allocation (like 60% stocks / 40% bonds, for example), thereby altering the entire makeup of the credit union’s overall allocation when considered holistically.

Three common types of permanent life insurance products and how they invest are:

1. Variable life insurance invests in the stock market, which can be aggressive, moderate, or conservative depending on the allocation that is chosen. Investments can also be highly concentrated into one or two asset classes or invested across many asset classes.

2. Indexed universal life insurance can be invested into a specific stock market index, like the S&P 500 or the NASDAQ 100, or into a fixed rate account for a more conservative approach.

3. Whole Life insurance is invested in the company’s general account, as opposed to a separate account, so the cash value is guaranteed to increase each year based on the insurance company dividends. Generally, Whole Life is considered the most conservative permanent life insurance product.

By considering how aggressive or conservative the underlying investments inside of a permanent life insurance policy are, a credit union can be better suited to properly evaluate how to allocate their entire portfolio holistically. This more complete picture of their asset allocation may allow a credit union to invest in higher yielding asset classes and generate additional income that could be used to fund additional employee benefits or a Charitable Donation Account, without coming off as “too aggressive” outside of their SERPs.

This can also do the opposite. It can confirm that the credit union is invested more aggressively than perhaps originally thought, making it imperative to reevaluate the risk profile of their SERP or other investments funding employee benefits and charitable endeavors.

Either way, it’s in the credit unions’ best interests to have a firm, holistic grasp on where their asset allocation puts them on the risk/reward spectrum to continue moving forward in the attainment of their goals.