Purchasing an existing Split Dollar Plan SERP loan from another credit union on a newly hired executive – FAQ

You just hired an executive that had a Collateral Assignment Split Dollar Plan SERP at his/her previous credit union. The following items address some critical issues to consider, however, we want to stress that the facts and circumstances of individual situations will be the ultimate driver of the decision.

The primary items to review are as follows:

1. Is the plan being portrayed with an accurate projection of the future benefit?
   Some vendors do not update their exhibits to the life insurance policy’s new capitalization (cap) rate if it is an Indexed Universal Life (IUL). The cap rate has changed dramatically over the last 10 years, decreasing by almost 50% on existing plans. This new/lower cap will impact the projected benefit of the plan. First and foremost, the “hiring” credit union needs to ensure they will be paid back principal and interest of the loan. Additionally, the benefit being projected should be a realistic expectation based on current modeling. The insurance company can only illustrate the current cap and/or current dividend rate (or lower). Life insurance illustrations are restricted from assuming a higher than currently available scenario.

   If the SERP is funded using an IUL policy, then the “hiring” credit union should request an updated exhibit from the corresponding life insurance company’s illustration showing the current maximum crediting rate, and 70% of the current maximum crediting rate to show current and potential worst-case scenarios.

   If the SERP is using a whole life policy, then using the current dividend and internal borrowing rate would be requested.

2. Are there any material weaknesses in the split dollar agreement that would put the “hiring” credit union at unnecessary risk?
   A legal review of the current split dollar agreement and promissory note should be conducted by an attorney specializing in such agreements.  If there are suggested changes based on this review, these should be made as a condition of purchasing the plan from the current credit union.

3. Has the health of the executive changed from the date the original plan was put in place?
   If the executive’s health has changed for the worse, this may make purchasing the plan the only option for implementing a split dollar plan SERP for the executive. If the plan has material weaknesses in either illustration or documentation, that may outweigh the benefit of purchasing the plan, however, if the executive’s health has changed, a deep dive review is warranted in considering the purchase.

4. How much of the desired replacement ratio with the purchased plan accomplish for the “hired” executive?
   It is likely the existing plan may not cover the entire benefit of the desired replacement ratio goal. So even with the purchase of the existing plan, an additional plan may need to be implemented to meet the intended goal.

5. Should the credit union wait the normal 12-18 months for consideration of purchasing the existing SERP?
   This will be a point of negotiation but the same issues apply here – if you would wait 12-18 months to implement a new plan, then you should wait the same time period for purchasing an existing plan.  All the same reasoning applies.