Which Investment Option Should You Use?

The Asset Allocation Decision in Indexed Universal Life Insurance Policies

EBS’ Managing Director, Chris Wyrtzen, recently wrote a white paper that describes a methodology developed by EBS to help with the asset allocation decision faced by owners of indexed universal life (IUL) policies.

These policies offer the ability to allocate policy cash value to an account that receives an interest credit based in part on the performance of the S&P 500 Index, excluding dividends, over a 1-year period.  The minimum crediting rate is typically guaranteed to be either 0% or 1%, in exchange for a cap on the maximum crediting rate.

Use of Index Investing in Split Dollar Arrangements

Index investing is particularly prevalent in Loan Regime Split Dollar arrangements like those used by nonprofit organizations.  The premiums paid by the organization are treated as loans to the executive that are repaid at death.  Having an interest credit that is guaranteed to be 0% or greater but with upside potential based on the S&P 500 can be very attractive.

Most IUL policies offer more than one index account to choose from, however, and therefore present a challenge in deciding which one to use.  A key point to keep in mind is that deciding what index to use does not have to be a long-term decision.  A different index can be used when the current index segment matures and the index credit is received – which is typically at the end of 12 months.  And it’s also possible to use more than one index at a time.

The IUL Asset Allocation Decision Tool

EBS’ methodology involves the creation of a grid.  The rows in the grid represent different rates of return in the S&P 500 index, excluding dividends.  The columns in the grid represent the different index account choices available in a specific IUL policy.

Each of the individual cells in the grid are the calculated interest credit a policy owner would receive given that S&P 500 return (excluding dividends) and the index represented in each column.  Some index options perform better in lower return markets (e.g. a High Floor index) and some index options would perform better in higher return markets (e.g. an Uncapped index).  The grid makes it clear which index would perform best at each S&P 500 rate of return.

EBS’s grid methodology is enhanced with the use of color coding.  The index with the highest crediting rate at a given S&P 500 rate of return is highlighted in green.  The second highest crediting rate is highlighted in yellow.  Color coding makes it easy to see which indexes perform best in low return, average return, and high return markets.

To read EBS’ white paper, you can go to our resource page, or simply click here.

What’s your RSU strategy?

The Deferral and Diversification of RSUs

EBS Managing Director, Chris Rich, was invited to join My Financial Coach for their quarterly economic update, The New Tax Bill, the Economy and How to Plan.  This event was hosted by fellow EBS Managing Director (and President/Founder of My Financial Coach), Bill MacDonald.  We also heard from two fellow subject matter experts and keynote speaker, Dr. Arthur Laffer.

Given that one of our areas of expertise is nonqualified deferred compensation plans, Chris was asked to briefly discuss tax planning strategies and ideas related to the deferral and diversification of restricted stock units.

One of the trends we have been seeing in plan design is the ability to defer restricted stock units in addition to cash compensation (salary and bonus).

Plan Design and Changes in Equity Compensation

By way of introduction, Chris noted the evolution in equity plan design over the last fifteen years or so in which there has been a significant shift from stock options to restricted stock.  Stock compensation is typically the largest component of executive compensation packages, and it is now common to see a portfolio approach that includes both options and restricted stock or restricted stock units.

Restricted Stock Units versus Restricted Stock

Going a step further, restricted stock units represent several advantages over restricted stock.  For an organization, RSUs can result in more simplified record keeping and they do not require upfront issuance of shares.

From the executive’s standpoint, income taxation can be deferred with restricted stock units, but not with restricted stock.  With both, vesting can trigger taxation.  But with RSU’s, they can be deferred under a company sponsored Deferred Compensation Plan, restoring to the executive the ability to control the timing of taxation through distribution elections, and allowing far more flexible planning options.

The Diversification Issue?

However, one issue that comes up with the deferral of RSUs is the concern by some executives of having a significant asset tied to the performance of company stock over a long period of time.  EBS has addressed this by implementing a plan feature that allows an executive to diversify or reallocate a portion of their RSUs into other notional investment options under the plan.

As Chris mentioned, what we have found at EBS is that many public companies do offer the deferral option for RSUs, but very few offer the ability to diversify or reallocate within the deferral account.  The fear is that this will trigger negative accounting issues, requiring a move from fixed to variable accounting.

But EBS has worked with several of the largest accounting firms and developed an accounting methodology that negates negative accounting that could be triggered in plans that do permit deferral and diversification.

Invest In Your Top Talent

In summary, Chris’ message to companies was to not overlook the value of adding the option to not only defer but diversify restricted stock units to their deferred compensation plans.  This can be a major enhancement to the ability for an organization to continue to attract, retain, and reward top talent – which never goes out of style.

You can reach our in-house expert, Chris Rich (former tax partner at Ernst & Young) directly by email at: crich@ebs-boston.com (this will be a hyperlink), by phone at 617-904-9444 x2, or via LinkedIn by clicking here (this will also be a hyperlink)

What are you waiting for? Time is of the essence when it comes to your investments.



Have you read our series Executive Stock Wealth in the Age of Distraction?  We share valuable information and discuss the shift from stock options and restricted stock to restricted stock units (RSUs).

We’ve also put together a video discussing the issue of RSUs and the timing of vesting grants.  You can watch the video and learn more about restricted stock units on our RSU Deferral and Diversification Video page.