Going Beyond Compensation to Attract, Retain Top Talent

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Your employees probably don’t think about needing long-term care (LTC), especially if they feel young and healthy. But now’s exactly the right time for you to help them plan for the future.

Baby boomers and successive generations will enjoy unprecedented longevity compared to previous generations. The upside is obvious. But there’s a downside: the number of chronic health conditions that can require costly long-term care. While most people conceptualize this need, they don’t have any LTC coverage. Meanwhile, employers may already offer group term life insurance to give employees extended benefits at the lower group premiums. There’s a way that banks can make this voluntary benefit more available and more portable — and even more attractive.

Many life insurance policies now offer riders or options that allow policyholders to access a portion of the death benefit to cover long-term care expenses. This flexibility allows policyholders to utilize the benefits of a life insurance policy to address potential LTC needs, so they can maintain financial stability and access quality care without depleting their assets.

This means banks can protect the financial future of employees with an affordable employer-sponsored LTC insurance program that:

  • Protects employees’ retirement plan. An ounce of prevention now can avert the disaster that an LTC episode can bring to individual financial portfolios.
  • Gives employees a choice about their care. Although Medicare and Medicaid may pay for some LTC costs, coverage may be limited.
  • Eases the burden on employees’ family. LTC insurance allows family members to be involved in the caregiving process without being the primary provider.

Life with LTC can be a complex financial planning product. Banks interested in offering the product should find someone to help guide them through the various options and lead the implementation process. A 2019 study found that 74% percent of employees feel that LTC is important, yet 25% of their employers offer it. Offering it is a way to fill a gap in your benefits portfolio, which could help attracting and retaining top talent.

One of the advantages of incorporating life insurance with LTC into a retention strategy is the ability to offer employees customized plans tailored to their needs. This flexibility allows employees to select coverage levels, beneficiaries and additional features based on their individual circumstances. Providing employees with choices fosters a sense of ownership and engagement, which can enhance job satisfaction and loyalty.

How It Works
Employer-sponsored life insurance with LTC benefits offer fully portable term or permanent life insurance that helps protect employees’ families during their working years, and includes meaningful long-term care benefits if extended care is needed. These benefits can be structured in ways that provide additional incentives and tax advantages for employees. Additionally, certain life insurance policies offer cash value accumulation that employees can access during their working years for various financial needs.

Long-term care can be costly to your employees and places a huge burden on most families who need it. In fact, health and disability insurance doesn’t even cover LTC costs. Medicare isn’t always the answer, either. For most, it’s an out-of-pocket expense that drains retirement savings. Look at the stats:

It’s important for banks to help their employees understand that LTC insurance is more affordable to them during their working years rather than later. Employer sponsored “hybrid” life insurance products with LTC riders can offer powerful coverage, underwriting concessions and additional benefits.

In today’s competitive employment landscape, organizations must go beyond traditional compensation packages to attract and retain top talent. Incorporating life insurance with LTC benefits into an employee retention strategy offers a range of advantages, from attracting and retaining talent to providing financial protection and flexibility. Recognizing the value of these benefits and investing in the long-term financial well-being of employees allows banks to position themselves as an employer of choice and build a loyal and engaged workforce.

Insurance services provided through NFP Executive Benefits, LLC. (NFP EB), a subsidiary of NFP Corp. (NFP). Doing business in California as NFP Executive Benefits & Insurance Agency, LLC. (License #OH86767). Securities offered through Kestra Investment Services, LLC, member FINRA/SIPC. Kestra Investment Services, LLC is not affiliated with NFP or NFP EB. Investor Disclosures: https://bit.ly/KF-Disclosures

Closing the Disability Insurance Compensation Gap

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Many highly compensated employees are unaware of the financial impact it would have if they were to become sick, disabled or unable to work.

How many of your bank’s executives would have to spend their retirement assets, personal savings or monetary reserves if they lost their income due to an illness or injury? They may currently have a group long-term disability plan, but those plans don’t cover an earner’s full salary, which can include bonus, commissions and 401(k) income, leaving a coverage gap. These plans often leave your company’s highest earners vulnerable to the gap, with only 30% to 50% of their income protected, while most of your broad-based employees achieve more significant income protection.

While the business disruption of losing one of your top-tier workers to injury or illness is difficult enough on its own, standard disability insurance creates a compensation gap for the institution’s, undermining the welfare of your business and leaving affected executives out in the cold. Coverage caps on the maximum benefit allowed affects highly compensated employees, which causes them to have less income protected than rank-and-file employees; the higher the income, the lower the income replacement percentage.

Group long-term disability coverage is a common benefit companies provide to the employees. This coverage is designed to provide a basic level of coverage at the lowest possible cost. Group contracts are temporary agreements, typically written with 2 to 3 year rate and contract language guarantees.

A $1.3 billion bank recently implemented a supplemental disability plan after uncovering a problem with their current nonqualified plan. There was a risk of not receiving the deferred compensation plan benefits if an employee became disabled, as well as not receiving anything close to 60% of their current salary if they were to become disabled. The problem grew each year, due to the rising costs of salaries, bonuses and impressive growth of the bank.

Under the current plan, the participants were to receive 67% of their base and bonus, to a maximum benefit of $10,000 a month. However, for some of the bank’s most highly valued and compensated participants in the plan, that maximum benefit is significantly less than 67% of their total income. But by adding a supplemental individual disability offering to the existing group LTD benefit, they can increase an employee’s level of protection up to 75% of base and bonus compensation.

So, what are the benefits? For the bank, there are packaged pricing discounts available with many group LTD carriers when they add individual disability insurance. Competitive bidding is high with group LTD carriers when the maximum benefit isn’t increased; the LTD rate volatility is reduced when risk is spread among a combination of group LTD and individual DI.

There are also several benefits for employees. For starters, it can provide maximum income replacement ratios. Individual DI rates are permanent to age 67 and can be offered as guaranteed standard issue, meaning medical exams aren’t required. The contracts and discounted rates are portable if the employee leaves. Plans can include an additional catastrophic benefit and cover all forms of compensation including equity. Finally, the plans can give employees the ability to purchase additional coverage, up to 75% of total compensation.

Minimizing Expenses, Maximizing Coverage
So, how can your institution minimize the expense and offer the best coverage? Individual disability benefits increase overall plan maximums, protect bonuses and allow for tax-free benefits — all benefits that allow highly compensated employees to raise their income replacement to necessary levels. Banks that combine group LTD with individual DI coverage create a solid, well-thought-out plan that deliver big benefits to top earners while helping keep company costs in check. Adding a supplemental individual disability insurance (IDI) offering to the existing group LTD benefit increases an employee’s level of protection up to 67% of base and bonus compensation.

Much of your bank’s success depends on the talents of key employees. But keeping the people who keep the business going is easier said than done. Higher pay is only one of the answers; providing quality benefits and educating employees on them is another opportunity. Supplementing group long-term disability (LTD) with individual disability income insurance (IDI) can be a vital part of better protecting your employees. It’s easy, and a great way to let them know how valuable they are to you and your bank. Implementing an IDI can help attract and keep the best talent in your industry while helping employees protect one of their greatest assets: their income.

The Bank-Owned Life (BOLI) Insurance Market is Changing: Here’s How

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BOLI-10-24-16.pngBank-owned life insurance (BOLI) has undergone a number of changes since it was first introduced in the early 1980s. The number of carriers offering BOLI was a handful in the 1980s, increased to 20 or so in the 1990s and 2000s, and since has decreased to 8 to 10 active carriers as a number of insurers have exited the market or are currently sitting on the sidelines due to the low rate environment.

As competition for attractive investments has increased due to low yields, many carriers have moderately increased duration. Interestingly, several carriers have reduced purchases of below investment grade securities as the yield spread available for them has decreased to the point where the investment return does not justify the increased risk.

On the sales front, in the first six months of this year, there was a 10 percent increase in the number of banks purchasing BOLI compared to a similar period in 2015. Despite the increase in BOLI purchases, there was a decline in the number of banks purchasing the hybrid separate account product as most banks opted for general account.

As the financial crisis passed and banks become more comfortable with the long-term credit quality of carriers, data shows that fewer banks selected hybrid account policies than in the past, which have a mix of variable and general account properties.

Some aspects of the market have, however, remained consistent over time: there have been steady annual increases in both the amount of BOLI assets held by banks and in the percentage of banks holding BOLI assets.

The focus of this article is to look more closely at the state of the market as of June 30, 2016, including changes that have occurred between June 30, 2015 and June 30, 2016 to help track market trends.

New Purchases of BOLI
IBIS Associates, an independent market research firm, publishes a report analyzing BOLI sales based on information obtained from insurers that market BOLI products. According to the IBIS Associates BOLI Report for the period January 1, 2016 to June 30, 2016:

  • During the first six months of 2016, 553 banks purchased BOLI. The 553 banks included institutions purchasing it for the first time as well as additional purchases by banks that already own BOLI. This was a 10 percent increase over the 502 banks that purchased BOLI during the same time period in 2015.
  • New BOLI premium from banks amounted to $1.78 billion as of June 30, 2016. During a similar six month period in 2015, the total was $2.10 billion or $320 million higher. The difference is attributable to one large variable separate account purchase in the first half of 2015 ($400 million).
  • General account purchases dominated the market during the first half of 2016. Of the $1.78 billion in new BOLI premium, $1.65 billion (92.8 percent) was invested in general accounts. Hybrid product purchases amounted to $75.8 million (4.3 percent) while variable separate account purchases (where the investment risk is held by the policyholders and investment gains flow directly to them rather than the insurance carrier) were only $51.4 million (2.9 percent).
  • During the period July 1, 2012 to June 30, 2014, 226 banks purchased a hybrid product while for the period July 1, 2014 to June 30, 2016, the number of banks with a hybrid product increased by just 42 banks.

The reasons cited by bankers for purchasing BOLI are that it provides competitive returns with superior credit quality. Current BOLI net yields are in the range of 3.00 percent to 3.75 percent which generates tax equivalent net yields of 4.85 percent to 6.05 percent for a bank in the 38 percent tax bracket. Income generated by BOLI can help offset the increasing costs of a bank’s benefit programs.

Status of Market
Based on a review of FDIC data, the September 2016 Equias Alliance/Michael White Bank-Owned Life Insurance Holdings Report, shows that as of June 30, 2016:

  • BOLI assets reached $159.0 billion reflecting a 3.8 percent increase from $153.1 billion as of June 30, 2015. Banks with between $1 billion and $10 billion in assets had the largest percentage increase in BOLI assets during this timeframe with 8.3 percent growth.
  • Of the 6,058 banks in the survey, 3,713 (61.3 percent) now report holding BOLI assets. This percentage has grown year after year. There is, however, a wide discrepancy in the percentage of banks holding BOLI by size category. For example, only 39.9 percent of banks with under $100 million in assets hold BOLI while 81.9 percent of banks with $1 billion to $10 billion in assets hold BOLI.

In summary, the positive trends in new purchases, growth in assets and usage of BOLI by banks continued in the first half of 2016.

What to Ask About Your D&O Policy

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Ernest Martin
Haynes Boone LLP

The board must determine whether the company’s D&O policy was negotiated to provide the broadest coverage at the best price, since the policy is subject to negotiation. More specifically, the board should at least ask the following:

  1. Does it protect board members from having to pay the policy’s retention if the company fails to do so?
  2. Does it have broad definitions of key terms such as “claim,” “loss,” and “wrongful act?”
  3. Does it minimize the effect of exclusions such as “bad conduct,” “prior notice,” and “insured v. insured” exclusions, which reduce or eliminate coverage?
  4. Does it maximize coverage for board members even if the company goes bankrupt?
  5. Does it have unfavorable alternative dispute resolution clauses?
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W. Scott Porterfield
Barack Ferrazzano

In a nutshell, ask if the policy limits match both your risks and your peers’ insurance coverage. Has a D&O insurance broker experienced with banks reviewed the policy and advised on the important limitations and exclusions in the policy and has experienced counsel done the same with both the broker and the board? Is the policy a duty to defend policy? (i.e. Who gets to select counsel to defend the directors and officers?) Because D&O insurance is a backstop for your corporate indemnification, is the company’s indemnification provision as broad as possible? Of particular note for any bank in dire capital position and, thus, a candidate for failure, does the policy contain a “regulatory exclusion” andor an “insured versus insured” exclusion that might exclude coverage for claims brought by the Federal Deposit Insurance Corp. (FDIC), as receiver of the bank?
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Marcus Williams
Davis Wright Tremaine LLP

Boards should be particularly focused on the coverage exclusions. For example, D&O policies have traditionally excluded coverage for securities fraud judgments, and ordinarily those exclusions will also provide for recoupment of the carrier’s prior payments of defense costs if there’s ultimately a finding that the carrier is not liable. More recently, we have seen policies that exclude securities claims altogether (as distinguished from final judgments), which may permit the carrier to avoid paying defense costs prior to a final judgment. Because of the extraordinarily high defense costs often associated with securities claims, the resulting burden can impose serious hardship on individual directors and executive officers, and even on the company (which usually will be required to indemnify the directors and officers until the entry of an adverse judgment). Regulatory actions are also increasingly excluded from policies, although in addition to policy limitations, directors and executives should be aware of laws that impose strict substantive and procedural requirements for indemnity and advancement of expenses for enforcement actions and resulting liabilities. Lastly, many of the more reputable insurance carriers—but not necessarily all of the best-known ones—will advance defense costs subject to what’s known as a “reservation of rights,” which allows the carrier to recoup prior advances if, ultimately, there’s a determination that the liability was not covered.
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Bob Monroe
Stinson Morrison Hecker LLP

The key questions for the board to ask are:

  1. What acts are excluded from coverage?
  2. Does coverage terminate on a change of control?
  3. What are limits for “tail” coverage or can you even buy it in the event of policy change or change in control?
  4. Do we have side A and B coverage?
  5. When and for what reasons can the insurer terminate coverage?
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Thomas Vartanian
Dechert LLP

Directors should have the answers to the following questions about the company’s D&O policy:

  1. What are the current limits of liability, and are they sufficient to cover legal fees, judgments and settlements, given current standards for each?
  2. Are regulatory enforcement actions, civil money penalty assessments and securities litigation covered, or are there exclusions that impact these kinds of claims?
  3. How long has the policy been in place and what is the experience with the company on claims that have been made?
  4. What are the claims notification requirements of the policy?
  5. How does the policy dovetail with indemnification to directors and officers provided by the company in its bylaws so that there will not be gaps?
  6. How do the D&O policies work with regard to service on the board of the parent, one or more subsidiaries, or both?
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John Eichman
Hunton & Williams LLP

The D&O insurance world has changed since the financial crisis. Among many questions, directors should ask:

  1. What “wrongful acts” does the policy cover? Some carriers contend if there’s an adverse judgment for anything other than negligence, there’s no coverage.
  2. Are policy limits sufficient? Defense costs can consume limits.
  3. Is there a regulatory exclusion? Avoid this if possible.
  4. Is there protection for securities claims and cyber liability?
  5. Should our bank buy the extended reporting period under an expiring policy? Probably so, if you are changing carriers or the current carrier is issuing a narrower policy.