Whole Life Insurance: Banks' Investment Strategy And Benefits

Banks invest in whole life insurance policies for several reasons. Firstly, it offers them a competitive yet safe growth rate on cash, often higher than what they could achieve through other investments. Secondly, life insurance offers tax-sheltered growth, as the cash value growth inside life insurance is not taxed. Thirdly, life insurance provides guaranteed access to liquidity, allowing banks to invest in their business operations, equipment, real estate, or other opportunities. Additionally, life insurance has built-in death benefit protection, which can provide a substantial tax-free benefit if a key executive passes away. Furthermore, life insurance allows for high funding limits, enabling banks to provide robust retirement plans for their executives. Overall, banks view life insurance as a stable and attractive investment option that provides both growth and protection.

Banks invest in life insurance to protect themselves from the unexpected loss of key people

In addition to protecting against the loss of key people, BOLI is also used to recover the cost of providing pre- and post-retirement employee benefits, and to provide a direct employee benefit. BOLI is a life insurance policy purchased by a bank or bank holding company to insure the life of certain employees, often officers or other highly compensated employees. The bank pays the premium and is the beneficiary, receiving the proceeds from the death benefit, revenue from investment earnings, and bearing the risk of investment losses.

BOLI is attractive to banks because it can produce better returns than traditional bank investments. BOLI policies produce far superior returns than traditional bank investments and the growth in the cash value of the policies, as well as any death benefits paid out, are completely tax-free. According to BoliColi.com, BOLI returns typically exceed after-tax returns of more traditional bank investments such as municipal bonds, mortgage-backed securities, and 5- and 10-year Treasuries by 150 to 300 basis points or 1.5–3% annually.

The favorable tax treatment of life insurance has a sizable impact on returns. In October 2016, BankDirector.com confirmed that "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." BOLI also offers a measure of safety and strength, with the policies considered somewhat liquid due to their cash-surrender value, allowing them to be counted as Tier 1 capital under new capital requirement rules.

Overall, BOLI provides banks with a way to protect themselves from the unexpected loss of key people, while also offering attractive returns and tax advantages.

Life insurance offers banks guaranteed growth

Life insurance offers banks a guaranteed growth rate on cash. The growth rate from these policies is often more favourable than other investment options, such as CDs, bonds, or commercial paper.

Life insurance provides banks with a competitive yet safe growth rate. Many banks have more invested in life insurance policies than in bank premises, fixed assets, and all other real estate assets combined. As of 30 September 2020, bank-owned life insurance assets in the US reached a record high of $182.2 billion, a 3.3% increase from 2019.

Life insurance offers tax-sheltered growth, as the cash value growth inside life insurance is not taxed by the IRS. This incentivises banks to protect themselves with life insurance that never expires by offering this tax-shelter for cash growing inside permanent policies.

Life insurance also guarantees access to liquidity. The cash value is fully accessible to the bank, providing a stable source of funding that can be used for various purposes, such as investing in business operations, equipment, or real estate.

In addition, life insurance provides banks with built-in death benefit protection. In the unfortunate event of the passing of a key executive, the bank would receive a substantial tax-free death benefit to compensate for their loss.

Life insurance also allows for high funding limits, providing banks with robust retirement plans and generous funding limits for their key executives.

By investing in life insurance, banks can benefit from guaranteed growth, tax advantages, and improved liquidity, making it a favourable investment option for their capital.

Life insurance offers banks tax-sheltered growth

As of 30 September 2020, bank-owned-life insurance assets reached a record high of $182.2 billion, a 3.3% increase from 2019, according to the NFP-Michael White Bank-Owned Life Insurance (BOLI) Holdings Report. Banks are the largest purchasers of cash-value life insurance in the United States.

The cash value of life insurance policies is totally liquid and accessible to the bank. Banks can access this cash at a moment's notice to invest in their business operations, equipment, real estate, or spend it as they wish.

Life insurance also offers banks guaranteed growth rates that are much better than those of CDs, bonds, or commercial paper. Many of these policies are structured so that the bank takes on zero market risk, so they don't have to worry about annual losses but still get a competitive growth rate.

In addition, life insurance provides banks with guaranteed access to liquidity, a built-in death benefit, high funding limits, and stable long-term growth.

Life insurance provides banks with guaranteed access to liquidity

The cash value in life insurance policies grows at a guaranteed rate over time, which can be higher than the growth rate that banks would get from other investments such as CDs, bonds, or commercial paper. This growth is also tax-sheltered, as the cash value growth inside life insurance is not taxed by the IRS. This makes the effective growth rate even higher than other investments.

In addition, life insurance policies can be used as collateral for loans, making it easier for banks to get approved for loans or get better rates. The cash value in life insurance policies can also be withdrawn, although there may be tax implications depending on the amount withdrawn.

Overall, life insurance provides banks with a source of liquidity that is guaranteed, accessible, and offers a competitive growth rate. This helps banks to have a stable source of funds that they can use for various purposes, such as investing in their business or as collateral for loans.

Life insurance has built-in death benefit protection

Life insurance has a built-in death benefit protection. This is the most important feature of a life insurance policy, and it is the primary reason people get life insurance. The death benefit is the money – a lump sum or otherwise – that is paid to your beneficiaries if you die while your life insurance policy is in effect. The death benefit amount is based on the face value of the life insurance policy, with subtractions for any withdrawals you made from cash value or policy loans you didn't pay back.

The death benefit is typically paid in a lump sum to beneficiaries, but there are other options. For example, beneficiaries might be able to leave the death benefit with the insurance company in an interest-bearing account. They can also receive the death benefit in guaranteed payments for the rest of their life or in installments over a certain period.

The death benefit can be divided up any way the policyholder wants. If you’re one of four beneficiaries, that doesn’t mean you’ll get one-quarter of the death benefits automatically. The policyholder can allocate different percentages to different beneficiaries.

Beneficiaries can use the death benefit any way they want. There are no stipulations or conditions on benefit payouts. They can take the lump sum and use it for living expenses, or for any other purpose, from education to retirement savings or even going on vacation.

The death benefit may not be subject to taxes. Generally speaking, life insurance death benefits are exempt from income tax. However, you should consult a tax advisor if you receive a death benefit payment.

Sometimes, part of the benefit can be paid out before death. Many life insurance policies have an Accelerated Death Benefit rider that allows policyholders with a terminal illness to access part of the death benefit amount while they are still alive.

Under certain circumstances, a death benefit may be decreased. For example, if there were outstanding loans against the cash value or if the policyholder willfully misrepresented their information during the application process to obtain lower premiums.

Beneficiaries can be charities or other organisations. As a means of creating a legacy, some policyholders may choose to designate a charity or other organisations as their beneficiary.

Frequently asked questions