Banks' Secret Weapon: Life Insurance Policies

Banks use life insurance as a tax shelter and to fund employee benefits. This is known as bank-owned life insurance (BOLI). It is a permanent life insurance policy that is often purchased for high-earners and/or board members of a bank. The bank pays for the policy and benefits from tax-free savings provisions after the insured individual's death.

BOLI is a type of life insurance created to benefit a bank, not the insured or their beneficiaries. It is used as a tax shelter and to fund employee benefits. The policy is bought on an executive's life, and tax-free benefits are paid on their death.

According to the Michael White/Meyer-Chatfield Bank-Owned Life Insurance Holdings Report, bank-owned life insurance assets (in the form of cash value) reached a record high of over $140 billion in late 2010. By the first quarter of 2012, this figure had increased to $145.6 billion.

Banks use life insurance as a tax shelter

BOLI is typically purchased for key employees whose death could cause a financial loss for the bank. These employees must agree to the policy, and even if they leave or are terminated, the policy remains in place. The funds from the policy can then be used by the bank to continue paying for other employee benefits.

In addition to the tax benefits, BOLI offers banks a way to protect their investments. Life insurance companies are reserve-based lenders, which makes them stable institutions in down economies. Unlike banks, life insurance companies do not use excessive leverage, which can lead to instability and failure. By investing in life insurance, banks can reduce their risk and protect their assets.

While whole life insurance may not be considered a traditional tax shelter, it can still be an effective tool for individuals to shelter money that has already been taxed from future taxes. The cash value of a whole life insurance policy can grow tax-deferred, and individuals can access this cash value tax-free through policy loans. This allows individuals to create their own private banking system and take control of their finances.

They also use it to fund employee benefits

Banks use life insurance to fund employee benefits, and this is often done through bank-owned life insurance (BOLI). BOLI is a product where the bank is the policy beneficiary and owner. It is used as a tax shelter, with its tax-free savings provisions leveraged as funding mechanisms for employee benefits.

BOLI is a permanent life insurance policy often purchased for high-earners and/or board members of a bank. The bank pays for the policy and benefits from tax-free gains after the insured individual's death. The death benefits are used to fund employee benefits.

BOLI is not taken out for every employee but only those whose death could cause a financial loss for the bank. The insured employee must agree to the policy. The policy remains in place even if the employee leaves or is terminated.

BOLI offers tax advantages to banks, as premiums paid and capital appreciation are tax-free. This allows banks to fund employee benefits at a lower cost. The growth in the cash value of the policy can be used to offset the cost of employee benefits.

BOLI can also be used to incentivise and attract employees, as well as facilitate smooth business transitions in the event of an employee's death. It is considered a low-risk investment for banks, providing a guaranteed rate of return and diversifying their investment portfolio.

In summary, banks use BOLI as a tax-efficient way to fund employee benefits and provide additional incentives, while also protecting their assets and facilitating business continuity.

Life insurance can be used to offset costs

Banks use life insurance to offset costs in several ways. Firstly, bank-owned life insurance (BOLI) is a type of insurance where the bank is the beneficiary and owner of the policy. This type of insurance is often purchased for high-earners or board members of a bank, and the bank pays for the policy and benefits after the insured individual's death. BOLI is used as a tax shelter and to fund employee benefits, providing tax-free savings that can be used to offset costs associated with employee benefits programs.

BOLI also helps banks compete with other employers' benefit plans and can be used to fund benefit plans for all employees. It offers superior returns compared to traditional bank investments, with tax-free growth in the cash value of the policies and tax-free death benefits. This favourable tax treatment has a significant impact on returns, with BOLI net yields generating tax-equivalent net yields of 4.85-6.05% for banks in the 38% tax bracket.

Additionally, BOLI assets are considered Tier 1 capital, representing a bank's equity and reserves, and are thus seen as a robust capital profile. Life insurance companies invest for long-term stability and do not employ leverage, making BOLI a high-quality, low-risk asset.

Overall, BOLI allows banks to offset costs by providing tax-free funds that can be used to fund employee benefits and other expenses.

Banks only take out policies for key players

BOLI is a permanent life insurance policy where the bank is the policy beneficiary and usually the owner. It is a type of life insurance created to benefit a bank, not the insured or their beneficiaries. Banks use BOLI as a tax shelter and to fund employee benefits.

BOLI is often purchased for high-earners and/or board members of a bank, which pays for the policy and benefits after the insured individual's death. The death benefit is usually tax-free.

BOLI is not available to individuals. It is only for banks and corporations, who purchase it for specific employees, often executives.

According to data reported to the FDIC, the total cash surrender value of all policies held by banks was $202.4 billion as of June 30, 2023.

Life insurance is a stable investment

However, it's important to consider the potential drawbacks of life insurance as an investment. The premiums for life insurance, especially whole life insurance, can be expensive, with higher costs than other types of insurance or investment options. The cash value of life insurance policies may also take several years to grow significantly, and the rate of return can be relatively low compared to other investments. Additionally, policyholders have limited control over their investment portfolio with life insurance.

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