Obtaining Bank-Owned Life Insurance: A Comprehensive Guide

Bank-owned life insurance (BOLI) is a type of insurance where a financial institution purchases coverage for key employees or executives, with the bank being the policy owner and beneficiary. This arrangement offers banks a tax-efficient investment strategy, as the policy's cash value grows tax-free and the death benefits are typically exempt from income tax. BOLI policies are designed to benefit the bank rather than the insured individual or their beneficiaries. While BOLI is not available to individuals, understanding how it works can provide insight into the strategies employed by banks to manage their risks and employee benefit costs.

Banks can purchase BOLI policies to fund employee compensation and benefit plans

Bank-owned life insurance (BOLI) is a type of insurance where the bank is the policy beneficiary and owner. Banks can purchase BOLI policies to fund employee compensation and benefit plans. This is a common practice, with most of the largest financial institutions in the nation having used BOLI for many years.

BOLI is often used to fund employee benefits for high-earners and/or board members of a bank. The bank pays for the policy and benefits after the insured individual's death. The benefits of BOLI for banks include tax-favourable conditions and the ability to generate earnings that offset the costs associated with employee benefits programs.

The U.S. Department of the Treasury's Office of the Comptroller of the Currency (OCC) explains that banks are allowed to purchase BOLI policies in connection with employee compensation and benefit plans. The OCC may also approve other uses on a case-by-case basis.

There are three types of BOLI insurance available to banks: general, hybrid, and separate. General is the most common and oldest type, usually invested in bonds and real estate. A separate account allows the insurance provider to separate the general account holdings into managed investments. A hybrid account combines aspects of both general and separate BOLI.

BOLI policies are a tax-efficient investment strategy for banks

Bank-owned life insurance (BOLI) is a type of insurance where banks can purchase coverage for key employees. It is a tax-efficient investment strategy for banks, providing several financial advantages. Firstly, BOLI offers tax-deferred growth on the cash value of the policy, allowing banks to accumulate earnings over time without paying taxes. Secondly, the death benefits received from a BOLI policy are generally income tax-free, providing a significant advantage as the bank receives a substantial sum without incurring income tax.

BOLI policies are designed to benefit the bank rather than the insured employee or their beneficiaries. The bank is typically the owner and beneficiary of the policy and pays the premiums. This arrangement offers a stable return on investment, which can be higher than returns from other investments. The funds received from BOLI policies can be used to offset employee benefit costs, such as health insurance, retirement plans, and other perks. By managing these expenses, banks can improve their overall financial performance and stability.

There are three main types of BOLI policies: General Account, Separate Account, and Hybrid Account. The General Account is the oldest and most common type, where the policy's assets and liabilities are held in the insurance company's general account. The Separate Account type offers greater protection against insurer insolvency but may involve more investment risk. The Hybrid Account combines features of both, offering protection against insolvency and a minimum guaranteed return.

BOLI policies are a long-term investment, and early withdrawal may result in penalties and adverse tax consequences. Banks must carefully consider employee retention, as the departure of key employees can impact the policy. Additionally, regulatory compliance is crucial to maintaining the tax benefits associated with BOLI. Overall, BOLI is a valuable tool for banks to enhance financial stability, manage employee benefit costs, and improve financial performance.

The bank is the owner and beneficiary of BOLI policies

Bank-owned life insurance (BOLI) is a product where the bank is the beneficiary and usually the owner of the policy. This type of insurance is used as a tax shelter for financial institutions, leveraging tax-free savings provisions as funding mechanisms for employee benefits. Banks use BOLI to fund employee benefits at a lower cost than they would otherwise pay.

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 receives the benefits after the insured individual's death. Banks do not take out BOLI for every employee—only those whose death could cause a significant financial loss for the bank.

The bank purchases life insurance for a select group of management, including officers or other key personnel. The bank is the owner of the policies, pays all premiums (usually a single, lump-sum premium), and is the beneficiary of the insurance proceeds. Some banks may choose to share a portion of these proceeds with plan participants.

BOLI is a tax-efficient method for offsetting employee benefit costs. The cash surrender values grow tax-deferred, providing the bank with monthly bookable income. Upon the death of the insured individual, tax-free death benefits are paid to the bank.

BOLI is typically purchased as a single premium or a series of annual premiums on a select group of key employees and/or bank directors. The bank is the owner and beneficiary of the policy, and the tax-adjusted cash value growth within a BOLI policy produces a return greater than the opportunity cost of alternative investments.

BOLI policies are long-term assets

Bank-owned life insurance (BOLI) is a long-term asset that banks should ideally hold on to for decades. It is a sizable asset for many banks, with the average BOLI contract valued at around $3 million.

BOLI is a long-term asset because it is a permanent life insurance policy that remains in place even if the insured employee leaves or is terminated. The tax-deferred growth of the cash surrender value is the greatest value of a BOLI plan. While the bank receives death proceeds when an employee dies, it loses the potential tax-deferred growth of that contract. Therefore, the longer the bank holds on to the policy, the more time the cash value has to grow.

Additionally, BOLI is a long-term asset because it is intended to offset the cost of employee benefit plans, which are long-term commitments. BOLI provides tax-free income that can help to offset the cost of existing and/or new employee benefit expenses, such as health insurance and 401(k) contributions.

When selecting a BOLI carrier, it is important to consider the insurer's longevity, service commitment, values, and investment philosophy. The insurer should have a strong commitment to the BOLI market and be able to provide stability during volatile economic times.

To meet long-term commitments, insurers must follow an appropriate asset-liability matching program while achieving attractive portfolio returns to back customer obligations. An insurer's general investment account should be well-diversified and managed with a long-term view that withstands short-term fluctuations in asset values.

In summary, BOLI is a long-term asset because of the nature of the policy, the tax benefits it provides, and the long-term commitments it helps to fund. By selecting a reputable BOLI carrier, banks can ensure the stability and strength of their BOLI product over time.

BOLI policies can be a stable source of investment returns

Bank-owned life insurance (BOLI) is a stable source of investment returns for financial institutions. It is a type of life insurance policy that banks purchase for their employees, typically high-level employees such as senior executives and managers. The purpose of BOLI is to provide financial benefits to the bank, such as tax advantages and a potential source of income. The bank pays the premiums for the insurance policy and becomes the beneficiary, receiving a death benefit upon the insured employee's death.

One of the key advantages of BOLI is its tax efficiency. The cash value of BOLI policies grows on a tax-deferred basis, meaning the bank does not have to pay taxes on the investment gains until they are withdrawn. This allows banks to accumulate funds without immediate tax implications. Additionally, the death benefits received by the bank are typically tax-free.

BOLI can also help banks offset existing employee benefit expenses. The tax-advantaged interest generated by a fixed-income BOLI policy is usually higher than what a bank can earn on other investments with a similar risk profile. This makes BOLI an attractive investment, especially in a low-interest-rate environment.

Another benefit of BOLI is its ability to provide liquidity. BOLI can be a vital source of liquidity for banks, both in emergency situations and strategic opportunities. The cash value component of BOLI policies has the potential to grow over time, providing a return on excess capital.

Furthermore, BOLI can aid in risk management. BOLI policies offer a combination of tax advantages, asset growth potential, and cost-offsetting benefits, contributing to the bank's overall risk management strategies. The death benefit provides financial protection in the event of an employee's death, helping to offset potential operational disruptions.

While BOLI offers numerous benefits, it is important to consider some potential disadvantages, such as complexity, illiquidity, investment risk, cost of premiums, and regulatory changes. BOLI involves compliance with banking and insurance regulations, and banks must be prepared to hold the policies for an extended period to maximize their benefits.

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