Understanding Bank-Owned Life Insurance: An Intangible Asset?

Bank-owned life insurance (BOLI) is a type of permanent life insurance policy that is owned and paid for by the bank, with the bank also usually acting as the policy beneficiary. This type of insurance is not available to individuals and is instead taken out by banks on specific high-value employees, often executives, for whom the bank would suffer financially if they were to die. The policy remains in place even if the employee leaves or is terminated. BOLI is considered an intangible asset, as it is a non-physical item of value that contributes positively to the finances of the bank.

Bank-owned life insurance (BOLI) is a permanent life insurance policy

BOLI is a type of permanent life insurance with a cash value component, which is why it is considered an asset. The cash value of the policy grows over time, and the bank can access these funds through loans or withdrawals. This is in contrast to term life insurance, which does not have a cash value and only lasts for a specified term; this type of insurance is not an asset.

BOLI is purchased by banks for high-earners, board members, and other key employees whose deaths could cause financial loss for the bank. The bank pays for the policy and receives the benefits after the insured individual's death. Even if an employee leaves or is terminated, the policy remains in place, and the funds can be used to continue funding employee benefits.

The primary purpose of BOLI is to provide a tax-sheltered funding mechanism for employee benefits. All premiums paid into the fund and capital appreciation are tax-free for the bank, allowing them to fund benefits at a lower cost.

As an intangible asset, BOLI has no physical form, but it represents potential revenue for the bank. Intangible assets can be challenging to value from an accounting standpoint, and their values can be susceptible to market demand and technological advancements.

In summary, BOLI is a permanent life insurance policy that serves as an asset for banks by providing tax-free funds to offset employee benefit expenses and protect the bank's financial interests in the event of key personnel deaths.

BOLI is a tax shelter for banks

Bank-owned life insurance (BOLI) is a type of permanent life insurance policy that is used as a tax shelter for banks and other financial institutions. It is a unique product where the bank is typically both the owner and the beneficiary of the policy, which is taken out on the lives of key executives or high-earners. This means that the bank receives the death benefit when the insured individual passes away.

BOLI is considered a tax shelter because it provides tax-free savings provisions that banks can use to fund employee benefits. The premiums paid into the policy, as well as any capital appreciation, are not taxed. This allows banks to use the BOLI system to fund employee benefits at a lower cost. In addition, even if an employee covered by BOLI leaves or is terminated, the policy remains in place, providing stability and continuity for the bank.

BOLI is not available to individuals and can only be purchased by banks and corporations for specific employees, typically high-value members or executives. According to data from the FDIC, as of June 30, 2023, the total cash surrender value of all BOLI policies held by banks was $200.4 billion.

While BOLI offers tax advantages and a way to fund benefit plans, there are also potential downsides. For example, if a bank surrenders a policy because it can no longer afford the premiums, the policy will be taxed, and there is a 10% penalty on any gains. Additionally, the credit quality of the BOLI insurance carrier's credit rating is essential as a poor rating can expose the bank to risk.

In summary, BOLI is a type of life insurance that provides banks with a tax shelter and a mechanism to fund employee benefits. It offers tax-free savings and stability, but it is important to carefully consider the potential risks and restrictions associated with this type of policy.

BOLI is used to fund employee benefits

Bank-owned life insurance (BOLI) is a strategic financial tool used by banks to fund employee benefits while taking advantage of tax benefits. BOLI is a permanent life insurance policy that banks purchase for high-earners and/or board members. It is important to note that banks do not take out BOLI for every employee but only for those key players whose deaths could cause significant financial loss to the bank.

BOLI is a type of life insurance designed to benefit the bank rather than the insured or their beneficiaries. In a typical scenario, the bank sets up a contract and makes payments into a specialised fund, the insurance trust. The policy is bought on an executive's life, and all employee benefits are paid out from this fund. The bank is the owner of the policy, pays all premiums, and is the beneficiary of the insurance proceeds.

The primary economic benefit of BOLI is that the growth of the cash surrender value is tax-deferred, and the death proceeds are received tax-free. This makes BOLI an excellent tool for banks to offset existing or new benefit costs. BOLI provides favourable tax-equivalent yields compared to other investment alternatives, and the increased tax-free income helps offset employee benefit expenses, including health insurance and 401(k) contributions.

Additionally, BOLI offers continuity, as the policy remains in place even if the covered employee leaves or is terminated. This ensures that funds from the policy can continue to support other employee benefits. BOLI also provides investment variety, allowing banks to tailor their portfolios according to their risk tolerance and investment goals.

The eligibility criteria for BOLI coverage are based on the concept of "insurable interest". Banks must demonstrate a clear financial stake in the lives of those insured, meaning they would suffer a tangible financial loss if the insured individual passed away. Furthermore, the insured employee must willingly consent to the policy, showcasing the collaborative nature of BOLI arrangements.

BOLI is only for specific employees

Bank-owned life insurance (BOLI) is a unique type of life insurance that is specifically designed for banks and financial institutions. It is an important tool for banks to provide benefits for their employees and protect themselves from financial losses. However, it is essential to understand that BOLI is not available to all bank employees but is instead reserved for specific employees who meet certain criteria.

BOLI is a permanent life insurance policy that a bank purchases for its key executives and high-earners. The bank acts as the policy beneficiary and owner, while the insured individual is typically a member of the board or a high-ranking executive. The death of such an individual could result in significant financial losses for the bank, and BOLI helps mitigate this risk. It is worth noting that the insured employee must provide consent for the policy.

BOLI serves as a tax shelter for banks, allowing them to leverage tax-free savings provisions to fund employee benefits. The premiums paid and capital appreciation are tax-free for the bank, which helps them offset the costs associated with employee benefits. This type of insurance is particularly beneficial for banks to remain competitive with other employers' benefit plans.

While BOLI provides benefits for the bank, traditional at-work life insurance plans are typically offered to rank-and-file employees as part of their workplace benefits package. These plans ensure that employees' loved ones are taken care of in the event of their death.

In summary, BOLI is a valuable tool for banks to protect their financial interests and provide benefits for their employees. However, it is important to emphasize that BOLI is not available to all bank employees but is specifically designed for key executives and high-earners whose contributions are deemed critical to the bank's financial stability.

BOLI is an illiquid asset

The illiquid nature of BOLI can be a concern for banks, especially those that may need to raise cash quickly in times of financial distress. It is important for banks to carefully consider the liquidity of their assets and to ensure that they have a balanced portfolio that includes both liquid and illiquid investments. While BOLI can provide long-term stability and growth, it is important for banks to also maintain a level of liquidity to ensure they can meet their short-term obligations and weather any financial storms.

Another implication of BOLI's illiquidity is that it can be difficult for banks to accurately value these policies. Without an active market to provide pricing data, banks must rely on complex modeling and assumptions to determine the fair value of their BOLI assets. This process can be time-consuming and costly, and it may not always result in an accurate reflection of the policy's true value. As such, banks must carefully consider the potential risks and challenges associated with valuing illiquid assets like BOLI.

Despite the challenges posed by its illiquid nature, BOLI can still be a valuable tool for banks to manage their capital and grow their assets. By carefully considering the risks and rewards of investing in illiquid assets, banks can ensure that they are making informed decisions that align with their long-term strategic goals. Additionally, banks can take steps to mitigate the risks associated with illiquidity by diversifying their investments and maintaining adequate capital buffers.

In conclusion, while BOLI can provide significant benefits to banks in terms of capital management and tax advantages, it is important to recognize that it is an illiquid asset that requires careful consideration and management. Banks must ensure that they have the appropriate expertise and strategies in place to effectively manage their BOLI portfolios and maintain a healthy balance between liquidity and long-term growth.

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