Bank-Owned Life Insurance (BOLI) is a powerful financial product where the bank is both the policy beneficiary and owner. Primarily, it serves as a tax-saving mechanism and a funding strategy for employee benefits but is focused on key executives and high-ranking personnel.
This permanent life insurance policy is typically purchased for key executives or board members. The bank bears the policy costs and reaps the benefits upon the insured individual’s death. The purpose is to secure the bank against potential financial losses due to the death of these valuable employees.
Bank-Owned Life Insurance is uniquely structured to aid banks, ensuring the institution—not the individuals or their loved ones—benefits from the policy. However, employees may still access traditional life insurance as part of their workplace benefits package.
Key Insights
- Bank-Owned Life Insurance (BOLI): A specialized form of life insurance for the banking sector.
- Usage: Functions as a tax shelter and funds executive benefits.
- Credit Quality: Banks must consider the insurance carrier’s credit quality.
- Beneficiaries: The policy benefits the bank tax-free upon the insured executive’s death.
- Permanence: The policy remains effective even if the covered executive leaves or is terminated.
How Bank-Owned Life Insurance (BOLI) Functions
Banks leverage BOLI contracts to optimize their funding for employee benefits. A typical scenario includes establishing a contract and making payments into an insurance trust. This trust funds policies—taken on the lives of key executives—with premiums and capital gains growing tax-free for the bank.
According to the U.S. Department of the Treasury’s Office of the Comptroller of the Currency (OCC), banks can purchase BOLI for various purposes, including employee compensation and benefits, key person insurance, and insurance for financial loss recovery related to borrowers and loans. The agreement must have an ‘insurable interest,’ meaning the bank would experience financial loss if the key employee dies. Such policies typically cover those within the top 25% of the hierarchy, ensuring only substantial financial risks are managed.
Different Types of BOLI Accounts
BOLI comes in three varieties:
- General Account: The bank’s deposits are added to the carrier’s general portfolio which mainly comprises bonds and real estate. Risks adjust alongside the carrier’s credit rating.
- Separate Account: This segregates general account holdings, offering detailed account management and investment transparency, though without credit rating guarantees.
- Hybrid Account: Combines aspects of general and separate accounts, providing guaranteed credit ratings and isolation from creditors while offering deeper investment insights.
Evaluating BOLI: Pros and Cons
Advantages:
- Tax Advantages: The tax-free growth and benefits provide significant financial comfort.
- Longevity: Even if an executive leaves or is fired, the policy remains active, continually aiding the bank’s finances.
Disadvantages:
- Policy Surrender: If a policy is surrendered due to unmet premiums, it results in potential taxes and penalties on earnings.
- Credit Quality Risks: Since it is an illiquid asset, banks expose themselves to credit risks if the insurance provider’s rating falls.
Purpose Behind Banks Opting for BOLI
Banks turn to BOLI for its tax advantages and ability to efficiently fund benefit plans. It’s a cost-effective method to manage employee-related financial commitments with tax-free capital growth.
When Are Benefits Disbursed?
Tax-free benefits are disbursed upon the death of the insured executive, securing funds for the bank.
Individual Purchase of BOLI: Is It Possible?
No, BOLI is not available for individual purchase. It’s exclusively designed for banks and corporations for specific high-level employees.
How Extensive Is BOLI Usage Among Banks?
As per the FDIC, the total cash surrender value for all BOLI policies held by banks reached $202.4 billion as of June 30, 2023.
Conclusion
Bank-Owned Life Insurance is an evolving tax sheltering tool and financial aid for benefit plans tailored for key bank employees. By securing high-value staff and balancing operational costs, including employee benefits, banks gain valuable long-term financial stability through BOLI. When managed responsibly and with strong insurance providers, BOLI proves advantageous for both the banks and their valued employees.
Related Terms: tax shelter, life insurance, capital appreciation, insurance trust, tax-free savings.
References
- BoliColi. “What Is Bank-Owned Life Insurance (BOLI)?”
- BoliColi.com. “What is Bank-Owned Life Insurance?”
- U.S. Department of the Treasury, Office of the Comptroller of the Currency. “Interagency Statement on the Purchase and Risk Management of Life Insurance”, Page 2.
- MB Schoen & Associates. “BOLI Insurance - Who Banks Can Insure and Why”.
- Federal Financial Institutions Examination Council. “FFIEC CDR Call Bulk All Schedules - June 30, 2023”, Total figures of fields labelled Life Insurance Assets General Account, Life Insurance Assets Separate Account, and Life Insurance Assets Hybrid Account.
