What Is Bank-Owned Life Insurance (BOLI)?
Bank-Owned Life Insurance (BOLI) is a financial product where a bank assumes the role of the policy beneficiary and typically also the policy owner. This type of insurance serves as a tax shelter for financial institutions, enabling them to leverage its tax advantages to fund various employee benefits effectively.
Primarily designed for high-earning individuals and board members of a bank, BOLI is funded by the bank and provides benefits upon the insured individual’s passing. Not all bank employees are covered by BOLI; rather, it is typically reserved for key personnel whose demise could result in financial losses for the bank.
Unlike traditional workplace life insurance plans aimed at providing for employees’ beneficiaries in the event of death, BOLI is structured to benefit the bank itself, focusing on the bank’s financial interests.
Key Takeaways:
- BOLI acts as a tax-advantaged life insurance option for banks.
- It serves as a means for banks to finance employee benefits.
- Credit quality of the BOLI issuer is a critical consideration for banks.
- Benefits are paid out tax-free upon the insured executive’s death.
- The policy remains active even if the covered employee leaves or is terminated.
How Bank-Owned Life Insurance (BOLI) Works
Banks utilize BOLI contracts to finance employee benefits at rates lower than conventional means. This involves setting up a contract, making payments into an insurance trust reserved for the purpose, and purchasing the policy in the name of an executive.
The funds accumulated in this trust are used to fulfill benefits for specified employees, with all premiums and capital growth being tax-exempt for the bank. This tax-efficient structure allows banks to sustain employee benefits effectively.
According to the U.S. Department of the Treasury’s Office of the Comptroller of the Currency (OCC), banks can acquire BOLI policies for various purposes including employee compensation, key person insurance, and post-retirement benefits. These policies are typically obtained for employees who are vital to the bank’s financial well-being.
Banks are restricted from purchasing BOLI for all employees; it is reserved for those where the bank can demonstrate a financial interest in the insured individual’s life.
3 Types of BOLI Accounts
There are three types of BOLI accounts available – general, separate, and hybrid. The general account is the most common and typically involves investments in bonds and real estate, with fluctuating credit ratings.
In contrast, a separate account allows for a more detailed investment approach, where fund managers manage the investments separately, providing clear portfolio insights and utilizing a yield-to-worst ratio.
A hybrid account combines traits of both general and separate accounts, providing banks with a guaranteed credit rating and investment transparency while safeguarding against creditor claims.
Bank-owned life insurance acts as a tax-efficient strategy for banks to finance expenses using tax-free funds.
Pros and Cons of Bank-Owned Life Insurance
BOLI, as noted by BoliColi.com, offers advantages such as tax benefits and the capacity to generate earnings to support employee benefit programs efficiently. It enables banks to sustain benefit plans even if employees leave or are terminated.
Tax Benefits
One of the primary benefits of BOLI is its tax-favorable nature, allowing banks to offset benefit program costs using tax-free earnings. Additionally, the policy remains active even if an employee exits the bank, offering stability in funding employee benefits.
Surrendered Policies
However, downsides may include surrender penalties if a policy cannot be maintained, and risks associated with the credit quality of the insurance carrier. Purchasing policies from reputable insurers is crucial to mitigate these risks.
It’s essential for banks to assess the creditworthiness of the insurance carrier when investing in BOLI to manage potential risks effectively.
Why Do Banks Purchase BOLI?
Banks opt for BOLI to leverage its tax benefits and enable efficient funding of employee benefit schemes. The tax-free nature of premiums and earnings allows banks to maintain sustainable benefit programs.
When Are Benefits Paid?
Benefits from BOLI are triggered upon the death of the insured executive, resulting in tax-free payouts to the bank.
Can I Buy Bank-Owned Life Insurance?
No, individuals cannot purchase BOLI for personal use; it is exclusively available to banks and corporations for specific employees, typically executives.
How Much BOLI Do Banks Own?
Reported data indicates that banks collectively hold BOLI policies worth a significant sum, emphasizing the widespread adoption of this strategy among financial institutions.
The Bottom Line
BOLI serves as a strategic tool for banks to optimize tax advantages and efficiently fund employee benefits. By using reputable insurers and adhering to sound credit standards, BOLI can be a beneficial financial instrument for both employees and the bank itself.