Bank-owned life insurance (BOLI)

Bank-owned life insurance (BOLI) is a tax-efficient method by which a bank purchases a policy for an executive, and the bank is the beneficiary. BOLI provides the bank with monthly tax-deferred bookable income, and the bank receives tax-free death benefits upon the executive’s death. BOLI is often used to offset the cost of high-end employee benefits.

How does BOLI work?

  • A bank purchases a policy on a key executive, most often with a single payment, or alternatively with a series of annual payments. The bank may choose to share some of the proceeds with the executive, but the bank owns the policy. BOLI policies are typically immediately accretive to earnings, instantly representing gains on the cost of purchase.

  • FASB Technical Bulletin No. 85-4 governs BOLI accounting. BOLI is an "other asset" on a balance sheet. The death benefit proceeds, or the increase in policy value over a period, should be listed as “other income”.

  • BOLI is a long-term asset and is highly recommended as a tax-efficient investment option for banks. 

 

Advantages of BOLI

  • Returns most often exceed after-tax returns of more traditional bank investments.

  • Taxes are deferred as cash values grow

  • Death benefits are tax-free

  • Can offset costs of employee benefits 

  • Products are priced for institutions and designed for financial buyers

  • Low risk

  • Well-defined regulations 

  • Diversifies investment portfolio

  • Can immediately increase return on equity
     

Disadvantages of BOLI

BOLI can be liquidated at any time without policy charges, but if the contract is surrendered by the bank, its gains become taxable and are subject to a 10% IRS penalty on the gain similar to surrendering an IRA early. Unless a bank required immediate liquidity, this issue will typically not arise.

 

Therefore, for most banks the greatest concern is the insurance carrier's credit. Most carriers are very high quality, although of course changes can happen over time.

 

One other concern is the how competitive the crediting rate is compared to the market. If the bank does not wish to surrender the policy and pay taxes and the 10% penalty, the other option is to exchange the policy to another carrier using an IRC Section 1035, similar to a tax-free IRA rollover. Most 1035 exchanges occur after the policy has been held for at least ten years, to avoid carrier penalties.

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