What Is Bank-Owned Life Insurance?
Bank-owned life insurance (BOLI) is a product where the bank is the policy beneficiary and usually the owner. Such insurance is used as a tax shelter for the financial institutions, which leverage its tax-free savings provisions as funding mechanisms for employee benefits.
This permanent life insurance policy is often purchased for high-earners and/or board members of a bank, which pays for the policy and benefits after the insured individual’s death. Banks do not take out bank-owned life insurance for every employee working for them, but only those key players whose death could cause the bank to lose money.
Bank-owned life insurance is a type of life insurance created to benefit a bank, not the insured or their beneficiaries. Bank employees may be offered a traditional at-work life insurance plan to cover their loved ones if they die as part of a workplace benefits package.
Key Takeaways
- Bank-owned life insurance (BOLI) is a form of life insurance used in the banking industry.
- Banks use it as a tax shelter and to fund employee benefits.
- A significant concern for banks is the credit quality of the BOLI issuer.
- The policy is bought on an executive’s life and tax-free benefits are paid on the executive’s death.
- Even if an employee covered by BOLI leaves or is terminated, the policy on them remains in place.
Life Insurance
How Bank-Owned Life Insurance (BOLI) Works
Banks primarily use BOLI contracts to fund employee benefits lower than they might otherwise pay. In a typical scenario, the bank sets up the contract and then makes payments into a specialized fund set aside as the insurance trust. The policy is bought on an executive’s life.
All employee benefits that need to be paid to particular employees covered under the plan are paid out from this fund. All premiums paid into the fund and capital appreciation are tax-free for the bank. Therefore, banks can use the BOLI system to fund employee benefits tax-free.
As the U.S. Department of the Treasury’s Office of the Comptroller of the Currency (OCC) explains, banks are allowed to purchase BOLI policies “in connection with employee compensation and benefit plans, key person insurance, insurance to recover the cost of providing pre-and post-retirement employee benefits, insurance on borrowers, and insurance is taken as security for loans.” In addition, OCC may also allow for other uses, it says, “on a case-by-case basis.”
If you work for a bank or a corporation that offers bank-owned life insurance and your employer asks you to enroll, know that you are not under any obligation to oblige. Employees must agree to the policy.
Three Types of BOLI Accounts
There are three types (general, hybrid, and separate) of Boli insurance available to banks and corporations. General is the most common (and oldest) product of the three types. When banks invest in a general account product, it is mainly invested in bonds and real estate, the carrier of this type of insurance has a credit rating, which can change.
The bank’s investment deposit is used as a part of the carrier’s general account. The details of investments in a general account are shared in broad strokes rather than the in-depth view given with a separate account.
A separate account allows the insurance provider to separate the general account holdings into investments managed by fund managers. These managers provide the bank with details of the bank’s portfolio, and the credit rating of these accounts uses a yield-to-worst ratio. Still, there isn’t any guaranteed minimum credit rating as a general account.
A hybrid account combines aspects of a general and a separate type of Boli. With a hybrid, banks and corporations receive a guaranteed credit rating and detailed information about investment holdings, like in a separate account. Separate and hybrid insurance are also isolated from creditors (unlike general insurance), which protects banks who take these types of Boli out on their employees.
Bank-owned life insurance is a kind of tax shelter providing funds (tax-free) to the bank to offset costs.
Pros and Cons of Bank-Owned Life Insurance
According to BoliColi.com, which helps manage corporate-owned and bank-owned life insurance portfolios, this type of insurance was traditionally combined with benefit plans for new senior executives but they are becoming more common as more banks purchase policies to offset employee benefit expenses.
Tax Benefits
As noted, the advantages of BOLI included its tax favorability and the ability to generate earnings that offset the costs associated with employee benefits programs. Another pro is that even if an employee leaves or is fired from the bank, the insurance policy stays in place, so funds from the policy can help the bank continue to pay for other employee benefits.
Surrendered Policies
There can be downsides. For example, if a contract is surrendered because they can’t keep up with the premiums, that policy will be taxed, and there is a 10% penalty on any gains. In addition, the credit quality of a BOLI insurance carrier’s credit rating is essential.
In addition, because BOLI is an illiquid asset if a bank purchases a policy from a company with a poor credit rating, it exposes the bank to risk, especially if it isn’t purchased as a single-premium policy yields the most significant returns.
Why Do Banks Purchase BOLI?
BOLI offers banks a tax shelter and a way for them to fund benefit plans. Premiums paid into the fund, in addition to all capital appreciation, are tax free for the bank. Therefore, banks can use the BOLI system to fund employee benefits on a tax-free basis.
When Are Benefits Paid?
Since the policy is taken out on an executive’s life, tax-free death benefits are paid when the executive dies.
Can I Buy Bank-Owned Life Insurance?
No. Individuals cannot purchase bank-owned life insurance for themselves. It is only for banks and corporations, who purchase it for specific employees, often executives.
How Much BOLI Do Banks Own?
According to a report from 2020 (the latest figures available), two-thirds of U.S. banks hold BOLI assets, and $182.2 billion is the total cash surrender value of all of the policies.
The Bottom Line
Banks using BOLI as a tax shelter and vehicle for funding benefit plans for all employees are on the rise. This permanent life insurance policy allows banks to cover high-value employees and board members and use the funds to offset benefit programs.
BOLI can help banks compete with other employers’ benefit plans, and even if a BOLI-covered employee leaves or is terminated, the policy stays within the company. As long as banks use reputable insurers with strong credit standards, the use of BOLI can be beneficial for the employees and the bank itself.
FAQs
Does Bank of America provide life insurance?
Core coverage: Bank of America provides these insurance benefits automatically at no cost to you. What it is Supplemental life insurance coverage paid on a post-tax basis. A statement of health may be required.
What is a bank owned life insurance policy?
What Is Bank-Owned Life Insurance? Bank-owned life insurance (BOLI) is a product where the bank is the policy beneficiary and usually the owner. Such insurance is used as a tax shelter for the financial institutions, which leverage its tax-free savings provisions as funding mechanisms for employee benefits.
Can I purchase bank owned life insurance?
Banks can purchase BOLI policies in connection with employee compensation and benefit plans, key person insurance, insurance to recover the cost of providing pre- and postretirement employee benefits, insurance on borrowers, and insurance taken as security for loans.
How Much Does Bank of America have in life insurance?
If you look at their line 41, this bank has just over $18 billion in life insurance. So again, this major bank has more than double the amount of life insurance than in total real estate
Why do banks invest in life insurance?
Banks buy life insurance because it offers benefits not available through their own products and institutions. Bank products have low rates and are taxable, while life insurance offers guaranteed growth, tax advantages and an opportunity to shore up balance sheets with an asset so reliable it can be used as collateral.
How do banks use whole life insurance?
You can only borrow against a permanent or whole life insurance policy. Policy loans are borrowed against the death benefit, and the insurance company uses the policy as collateral for the loan. Life insurance companies add interest to the balance, which accrues whether the loan is paid monthly or not.
Is bank owned life insurance taxable?
The general rule for bank-owned life insurance (BOLI) is that proceeds received by reason of death are tax free; however, if the BOLI policy is transferred for value (i.e., the purchase of an existing policy, rather than a newly issued policy), the death benefit is no longer tax free, unless an exception applies to the …
Is Boli income taxable?
The annual income from the BOLI is non-taxable and non-interest income. It has a positive impact on after-tax net income.
Can I purchase Boli?
Insurable interest is governed on a state by state basis and violating applicable insurable interest statutes could have severe federal tax consequences. While no states have an outright prohibition against BOLI, some states, including California, prohibit ?classes? of employer owned life insurance.
Can an individual buy Boli?
An individual can purchase BOLI through a financial institution. For example, you decide to invest $50,000 in a one-year credit of deposit (CD) with a bank, and you’ll receive a return of 1.5% on your investment.
Can I sell my life insurance policy for cash?
For many life insurance policyowners, the answer is yes, you can sell your life insurance policy for cash. It’s known as a life settlement, and it’s a great way to get money for your unwanted policy, much more money than if you were to surrender it back to the insurance company.
What is the cash value of a 10000 life insurance policy?
So, the face value of a $10,000 policy is $10,000. This is usually the same amount as the death benefit. Cash Value: For most whole life insurance policies, when you pay your premiums some of that money goes into an investment account. The money in this account is the cash value of that life insurance policy.
How much can you sell a $100 000 life insurance policy for?
Pros and Cons to Selling your Life Insurance Policy
On average, if you have a $100,000 life insurance policy, you will be receiving about $25,000. The next big advantage is that you won’t have to make any more premium payments on your insurance policy.
How much Boli Does Bank of America have?
For example, Bank of America owns $22 billion, JP Morgan Chase owns $11 billion and Wells Fargo owns 18 billion in BOLI assets as per their 2019 third quarter balance sheet (please line number 41 in the balance sheet.
How do I invest in Boli insurance?
BOLI can only be purchased by banks and is not available to individual investors. BOLI is a type of life insurance policy purchased in the name of a key employee. The bank owns the policy and is named the beneficiary.
Can a person buy Boli?
Banks can purchase BOLI policies in connection with employee compensation and benefit plans, key person insurance, insurance to recover the cost of providing pre- and postretirement employee benefits, insurance on borrowers, and insurance taken as security for loans.
Bank Owned Life Insurance (BOLI) – OCC.gov
Bank Owned Life Insurance (BOLI) Home Topics Supervision & Examination Capital Markets Balance Sheet Management Bank-owned Life Insurance (BOLI) National banks may purchase and hold certain types of life insurance called bank-owned life insurance (BOLI) under 12 USC 24 (Seventh). Banks can purchase BOLI policies in connection with employee compensation and benefit plans, key person insurance, insurance to recover the cost of providing pre- and postretirement employee benefits, insurance on borrowers, and insurance taken as security for loans. The OCC may approve other uses on a case-by-case basis. Popular Links Final Interagency Policy Statement on Funding and Liquidity Risk Management Interagency Advisory on Interest Rate Risk Management Risk Management and Lessons Learned (OCC 2009-15) Requests under 716(f) of the Dodd-Frank Act References Bank-Owned Life Insurance (OCC 2004-56, December 2004) This OCC Bulletin provides an overview for the Interagency Statement on the Purchase and Risk Management of Life Insurance, which provides general guidance regarding supervisory expectations, split-dollar arrangements, and the use of life insurance as security for loans. Popular Links Final Interagency Policy Statement on Funding and Liquidity Risk Management Interagency Advisory on Interest Rate Risk Management Risk Management and Lessons Learned (OCC 2009-15) Requests under 716(f) of the Dodd-Frank Act Related News and Issuances DateIDTitle 12/07/2004 OCC 2004-56 Bank-Owned Life Insurance: Interagency Statement on the Purchase and Risk Management of Life Insurance
What is Bank Owned Life Insurance (BOLI)? – BoliColi.com
Bank Owned Life Insurance | BoliColi.com Bank Owned Life Insurance (BOLI) is a tax efficient method that offsets employee benefit costs. The bank purchases and owns an insurance policy on an executive’s life and is the beneficiary. Cash surrender values grow tax-deferred providing the bank with monthly bookable income. Upon the executive’s death, tax-free death benefits are paid to the bank. BOLI is used as a tax efficient method for offsetting the costs of employee benefit programs. Historically, BOLI was often combined with a new executive benefit plan for senior executives. However in more recent years many banks have added BOLI in order to offset existing employee benefit expenses. There are three types of BOLI products currently offered to banks: General Account: This is the oldest form and still the most common product in the market today. When banks make an investment in a general account product the deposit becomes part of the general account of the insurance carrier. Most insurance carriers primarily invest in real estate and bonds. The carrier does not provide specific detail on where they are investing the BOLI proceeds rather they provide some detail of the general account holdings of the carrier. The product has a current crediting rate which can be changed from time to time by the carrier as well as a guaranteed minimum crediting rate that it cannot fall below. Separate Account: Under this approach the carrier segregates the holdings from their general account into bank eligible investments managed by well-known fund managers. The fund managers provide detailed reporting of the assets within the portfolio. The crediting rate is determined by the carrier using a yield-to-worst ratio. However there is no guaranteed minimum crediting rate. A stable value insurance rider can be purchased in order to smooth out the mark to market performance and provide downside protection. Hybrid Account: This approach is a combination of the benefits of the above approaches which provide both a current and guaranteed crediting rate of a general account product with the transparency of a separate account product. It should be noted that both separate and hybrid product are not subject to creditors of the insurance carrier providing another level of protection to the bank. How Does BOLI Work? A bank purchases the life insurance with either 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, although many banks opt to share a portion of the insurance proceeds with the participants. The tax-adjusted cash value growth within a BOLI policy produces a return greater than the opportunity cost, of what the bank would have made in an alternative investment if it had not purchased BOLI. From a compliance standpoint, the BOLI gains are used to offset the costs of the employee benefit programs. Typical BOLI products are single-premium and immediately accretive to earnings, creating an instant positive spread over the cost of funds used to purchase BOLI. The accounting for BOLI is governed by FASB Technical Bulletin No. 85-4 and should be recorded on the balance sheet as an “other asset”. The increase in cash surrender or contract value during a specific period, as well as the final net insurance proceeds at maturity, should be recorded as “other income”. BOLI is a long term asset when properly implemented and administered, offers the bank a highly-rated investment option with a significant…
Bank-Owned Life Insurance (BOLI) – Investopedia
Bank-Owned Life Insurance (BOLI) What Is Bank-Owned Life Insurance? Bank-owned life insurance (BOLI) is a product where the bank is the policy beneficiary and usually the owner. Such insurance is used as a tax shelter for the financial institutions, which leverage its tax-free savings provisions as funding mechanisms for employee benefits. This permanent life insurance policy is often purchased for high-earners and/or board members of a bank, which pays for the policy and benefits after the insured individual’s death. Banks do not take out bank-owned life insurance for every employee working for them, but only those key players whose death could cause the bank to lose money. Bank-owned life insurance is a type of life insurance created to benefit a bank, not the insured or their beneficiaries. Bank employees may be offered a traditional at-work life insurance plan to cover their loved ones if they die as part of a workplace benefits package. Key Takeaways Bank-owned life insurance (BOLI) is a form of life insurance used in the banking industry.Banks use it as a tax shelter and to fund employee benefits.A significant concern for banks is the credit quality of the BOLI issuer.The policy is bought on an executive’s life and tax-free benefits are paid on the executive’s death.Even if an employee covered by BOLI leaves or is terminated, the policy on them remains in place. Life Insurance How Bank-Owned Life Insurance (BOLI) Works Banks primarily use BOLI contracts to fund employee benefits lower than they might otherwise pay. In a typical scenario, the bank sets up the contract and then makes payments into a specialized fund set aside as the insurance trust. The policy is bought on an executive’s life. All employee benefits that need to be paid to particular employees covered under the plan are paid out from this fund. All premiums paid into the fund and capital appreciation are tax-free for the bank. Therefore, banks can use the BOLI system to fund employee benefits tax-free. As the U.S. Department of the Treasury’s Office of the Comptroller of the Currency (OCC) explains, banks are allowed to purchase BOLI policies “in connection with employee compensation and benefit plans, key person insurance, insurance to recover the cost of providing pre-and post-retirement employee benefits, insurance on borrowers, and insurance is taken as security for loans.” In addition, OCC may also allow for other uses, it says, “on a case-by-case basis.” If you work for a bank or a corporation that offers bank-owned life insurance and your employer asks you to enroll, know that you are not under any obligation to oblige. Employees must agree to the policy. Three Types of BOLI Accounts There are three types (general, hybrid, and separate) of Boli insurance available to banks and corporations. General is the most common (and oldest) product of the three types. When banks invest in a general account product, it is mainly invested in bonds and real estate, the carrier of this type of insurance has a credit rating, which can change. The bank’s investment deposit is used as a part of the carrier’s general account. The details of investments in a general account are shared in broad strokes rather than the in-depth view given with a separate account. A separate account allows the insurance provider to separate the general account holdings into investments managed by fund managers. These managers provide the bank with details of the bank’s portfolio, and the credit rating of these accounts uses a yield-to-worst ratio. Still, there isn’t any guaranteed minimum credit rating as a general account. A hybrid account combines aspects of a general and a separate type of Boli. With a hybrid, banks and corporations receive a guaranteed credit rating and detailed information…
Bank Owned Life Insurance or BOLI for Better … – BeamaLife
Bank Owned Life Insurance or BOLI for Better Investment Returns How Does Bank Owned Life Insurance Work? Bank (National, Regional or Community) or a Credit Union can purchase normally single premium universal or whole (general, hybrid or separate account) bank owned life insurance policy from Tier 1 assets on key employees for several common purposes: to act as supportive capital for the funding of other deferred compensation plans like pensions and retirement packages. Bank is the owner and beneficiary of these policies. If the insured employee passes away unexpectedly or at the end of life expectancy, the policy you purchased – and have paid all premiums – comprises the death benefit; of which your Bank is the sole beneficiary. This tax-free sum can then be used to try and fill the vacuum left by the death of the key executive, as well as fund other well-defined business needs. Depending on the insurance companies and an amount of the premium, if 10 or more executives are selected then in most cases no medical tests require. Bank normally uses less than 25% of Tier 1 capital to fund the bank owned life insurance policies. It is advisable to use top 30% bank executives to avoid any potential income tax consequences. Banks continue to keep the life insurance policies on retired or separated executives as the rate of return on this kind of arrangement is much higher when it is held for a long time. The bank owned life insurance is highly regulated by various federal and state banking authorities. Even though bank owned life insurance policies are a very attractive investment proposal for banks, they should not be bought for rates of return purposes but to either offset the employee benefit expense or cost recovery of deferred compensation and other retirement benefits to executives. Uses and Benefits of Bank Owned Life Insurance The abilities of bank owned life insurance have grown substantially since its inception; although it is still an investment vehicle of choice to fund the benefits packages of upper-echelon management and other employees. The primary attributes have of course stayed the same; they’ve just acted as a sort of springboard from which additional properties grew: BOLI can now be used to offset expenses like those incurred by health issues, workers’ comp, disability insurance, and more; it has broken beyond being merely a supplementary fund for a retirement package. The presence of BOLI increases the number of options you have in designing an investment strategy for bank investment. It’s worth mentioning again: the tax-deferred nature of the growing investment and the tax-free death benefit. The rare ability to increase your overall economic yields on investments, and decrease your overall debt, all without adversely affecting your investment risk as pertains to your entire portfolio. Bank owned life insurance can be an optimal addition to portfolio diversification, without adding to the risk. BOLI provides a great net return on earnings and increased shareholder value if structured properly. An often overlooked benefit to BOLI is the fact that they are usually issued by highly-rated insurance companies, which means that the chance for default or bankruptcy or other negative situations is remote. The tax advantages enjoyed by BOLI are usually absent in other nonqualified retirement packages or benefit plans; in fact, this is what makes BOLI such a good supplement as a component of a more general deferred compensation package. While the ins-and-outs of bank owned life insurance isn’t exactly like navigating a minefield, all it takes is one misstep to have you spending more than necessary to secure an optimal situation. A no-obligation consultation with a senior consultant at BeamaLife can apprise you of important guidelines like making sure the BOLI is limited to highly compensated employees, obtaining consent from the employees you’ve targeted for the policy, and informing these employees of the amount, the possible uses and…
What Is Bank Owned Life Insurance (BOLI)? – The Motley Fool
What Is Bank Owned Life Insurance (BOLI)? | The Ascent Many or all of the products here are from our partners that pay us a commission. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Terms may apply to offers listed on this page. You’ve heard of life insurance and homeowners coverage, but have you ever heard of bank-owned life insurance? By the time you finish reading this article, you’ll know what bank-owned life insurance is, how it works, who buys it, and why.What is a bank-owned life insurance policy (BOLI)?Bank-owned life insurance (BOLI) is a type of insurance coverage purchased by banks. Frequently, a BOLI policy is taken out in the name of a key employee, executive, or board member. Every BOLI program is closely regulated. For example, the federal banking agencies issued guidelines to ensure that each bank uses safe banking practices and focuses on risk management when using a BOLI transaction to fund their employee benefit program.If that sounds confusing, stay with us. Here are the key facts to remember:BOLI can only be purchased by banks and is not available to individual investors.BOLI is a type of life insurance policy purchased in the name of a key employee.The bank owns the policy and is named the beneficiary.The bank benefits from the tax-free or tax-deferred nature of the policy.If the employee dies, the bank is the beneficiary of the death benefit on the policy. These funds are also tax-free.Money earned from the death benefit or cash surrender value is earmarked to pay for employee benefits.In addition to supporting employee benefit plans, a BOLI allows financial institutions to diversify their portfolio.Why do banks buy bank-owned life insurance?Banks buy BOLI because life insurance policies offer tax-free benefits that banks cannot provide. For example, interest earned through a banking product is taxable, while interest earned investing in a life insurance policy is not. Banks do not offer guaranteed rates on any of their banking products, while many permanent life insurance policies do. In short, life insurance is the most practical, efficient way a bank can invest money and know with a degree of certainty it will pay off.How does BOLI work?A bank buys permanent life insurance policies for its top-tier employees and board members. The bank owns each policy and is named as the sole beneficiary. Part of each premium the bank pays goes toward building cash value.Everything, from premiums paid to the cash value growth, is tax-free. In addition, if a key employee dies, the bank receives the life insurance payout tax-free. Those tax-free funds help offset the cost of employee benefits, like medical plans, 401(k) matches, and group life insurance.Pros and cons of bank-owned life insuranceHere’s a quick rundown of the pros and cons associated with bank-owned life insurance:Pros of BOLICash value grows tax-free if held until the death of the person insured. If it’s cashed before the person dies, it is tax-deferred.Death benefits are tax-free.Proceeds are used to fund employee benefits.There are no surrender charges attached to a BOLI, saving banks money.Investment risks within the life insurance policies do not exceed standard business risks.Using a BOLI as an asset adds diversity to a bank’s portfolio.Cons of BOLIThere’s a lack of liquidity. Unlike some other investments, a bank does not have immediate access to the funds tied up in a life insurance policy.If a policy is surrendered before the insured dies, all gains are taxed and the bank is required to pay a 10% penalty.Banks are exposed to greater risks when a policy is purchased through an insurance carrier with a less-than-stellar credit rating.Is bank-owned life insurance a good investment?For banks, it’s a great investment because the bank can invest money tax-free (or tax-deferred) and receive a payout if an employee dies. More importantly, a BOLI allows a financial institution to cover employee benefit costs. FAQs BOLI stands for bank-owned life insurance. Banks purchase BOLI to insure the lives of key employees and to recover the cost of providing employee benefits. Each policy names the bank as the sole beneficiary. A bank benefits by keeping money in a tax-free or tax-deferred investment, and then again when a key employee dies. Banks…
You Won't Believe What Bank of America Is Doing Now
You Won’t Believe What Bank of America Is Doing Now Flickr / longhorndave. Big banks like Bank of America (NYSE: BAC), JPMorgan Chase & Co. (NYSE: JPM) and Wells Fargo & Co. have been laying off staff by the thousands, but one thing they haven’t cut back on is Bank-Owned Life Insurance. According to Equias Alliance, BOLI assets grew by 4.3% 2013 from the prior year, reaching an incredible $143.8 billion. What exactly are BOLI assets? Like their brethren, Corporate-Owned Life Insurance, these are life insurance policies that banks buy to insure the lives of their employees – not from any sense of altruism, but in order to reap the profits when these workers die. According to Equias’ report, well over 50% of all U.S. banks and savings and loans, and savings banks hold these assets, with national banks holding more than $91 billion of the total. And, though the employees’ own coverage may end when their employment stops, BOLI lives on – regardless of the way in which the worker was terminated. A bona-fide funding method BOLI is an entirely legal way to fund employee benefits, including retirement plans. The practice has been sanctioned by the Office of the Comptroller of the Currency, and gained popularity as an investment vehicle during the 1990s, primarily to fund executive bonuses and pensions. At first, banks insured their most prized executives, those whose passing, assumedly, would have an effect on the business. But banks loved the high returns and tax-free payouts when insured employees died. Soon, banks were insuring even low-paid workers – often without the employee’s knowledge – hence the phrases “dead peasant policies” and janitors insurance”. This free-for-all was reined in by legislation in 2006, which dictated that only the upper 35% of earners could be insured in this way, and express permission was necessary. Still, the practice continues, with some estimates saying that a full 20% of new life insurance policies written are company-owned. The spending spree that took place before the 2006 curbs has given the biggest banks very large BOLI assets, as well: Bank of America holds policies with cash surrender value of $17.6 billion, with Wells Fargo coming in second with $12.7 billion. JPMorgan, which had $11.1 billion in early 2009, has only about $5 billion today. Pros and cons BOLI assets are beloved by banks for their robust capital profiles, as well. Since the policies are considered somewhat liquid – due to their cash-surrender value – they can be counted as Tier 1 capital under new capital requirement rules. The tax-free benefits can be used by the banks in any way they choose, and are not restricted to employee benefits programs. As a nice bonus, investment income on these policies is also free of tax. But some banks, notably JPMorgan, have run into some trouble with these products. In an effort to hedge against interest rate fluctuations, the bank created long-term derivatives from BOLI assets, some of 30 years’ duration. New banking rules require that these kind of trading vehicles have more capital behind them, a wrinkle that has caused some losses as of late. Because of their duration, these positions are difficult to unwind, as well. The biggest issue, however, may be the perception that these kinds of insurance policies are just plain morbid. In 2008, the widow of an Amegy Bank employee who died of brain cancer became aware of such a policy when she mistakenly received the bank’s payout from its BOLI. She sued, claiming that the bank obtained her deceased husband’s consent after his diagnosis, then fired him. His own life insurance policy with the bank terminated upon his dismissal. She settled for an undisclosed amount in 2010. Bank of America employed 308,000 people when it bought Merrill Lynch in 2008, and has whittled that number down to around 284,000 currently – still several thousand more than JPMorgan’s employee count. With that many workers on the payroll, B of A has been a leader when it comes to insuring its employees’ lives. According to The Wall Street Journal, the bank had about $16 billion in BOLI by 2008; JPMorgan’s $12 billion was obtained by its…
Here are the benefits of bank-owned life insurance
Here are the benefits of bank-owned life insurance Photo by Atit Phetmuangtong/EyeEm/Getty Images Over the past two decades, banks have increasingly dabbled in BOLI, or bank-owned life insurance. While there are downsides to consider, experts say the benefits of these policies are two-fold: to generate income in the long term and to retain bank leaders. By Beth Mattson-Teig Quick stat $182.2 billion The cash surrender value of all U.S. bank-owned life insurance policies Source: NFP-Michael White BOLI Holdings Report, Q3 2020 Bank interest in bank-owned life insurance (BOLI) has been surging amid what some describe as a perfect storm of market conditions. Two-thirds of banks in the U.S. hold BOLI assets, according to the NFP-Michael White BOLI Holdings Report for Q3 2020. The cash surrender value of those policies totals $182.2 billion. Banks with less than $10 billion in assets have, on average, approximately 14% of capital in BOLI. BOLI has become one of the most common methods of financing the cost of employee and director benefits, including nonqualified benefit plans. It gained considerable traction in 2004 when the Office of the Comptroller of the Currency (OCC) released Bulletin 2004-56: The Interagency Statement on the Purchase and Risk Management of Life Insurance. “That really gave banks the green light to own BOLI and provided clear guidelines for pre-purchase analysis and risk management,” says Russell McMillan, director, business development at M Benefit Solutions in Portland, Ore. That being said, there has been some cyclical ebb and flow in the demand since the OCC guidance was released. Because of the capital expense involved, BOLI competes with loans and other investments. If a bank is doing well making loans and its loan book is growing, BOLI will typically take a back seat to those loan assets, McMillan says. Over the past two years, demand for BOLI has spiked as interest rates dropped further, loan yields started to fall and yields in a bank’s permissible investment in securities portfolios started to decline. One of the main reasons that BOLI is attracting more interest from bankers is that yields compare favorably with today’s alternative investments, says Ken Derks, a managing consultant at Nashville, Tenn.-based NFP Executive Benefits. The credit quality of general account BOLI is fairly high, and banks are getting a nice spread compared with other investments, he says, adding that in the current market, BOLI policies are generating tax equivalent net yields between 3% and 4%. How does BOLI work? Banks typically purchase BOLI policies for top executives or directors. The bank is both the owner and the beneficiary of the policy. BOLI is frequently used to help offset and recover the cost of employee benefits, as well as nonqualified benefit plan expenses, supplemental retirement and supplemental life insurance plans for officers and directors. “Because the cash flows from a BOLI policy are generally tax-deferred income,” Derks says, “if the institution holds the policy for its full term, BOLI can provide attractive tax-equivalent yields to help offset the rapidly rising cost of providing employee benefits.” “You hope that it is many days and years in the future, but one day that [bank-owned life insurance] policy will come back to benefit the bank.” —Bill McCandless, Lone Star Capital Bank San Antonio-based Lone Star Capital Bank bought its first BOLI policy about seven years ago and…
What Is Bank-Owned Life Insurance (BOLI)? – The Balance
Bank-Owned Life Insurance (BOLI) ••• Pixelfit / Getty Images Bank-owned life insurance (BOLI) is a type of permanent life insurance policy banks buy for high-salaried employees or board members. Bank-owned life insurance (BOLI) is an insurance policy many banks purchase for a group of employees, generally top executives and directors. The bank is the owner and beneficiary. It’s used to offset the cost of its employee benefit program. Below, we discuss more about BOLI policies and how they work. Definition and Example of Bank-Owned Life Insurance (BOLI) Bank-owned life insurance (BOLI) is a type of permanent life insurance policy banks buy for high-salaried employees or board members. The bank pays for the coverage and is the beneficiary after the insured person’s death. BOLI is a tax-efficient tool often used to offset the cost of an employee benefit program, making it easier for banks to compete with other employers. BOLI isn’t the only type of employer-owned life insurance (EOLI) policy. Other types of corporations can purchase corporate-owned life insurance for key employees. For a bank to take out a BOLI policy on an employee, it must have that individual’s consent. If a person doesn’t like the idea of their employer having a life insurance policy on them, they can decline consent, and the policy can’t be generated. If the employee gives consent, the bank can purchase a life insurance policy on that employee. The bank pays for the policy, and the money generated from it is used to offset the costs of the employee benefit program. The policy also protects the bank from the loss it would experience if a critical member of its staff died unexpectedly. When the employee named in the policy passes away, the bank receives a death benefit. BOLI policies are common. The cash surrender value of these policies reached $182.2 billion as of September 2020. Of the 5,033 banks in the survey, 65% reported holding BOLI assets. How Bank-Owned Life Insurance Works Banks can purchase BOLI policies under 12 U.S. Code § 24 (Seventh). Further guidance is found in section 101(j) of the Internal Revenue Code and IRS Notice 2009-48. Some states also have specific laws in place to regulate BOLI policies. Here’s a look at how this type of insurance works. The bank asks a highly-compensated employee for permission to take out a life insurance policy on them. If the employee agrees in writing, the bank can purchase a permanent life insurance policy on that person. As the policy owner, the bank pays the premiums and absorbs any expenses related to the insurance. Banks can’t purchase life insurance policies on every employee. Institutions can only take out policies if there’s “insurable interest,” which means the bank would stand to lose financially if the person dies. Once the policy is in place, the employee continues working for the bank. Their benefits are funded in part by the BOLI program. Each year that the bank has the policy in place, it must file Form 8925 (Report of Employer-Owned Life Insurance Contracts) with the IRS. When the employee leaves the company, whether through termination or retirement, the bank keeps the policy in place to continue covering the benefits of other employees. After the eventual death of the employee, a death benefit is provided to the bank. Typically with a bank-owned life insurance policy, the bank keeps all of the death benefit. In some cases, a bank may choose to share some of the death benefit with the employee’s…
Different Types of Insurance To Provide Financial Safety Nets
Different Types of Insurance To Provide Financial Safety Nets Feel good about health insurance Group health insurance Offered through an employer, it’s usually much less expensive than if you purchase as an individual. Generally employers subsidize your premium payments and you choose from a variety of plans with a wide range of benefits, coverage and costs. Flexible Spending Account (FSA) and Health care Spending Account (HSA) These may also be offered through your employer. You pay for eligible medical expenses on a pretax basis and thus can get significant tax savings. One major difference between FSAs and HSAs is that an individual controls an HSA, while FSAs are less flexible and are owned by an employer. So if you leave your job, the funds within the FSA will likely be forfeited, while any funds deferred into your HSA are yours to keep and roll into another HSA. Consolidated Omnibus Budget Reconciliation Act (COBRA) If you lose your job, you may be able to remain on your former employer’s group policy for 18 months at your own expense to give you sufficient time to research and find coverage elsewhere. COBRA also allows 36 months of coverage if you get divorced and your spouse provided health care coverage. Individual health coverage While it might be expensive, if you don’t have access to group health insurance, it’s critical to get an individual plan. A minor accident or illness can cost many thousands of dollars. The Affordable Care Act, which was signed into law in 2010, was designed to help people better understand and evaluate their health insurance choices. Learn more.