What Is Bank-Owned Life Insurance (BOLI)?
Let me explain what bank-owned life insurance, or BOLI, really is. It's a tool banks use to handle taxes efficiently while funding employee benefits. Banks buy these life insurance policies on their top executives and board members, and they themselves are the beneficiaries. This setup protects the bank from financial hits if a key person dies.
How BOLI Works
Here's how BOLI operates in practice. The bank sets up the policy and pays premiums into a special fund that's treated as an insurance trust. This policy covers an executive's life, and when benefits are needed for covered employees, they're paid from this fund. All the premiums and any growth in the fund are tax-free for the bank, so you see how this lets banks fund benefits without the tax burden. As the Office of the Comptroller of the Currency notes, banks can use BOLI for employee compensation, key person protection, or even loan security, and sometimes for other purposes on a case-by-case basis. Remember, banks can't insure just any employee—only those whose loss would hurt the bank financially, like the top earners, and the employee has to consent.
Types of BOLI Accounts
When it comes to BOLI, there are three types you should know: general, hybrid, and separate accounts. The general account is the traditional one, where investments go into bonds and real estate, backed by the carrier's credit rating. The bank’s deposit becomes part of the carrier’s general pool, and you get broad details on investments, not the nitty-gritty. A separate account lets the provider manage investments through fund managers, giving you detailed portfolio info and using a yield-to-worst ratio for credit, but no guaranteed minimum rating. The hybrid blends both, offering a guaranteed credit rating, detailed holdings info, and protection from creditors, unlike the general type.
Pros and Cons of BOLI
BOLI has clear advantages, starting with its tax benefits that help generate earnings to cover employee benefit costs. Even if an employee leaves, the policy stays with the bank, keeping the funds available for other benefits. On the downside, if you can't maintain premiums and surrender the policy, it becomes taxable with a 10% penalty on gains. The insurer's credit rating matters a lot, and since BOLI is illiquid, a poor rating exposes the bank to risk, especially if not bought as a single-premium policy for best returns.
Frequently Asked Questions About BOLI
- Why do banks purchase BOLI? They use it as a tax shelter to fund benefit plans, with tax-free premiums and growth.
- When are benefits paid? Tax-free death benefits come when the insured executive dies.
- Can individuals buy BOLI? No, it's only for banks and corporations to insure specific employees like executives.
- How much BOLI do banks own? As of June 30, 2023, the total cash surrender value held by banks was $202.4 billion, per FDIC data.
The Bottom Line
In summary, banks are turning to BOLI more often as a way to shelter taxes and fund benefits for key employees and board members. It lets you offset costs through tax-free growth and death benefits, and the policy sticks with the bank no matter what happens to the employee. Just make sure to work with solid insurers to avoid credit risks. This approach helps banks stay competitive in benefits while keeping costs in check.
