What exactly is a bank-owned life insurance (BOLI) policy?
In the case of bank-owned life insurance, often known as BOLI, the bank serves as both the policy beneficiary and, in most cases, the policy owner. Financial institutions use this type of insurance as a tax shelter and use the tax-free savings provisions it offers to finance employee perks.
It is common practice for high-earners and board members of a bank to obtain this permanent life insurance policy. The bank pays for the policy and benefits after the covered individual’s death. Banking institutions do not purchase bank-owned life insurance for every individual who works for them; instead, they only purchase it for those essential players whose passing may result in a loss of funds for the institution.
An example of life insurance designed for the benefit of a bank rather than the insured or their beneficiaries is bank-owned life insurance. A standard at-work life insurance plan may be made available to bank workers as part of a workplace benefits package to cover their loved ones if they pass away.
What is the Process Behind Bank-Owned Life Insurance (BOLI)?
Banks deploy BOLI contracts primarily to fund employee benefits at a lesser cost than they could otherwise pay. In a typical arrangement, the bank is responsible for establishing the contract and disbursing payments into a specialized fund designated as the liability trust. The coverage is purchased based on the life of a high-level executive.
The plan distributes all the employee benefits due to those employees from this fund to the specific employees covered by the plan. The bank is exempt from paying taxes on any premiums deposited into the fund and any gain in value. Because of this, banks can use the BOLI system to finance employee perks without incurring any taxes.
According to the explanation provided by the Office of the Comptroller of the Currency (OCC) of the United States Department of the Treasury, financial institutions are permitted to acquire 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, the OCC may also permit other uses, as stated in the document, “on a case-by-case basis.”
This means that banks cannot obtain life insurance for their regular staff. The only workers for whom an institution can purchase insurance policies are those for whom there is “insurable interest,” which means that the bank would incur a financial loss if the employee passes away. In most cases, this refers to employees who receive high salaries or the top 25 percent of the staff. The insured worker is also required to provide their consent to the insurance.
There are three different kinds of BOLI accounts.
BOLI insurance is accessible to companies and banks in three types: general, hybrid, and separate. The general product is the most widely used and has been the longest of the three varieties. When financial institutions invest in a general account product, most investments are made in bonds and real estate. This kind of insurance provider has a credit rating, which is subject to change.
The carrier’s general account includes the investment deposit that the bank holds as a component. The information on investments held in a general account is presented in a general sense, as opposed to the more in-depth perspective provided by a separate account.
Using a separate account, the insurance provider can divide the general account holdings into investments that fund managers handle. Additionally, a yield-to-worst ratio is utilized to determine the credit rating of these accounts. These managers supply the bank with information on the bank’s portfolio. Despite this, no minimum credit rating is guaranteed for a general account.
There are elements of a general and a specific form of BOLI combined in a hybrid account. A hybrid provides financial institutions and companies with a guaranteed credit rating and precise information on investment holdings, similar to what would be found in a separate account. Because general insurance is not protected from creditors, separate and hybrid insurance are also protected from creditors. This safeguards financial institutions that take out these kinds of BOLIs on their workers.
An example of a tax shelter is bank-owned life insurance, which provides cash to the bank that is exempt from taxation to offset costs.
Arguments in Favor of and Against Bank-Owned Life Insurance
BoliColi.com, a company that assists in managing corporate-owned and bank-owned life insurance portfolios, states that this type of insurance was traditionally combined with benefit plans for new senior executives. However, as more banks purchase policies to offset employee benefit expenses, this type of insurance is becoming more common.
Advantages to Taxes
According to what was mentioned, the benefits of BOLI included the fact that it was tax-favored and could create revenues that may compensate for the expenses involved with employee benefit programs. Another advantage is that the insurance policy remains in effect even if an employee quits the bank or is terminated. This means that the cash from the policy can assist the bank in continuing to pay for other employee perks.
Policies that were Renounced
Certain drawbacks may be present. For instance, if a policy is surrendered because the policyholder cannot pay the premiums, the policy will be subject to taxation, and there will be a 10% penalty on any gains received from the surrender. In addition, the credit rating of a BOLI insurance provider is one of the most important factors to consider.
In addition, because BOLI is an illiquid asset, if a bank gets a policy from a firm with a weak credit rating, the bank is potentially exposed to risk. This is especially true if the policy is not acquired as a single-premium policy, which is the type of policy that generates the most substantial profits.
Why do financial institutions buy BOLI?
As well as providing a tax haven, BOLI also provides banks with a means of funding benefit schemes. This means the bank is exempt from paying taxes on capital appreciation and premiums paid into the fund. Consequently, banks can use the BOLI system to finance employee perks in a manner exempt from taxation.
When will benefits be paid out?
Because insurance is purchased during an executive’s life, the executive receives death benefits exempt from taxation upon their passing.
Can I get life insurance from the bank?
No. There is no way for individuals to obtain life insurance that the bank holds for themselves. It is exclusively available to financial institutions and businesses, which purchase it for particular personnel, most frequently CEOs.
To what extent do banks possess BOLI?
The total cash surrender value of all insurance owned by banks was $202.4 billion as of June 30, 2023, according to data supplied to the Federal Deposit Insurance Corporation (FDIC).
The number of financial institutions adopting BOLI as a tax shelter and a vehicle for paying benefit programs for all workers is growing. Banks can insure high-value workers and board members with this permanent life insurance policy, and they may utilize the cash to offset benefit packages.
BOLI can assist banks in competing with the benefit plans offered by other employers, and even if an employee whom BOLI covers quits the firm or is terminated, the policy remains inside the organization. Therefore, the employment of BOLI can be advantageous for both the workers of the bank and the bank itself, provided that the bank uses reputable insurers that adhere to stringent credit requirements.
Conclusion
- One type of life insurance utilized in the banking sector is bank-owned or BOLI.
- It serves as a tax haven for banks and is also used to support staff perks.
- One of the most critical concerns for financial institutions is the credit quality of the BOLI issuer.
- The insurance is purchased for the executive’s life, and the benefits are given out that are exempt from taxation upon the executive’s passing.
- If an employee protected by BOLI quits their position or is terminated, the policy that applies to them will continue to be in effect.
