How Does BOLI Work?
The bank purchases life insurance with a single premium, or a series of annual premiums, on key bank executives. The bank is the owner and beneficiary of the life insurance policies, and the proceeds are then used to offset the cost of employee benefits. The bank can also opt to share a portion of the insurance proceeds with the participants, depending on the benefit design. Cash surrender values grow tax deferred, providing the bank with monthly bookable income. Upon an executive’s death, tax-free death benefits are paid to the bank.
The accounting for bank-owned life insurance is governed by the Financial Accounting Standards Board (FASB) Technical Bulletin No. 85-4. BOLI cash value is recorded as “Life Insurance Assets” under “Other Assets” on the bank’s balance sheet. The increase in the BOLI cash value and the final net insurance proceeds are recorded as “Other Non-Interest Income.”
Types of BOLI
There are three types of bank-owned life insurance products available to financial institutions:
1. General Account: Historically, this is the most common BOLI product. With general account life insurance, policy cash values are held in a life insurance carrier’s general investment account and crediting rates are a function of the underlying portfolio returns. A carrier’s general account typically consists of high-quality corporate bonds and collateralized mortgages. The product has a current crediting rate, which can be changed by the carrier from time to time, as well as a guaranteed minimum crediting rate.
2. Separate Account: This BOLI product is a form of variable universal life insurance. The bank decides how to invest the policy cash value from a choice of investment subaccounts offered by the insurance carrier. The bank bears the investment risk, as policy cash values fluctuate based on the underlying performance of the investments chosen. These policies may offer a stable value wrap that helps smooth the returns of the underlying portfolio and provides downside protection. Cash values are held in a separate account apart from the carrier’s general account and are therefore not subject to the claims of the carrier’s creditors.
3. Hybrid: This product design combines features of both general and separate account policies. Hybrid products are not considered securities. They are protected from the claims of the carrier’s creditors and usually provide a guaranteed minimum crediting rate. These products typically offer various investment portfolio options from which the bank can select.
Advantages of BOLI
Bank-owned life insurance can be beneficial for a number of reasons:
- Cash values grow tax deferred, creating an earnings advantage over alternative taxable assets
- Death benefits are received tax free
- Most BOLI policies do not have surrender charges
- Products are institutionally priced and designed specifically for financial buyers
- Immediately accretive to earnings
- Creates the ability to immediately increase return on equity and return on assets
- Efficiently reduces the cost of providing employee benefits for banks
A Benefit You Can Bank On
It’s important to remember that BOLI is considered a long-term asset and not just a “yield play.” When a BOLI policy is surrendered prior to death, the gains within the policy become taxable and a 10% additional IRS penalty may apply if the policy is structured as a Modified Endowment Contract. However, when properly implemented and managed, BOLI can offer a significant advantage compared to other bank-permissible investments. The Executive Benefits Team at SilverStone Group can help you maximize the potential benefits of bank-owned life insurance as part of your benefits management plan. If you believe your institution could benefit from this financing strategy, our experts are ready to help.
This article originally appeared in the 2017 | ISSUE ONE of the SilverLink magazine under the title “Banking on BOLI.” To receive a complimentary subscription to the SilverLink magazine, sign up here.