Each year, there is an increasing amount of Bank Owned Life Insurance (BOLI) purchased in the United States. BOLI is life insurance owned by the bank and issued on the lives of bank employees and directors. According to the FDIC, in 2021, 66% of all US banks owned BOLI. Listed below are the primary reasons why two-thirds of the banks own BOLI:
1. Earnings from BOLI are income tax-free. If a BOLI policy is held until maturity (death of the insured), earnings are tax-free. BOLI is a life insurance product that builds cash value over the time. That cash value buildup is not taxed unless surrendered prior to death. When death does occur on an insured, proceeds from the insurance are received tax-free.
2. May help to improve a bank’s earnings. BOLI cash values are reported as an ‘Other Asset’ on the bank’s balance sheet and increases in the cash value are reported as ‘Non-Interest Income’.
3. BOLI provides investment diversification. There are different product types available for banks investing in BOLI, including general account, separate account and hybrid account. This provides investment diversification with low correlation to other fixed income assets.
4. BOLI is immediately accretive to earnings. Once money is received for the BOLI purchase, the bank will recognize immediate earnings on the policy. This improves non-interest income and shareholder value.
5. AAA credit rating carriers offer book value treatment. The BOLI cash values can be backed by highly rated insurance companies with strong AAA credit ratings. With a general account purchase, the carriers take on the mark-to-market risk which smooths out volatility for the policy owners.
6. Policies may be issued on a Guaranteed Issue basis. If there are 10 or more insureds, policies may be written on a Guaranteed Issue basis requiring only limited or no medical underwriting.
7. Allows banks to offer nonqualified plans for key employees and directors. As a way to reward, retain and recruit key executives, banks purchase BOLI to finance the cost of providing a deferred compensation plan to key executives.
8. Effective way to offset costs of employee benefit plan expenses. BOLI policies provide income that can help offset and recover a portion of the bank’s employee benefit expenses.
9. Covers the bank if a covered executive dies. If an executive of the bank dies that is covered, the tax-free proceeds from the life insurance policy go right back to the bank to help with any financial burdens the bank may incur or to hire a replacement.
10. Allows the bank to provide life insurance to an executive. The bank has the option to provide a split-dollar arrangement on the BOLI policy. In that case, the bank and the insured would agree upon a specific amount of the proceeds to go to the insured’s selected beneficiary and the bank would receive its portion.