Bank-Owned Life Insurance (BOLI) is a different form of life insurance obtained by banks for the lives of specific employees, like main executives and personnel. It acts as a financial tool for banks to handle risks efficiently, maintain their balance sheets, and handle the cost of employee benefit programs.
Unlike traditional life insurance policies bought by individual policyholders, bank-owned life insurance policies are owned by the bank, which also supports the beneficiary in the event of the insured employee’s death. This agreement hence enables banks to generate non-interest income that they can use to pay off or manage expenses relating to employee benefits, such as health insurance and retirement plans.
What is Bank Owned Life Insurance?
Bank-owned life insurance, also known as BOLI, is a type of life insurance that is usually bought by banks, where the bank is both the policy owner and the beneficiary.
This type of insurance is typically taken out on the lives of key executives and other select employees who play a crucial role in the bank’s operations and success. Banks utilize BOLI as a financial strategy to offset the costs of employee benefit programs and boost their earnings.
Types of Bank Owned Life Insurance Policies
Bank-Owned Life Insurance (BOLI) policies come in various forms, each designed to meet the different strategic needs and investment preferences of banks. Understanding the types of BOLI policies is essential for banks considering this financial instrument as part of their broader strategy to manage costs and enhance returns. The three primary types of bank-owned life insurance policies are:
- General account
- Separate account
- Hybrid account
• General account
General account bank-owned life insurance policies invest the premiums paid by the bank into the general account of the insurance company. The returns on these investments are credited to the policy’s cash value based on a fixed or minimum guaranteed interest rate, making the investment relatively stable and predictable. In addition, they are the oldest and most well-known policy type.
• Separate account
Separate account BOLI policies allocate the premiums into separate accounts that are distinct from the insurer’s general account. These accounts can be invested in various assets, allowing the bank to potentially achieve higher returns based on market performance.
• Hybrid account
Hybrid account bank-owned life insurance offers a blend of characteristics from both general and separate account BOLI. These policies allow for the allocation of a portion of the premiums to be in the insurer’s general account, providing a stable, fixed return, while allocating another portion to separate accounts for the potential to earn higher, market-driven returns.
How Does It Work?
Understanding the concept behind BOLI is straightforward. So, typically, banks purchase bank-owned life insurance policies for a group of certain employees. They will also be responsible for paying the premiums and becoming the policy’s beneficiaries.
On the other hand, the cash value of these policies increases tax-deferred, giving banks an income stream that can be used to pay off the costs of employee benefits. Upon the death of an insured employee, the bank receives the death benefit, which is generally tax-free, further enhancing the bank’s financial position.
What Does Bank Owned Life Insurance Cover?
Bank-Owned Life Insurance (BOLI) is a unique financial product that banks use for various strategic purposes. Understanding what BOLI covers and what it does not is crucial for banks considering this investment. Here’s a breakdown:
- Death benefits
- Key person protection
- Employee benefits
- Informal funding of deferred compensation plans
- Improvement in bank earnings
Remember that insurance providers determine the coverage offered under BOLI, and various factors also affect the cost.
What Does It Not Cover?
Here is an overview of what BOLI does not cover:
- Public relations issues.
- Short-term financial needs.
- All types of employees.
- Personal employee benefit.
- General business liabilities.
Understanding the specific coverages and limitations of BOLI is essential for banks to effectively integrate this financial instrument into their strategic planning and ensure compliance with regulatory standards.
Pros and Cons of BOLI
What are the pros and cons of BOLI? Is it a good option or a terrible option for me? If you would like to find out, this section will be of help.
Pros
- Access to non-interest income.
- Employee benefits.
- Tax-advantaged investment.
- Risk management.
- Cash value growth.
- Death benefits.
Cons
- Requires a significant upfront investment.
- Potential reputational risks if not properly managed and communicated.
- Subject to complex regulatory and compliance requirements.
- Potential interest rates.
- Surrender charges.
How Much Does BOLI Cost?
The cost of BOLI depends on several factors, including the amount of coverage, the type of policy, and the health and age of the insured employees. Banks must also consider the ongoing premium payments against the projected returns and benefits of the policy.
How to Get Bank Owned Life Insurance
Acquiring BOLI is a strategic process that involves several steps, ensuring that the investment aligns with the bank’s financial objectives and complies with regulatory requirements. Here is a comprehensive guide on how to acquire BOLI:
- Examine your needs and objectives.
- Seek advice from legal and financial advisors.
- Carry out due diligence on insurance companies.
- Choose qualified employees.
- Select the type and amount of coverage you want.
- Undergo underwriting.
- Complete your purchase.
- Use policy management practices.
- Get in touch with stakeholders.
Getting BOLI is a very important decision that needs due diligence, continuous management, and planning. But with these steps, you will be able to complete the process easily.
FAQs
Is BOLI right for you?
Whether BOLI is right for a bank depends on its financial goals, risk tolerance, and ability to manage and administer the policy over time. Banks must weigh the potential benefits against the costs and complexities of maintaining BOLI policies.
Who can I insure under a BOLI policy?
Banks typically insure key executives and essential personnel under BOLI policies. The selection of insured employees is subject to consent requirements and regulatory guidelines to ensure that the policy serves legitimate business interests.
Why do banks purchase BOLI?
Banks purchase BOLI as a financial strategy to offset the costs of employee benefit programs and to improve their bottom line. The cash value of BOLI policies grows on a tax-deferred basis, providing banks with a source of tax-advantaged income. Additionally, the death benefits received upon the passing of an insured employee can help cover the costs associated with replacing key personnel.
What happens if an employee leaves the bank?
If an insured employee leaves the bank, the bank may choose to keep the bank-owned life insurance policy in force if it continues to meet the insurable interest requirements. The bank remains the owner and beneficiary of the policy, regardless of the employee’s status.
Can a bank cash out a BOLI policy?
Yes, a bank can choose to surrender a BOLI policy before the death of the insured and receive the policy’s cash surrender value. However, this action may have tax implications and impact the bank’s financial strategy.
Is BOLI right for all banks?
BOLI may not be suitable for all banks. Banks must carefully consider factors such as their size, financial goals, risk tolerance, and capacity to manage the complexities of bank-owned life insurance policies. Consulting with financial and legal advisors is crucial in determining if BOLI aligns with a bank’s strategic objectives.
