Bank Owned Life Insurance
Areas of Focus
Understanding Bank Owned Life Insurance
Bank Owned Life Insurance (BOLI) consists of policies insuring the bank’s officers, directors and key employees, typically purchased with a one-time payment.
BOLI is an alternative asset that may enable the bank to record attractive yields through tax-deferred cash value accumulation and tax-free death proceeds.
A typical BOLI purchase is immediately accretive to earnings per share with earnings increasing in future years through tax-deferred interest compounding.
BOLI should be considered as a part of the bank’s overall Asset/Liability Management (ALM) strategy.
The benefits being financed can include the following:
Employer-paid health insurance
401(k) matching contributions
Executive benefit programs
Employee disability and group life plans
Profit sharing contributions
Financing Employee Benefits is a Business Purpose for BOLI
Regulatory guidance provides methodology to justify the amount of the BOLI purchased. Under the cost recovery method, the purchase is not excessive if the present value of the employee benefits exceeds the present value of the gain from the life insurance death benefits.
The maximum amount of BOLI to be purchased is generally equal to 25% of the bank’s Tier 1 Capital amount. Purchase amounts from any one insurance carrier should generally be less than 15% of the Tier 1 Capital amount.
It is not necessary to create new executive benefits to justify a BOLI purchase although BOLI is often implemented in conjunction with nonqualified benefit plans.
BOLI income is recorded as Other Income on the bank’s income statement. This income and the policy death benefits are not subject to income tax if the policy is held until maturity.
BOLI policies that are surrendered for cash prior to the death of the insured create taxable income. This taxable gain is equal to the final policy cash value less the original premium amount.
The gain on surrender may also be subject to a 10% MEC tax penalty.
BOLI has no legal impact on benefits provided by the bank to its employees, nor does it impact their personal insurance programs.
The bank is the beneficiary and sole owner of the policies; however, sometimes the bank will share a portion of the excess death benefit with the insured.
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Asset Quality
When reviewing the quality of the BOLI asset under consideration, the bank should pay special attention to the following guidance from the 2004 Interagency Statement on the Purchase and Risk Management of Life Insurance.
“To achieve the tax benefits of insurance, institutions must hold BOLI policies until the death of the insured. Therefore, carrier selection is one of the most critical decisions in a BOLI purchase and one that can have long-term consequences.”
“…management should have a thorough understanding of how the insurance product works and the variables that dictate the product’s performance. The variables most likely to affect product performance are the policy’s interest-crediting rate, mortality cost, and other expense charges.”
“An institution should analyze the cost and benefits of planned BOLI purchases. The analysis should include the anticipated performance of the BOLI policy and an assessment of how the purchase will accomplish the institution’s objectives. Before purchasing BOLI, an institution should analyze projected policy values (cash surrender value and death benefits)…”
During the asset selection process, EBS works with the Bank’s management and Board of Directors to document that the above asset quality considerations have been reviewed.
Regulatory Compliance
Assist with the Bank’s Pre-Purchase Analysis, including all documentation required by
FIL-124-2004 / OCC 2004-56 / SR04-19
Assist the Bank’s Board of Directors with approval documentation (e.g., Sample Board Resolution).
Provide Bank with a sample Policy and Procedure memorandum that the Board can use to establish internal policies and procedures governing BOLI holdings.
Provide Bank with an Administrative Manual to be used to store annual updated information concerning cash values, death benefits, census information, and procedures for filing death claims.
Implementation Services
Pre-Purchase Analysis
Determine/Quantify the need for insurance
Select Vendor
Select Insurance Carrier(s)
Review the characteristics of the available insurance products
Analyze the benefits of BOLI
Determine the reasonableness of compensation provided to the insured employee if the insurance results in additional compensation
Analyze the associated risks of BOLI and the Bank’s ability to monitor and respond to those risks
Consider Accounting Treatment
Administrative Services
EBS developed a world-class service platform for BOLI clients that provides comprehensive ongoing services to Bank clients.
