Bank-Owned life insurance (BOLI) encompasses all life insurance that a bank purchases and either owns or in which it has a beneficial interest. For many years, banks have been purchasing life insurance on the lives of directors, officers and employees with the banks as the owners and beneficiaries of the policies. These policies have been typically acquired to recover all or a part of the costs of the bank’s employee compensation and benefit programs.
With benefit costs continuing to rise, community banks are seeking competitively priced solutions to fund pre and post-retirement benefit liabilities. Right now is a good time to review the advantages of BOLI versus traditional bank-eligible investments due to the attractive yields and credit quality available from a properly structured BOLI portfolio.
BOLI can generate an increase of 150 to 200 basis points in after-tax investment yield, depending on the banking organizations tax rate. The BOLI investment strategy provides a competitive return on earnings and return on assets, thus improving the earnings per share for the bank.
Most traditional bank investments create taxable interest income. In contrast, BOLI results in no current income tax liability for the earnings generated each year. Earnings are sheltered inside the life insurance contract and are therefore tax-deferred. When a death occurs, the bank receives life insurance proceeds tax-free.