Bank owned life insurance (BOLI) is designed specifically for the banking industry. It is a high-yield, low risk investment and is approved by the regulators. The regulatory intent is to provide informal funding for executive expenses and benefits; however its impact provides a greater return on a banking organizations Tier I regulatory capital.
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.
While the increased yield is a contributing decision factor, a pure investment cannot be the sole purpose of any bank transaction. The regulators (OCC, FDIC & OTS) mandate that the purpose of the life insurance purchase be incidental to the business of banking. As with any corporation, the utilization of life insurance as an informal funding vehicle to offset existing “fringe benefits” or additional benefit accruals and liabilities is not only permissible, but encouraged.
The transaction will enhance the bank’s financial performance and strength.