For over three decades, banks have utilized bank owned life insurance (BOLI) portfolios as regulators have provided clear guidance on the use of this asset class by banking organizations. During the past decade, the use of BOLI has soared so that today a majority of banking organizations has BOLI on their balance sheet.
Bank owned life insurance is a stable; low-risk source of financing that can provide attractive tax-equivalent yields to help offset the rising costs of employee benefits. Typically, BOLI is an institutional life insurance arrangement designed for banks to generate greater cash value growth than typical retail permanent insurance policies.
In general, a bank purchases life insurance on a group of eligible key employees. The bank pays the premiums, and is the owner and beneficiary of the insurance policies. The policies become a part of the bank’s assets.
A bank earns income from the growth of the bank owned life insurance cash surrender value and from the insurance proceeds paid to the bank on the death of an insured employee. BOLI policies often cover the lives of executive officers and other employees who participate in the bank’s benefit plans. BOLI generally is not directly tied to the promised benefits, but is designed to recover all or a part of the bank’s associated aggregate benefit plan costs.
The annual yield on a BOLI investment generally compares favorably with other investment options available to banks. In addition, BOLI is income tax deferred, and if the BOLI contract is held until the death of an insured the bank receives life insurance proceeds free from federal income tax. The deferred tax savings on the growth of the cash value increases the bank’s net investment yield and is reflected on the bank’s financial statements.