With informal funding assets being a part of a banks general balance sheet, taxes produced from the funding asset are a key consideration. The impacts of informal funding plan with a tax advantaged bank owned life insurance (BOLI) asset versus taxable assets can be significant. The difference can be meaningful right away, and over time:
BOLI Funding Alternatives
IRR Analysis
Taxable Asset BOLI Asset* Taxable vs. BOLI Difference
Gross Rate: 6.50% 6.50% -
Investment Mgt. Fees: -0.25% -0.25% -
Taxes @ 40%: -2.50% 0.00% 2.50%
Other Insurance Costs: 0.00% -1.03% -1.03%
Net IRR: 3.75% 5.22% 1.47%
Value Analysis
Year 30:
Taxable Asset BOLI Asset* Taxable vs. BOLI Difference
Funding Amount: 1,000,000 1,000,000 -
Year 1: 1,037,500 1,050,469 12,969
Year 10: 1,445,044 1,592.359 147,315
Year 20: 2,088,152 2,489,973 401,821
3,017,471 3,985,019 967,548
Year 40: 4,360,379 7,666,057 3,305,678
*Assumes 45 year old male, $1,000,000 single premium, and held until mortality in year 40.
*Hypothetical performance does not take fees and charges into account.
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, usage rates among banks have soared so that today a majority of banking organizations have BOLI on their balance sheets.
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