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What do you think of when you think of “life insurance“? Chances are, you think of life insurance that’s there to provide for an individual’s family and other loved ones, people who depend on that person’s income, in the event of his or her untimely demise. As the premise goes, if you’re smart, you buy a life insurance policy to make sure that your loved ones will have a secure financial future even if you and therefore your paycheck aren’t going to be there anymore to provide for them.
But it’s not just individuals who benefit from life insurance. Organizations do, too, and they do it by insuring key employees who are central to that business’s operation. For example, banks can benefit from a type of insurance called “bank owned life insurance,” BOLI.
Here’s how it works: A bank can purchase bank owned life insurance (BOLI), on key personnel like bank officers, or other management personnel. The bank owns the policies, and pays the premiums. If an officer other key management member dies, the bank is the beneficiary of the insurance proceeds, not the individual’s family members – although the bank may choose to share the proceeds with other members on the plan, if it wishes.
This insurance benefits the bank in a number of ways. Specifically, banks use bank owned life insurance, BOLI, to:
1. Offset employee benefit costs
It’s no secret that many of today’s businesses are struggling to provide benefits to employees, benefits that were once taken for granted – things like group health insurance, pensions, and specialized benefits that businesses can use to attract and keep personnel necessary to the health and functionality of the business. That’s not true for banks that use this type of insurance, though.
Because bank owned life insurance, BOLI, gives banks a vehicle by which they can effectively offset the costs of providing benefits to employees. It can do this because taxes are deferred on the so-called “cash surrender value” of the BOLI policy while it is in effect. While the policy is in effect, the so-called “cash surrender value” (the value of the policy at any given time before it matures) grows over time; that value is tax-deferred. If an employee dies, the bank receives any death benefits tax-free. It can then turn around and use that money for other expenses without having to dip into profits.
Most people don’t think of life insurance policies as investment vehicles, but bank owned life insurance, BOLI, certainly is. It’s a great tool that can diversify the bank’s portfolio. Because any death benefits collected are tax free, this is in essence “”free money”” (less premium costs) that can improve the bank’s balance sheet.
BOLI allows banks to meet employee benefits in a cost-effective fashion and at the same time can increase value to shareholders as applicable. This improves the bank’s asset/liability profile.
In the event of an employee’s death, banks often use the BOLI death benefits to provide employee remuneration. Specifically, one study by the Todd Organization found that upwards of 30% of banks use death benefits to remunerate essential employees, such as offering incentives to attract and keep new management personnel; again, because the death benefits provide the money to do so, banks do not have to dip into earnings or capital to fund these expenses.
Most banks wisely keep up bank owned life insurance (BOLI) policies on employees even after they’ve retired. Upon the employees’ deaths, the bank receives the requisite benefits tax free, and again uses this “free” money to fund other necessary expenses without having to dip into profits.