Bank Owned Life Insurance

As of the third quarter of 2019, almost 3800 banks own $190 billion in Bank Owned Life Insurance (BOLI) policies. For example, Bank of America owns $22 billion, JP Morgan Chase owns $11 billion and Wells Fargo owns 18 billion in BOLI assets as per their 2019 third quarter balance sheet (please line number 41 in the balance sheet. You can find their balance sheets at FDIC website). One of the biggest benefits is that BOLI policies produce far superior returns than traditional bank investments, such as municipal bonds, 5- and 10-year Treasuries, and mortgage-backed securities. And, the growth in the cash value of the policies, as well as any death benefits paid out are completely tax-free. In a specific sense, bank owned life insurance is a permanent life insurance policy purchased for primarily to recover costs of employee benefits and offset liabilities for retirement benefits, helping banks to keep up with ever-rising benefit costs. Basically, if you’re a bank president or CEO, you purchase bank owned life insurance for certain employees to provide for them in their eventual retirement, earn better return on Tier 1 assets, as well as to hedge against financial failure.

How Does Bank Owned Life Insurance Work?

Bank (National, Regional or Community) or a Credit Union can purchase normally single premium universal or whole (general, hybrid or separate account) bank owned life insurance policy from Tier 1 assets on key employees for several common purposes: to act as supportive capital for the funding of other deferred compensation plans like pensions and retirement packages. Bank is the owner and beneficiary of these policies. If the insured employee passes away unexpectedly or at the end of life expectancy, the policy you purchased – and have paid all premiums – comprises the death benefit; of which your Bank is the sole beneficiary. This tax-free sum can then be used to try and fill the vacuum left by the death of the key executive, as well as fund other well-defined business needs.

Depending on the insurance companies and an amount of the premium, if 10 or more executives are selected then in most cases no medical tests require. Bank normally uses less than 25% of Tier 1 capital to fund the bank owned life insurance policies. It is advisable to use top 30% bank executives to avoid any potential income tax consequences. Banks continue to keep the life insurance policies on retired or separated executives as the rate of return on this kind of arrangement is much higher when it is held for a long time.

The bank owned life insurance is highly regulated by various federal and state banking authorities. Even though bank owned life insurance policies are a very attractive investment proposal for banks, they should not be bought for rates of return purposes but to either offset the employee benefit expense or cost recovery of deferred compensation and other retirement benefits to executives.

Uses and Benefits of Bank Owned Life Insurance

The abilities of bank owned life insurance have grown substantially since its inception; although it is still an investment vehicle of choice to fund the benefits packages of upper-echelon management and other employees. The primary attributes have of course stayed the same; they’ve just acted as a sort of springboard from which additional properties grew:

  • BOLI can now be used to offset expenses like those incurred by health issues, workers’ comp, disability insurance, and more; it has broken beyond being merely a supplementary fund for a retirement package.
  • The presence of BOLI increases the number of options you have in designing an investment strategy for bank investment.
  • It’s worth mentioning again: the tax-deferred nature of the growing investment and the tax-free death benefit.
  • The rare ability to increase your overall economic yields on investments, and decrease your overall debt, all without adversely affecting your investment risk as pertains to your entire portfolio. Bank owned life insurance can be an optimal addition to portfolio diversification, without adding to the risk.
  • BOLI provides a great net return on earnings and increased shareholder value if structured properly.
  • An often overlooked benefit to BOLI is the fact that they are usually issued by highly-rated insurance companies, which means that the chance for default or bankruptcy or other negative situations is remote.
  • The tax advantages enjoyed by BOLI are usually absent in other nonqualified retirement packages or benefit plans; in fact, this is what makes BOLI such a good supplement as a component of a more general deferred compensation package.

While the ins-and-outs of bank owned life insurance isn’t exactly like navigating a minefield, all it takes is one misstep to have you spending more than necessary to secure an optimal situation. A no-obligation consultation with a senior consultant at BeamaLife can apprise you of important guidelines like making sure the BOLI is limited to highly compensated employees, obtaining consent from the employees you’ve targeted for the policy, and informing these employees of the amount, the possible uses and the extent of the policy on which you’ll be paying premiums and administrative fees. We have set up and are managing many Split Dollar, Deferred Compensation, Defined Benefit and other Executive Bonus Plans across the country for last 18 years. Please call (877) 972-3262 or contact us for the further information.

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