Should I Participate in Bank Owned Life Insurance?

Bank Owned Life Insurance (BOLI) is a financial product that banks utilize for specific corporate purposes. BOLI is not an investment vehicle for individuals. Instead, it is an asset owned by the bank itself, typically insuring the lives of its executives and other key employees. BOLI serves the bank’s financial strategies, not as a personal investment opportunity.

Understanding Bank Owned Life Insurance

Bank Owned Life Insurance is a permanent life insurance policy purchased by a bank on the lives of its employees. The bank acts as both the policyholder and the beneficiary, paying premiums and receiving the death benefit upon the insured’s passing. These policies are generally acquired for a select group of key employees, often officers or highly compensated individuals.

BOLI’s structure involves cash value accumulation within the policy, which grows tax-deferred. This cash value is recorded as an “other asset” on the bank’s balance sheet, contributing to its financial strength. Banks typically fund BOLI with either a single, large premium payment or a series of annual premiums. Upon an insured employee’s death, the bank receives the death benefit, which is generally income tax-free under specific conditions.

Why Banks Utilize BOLI

Banks invest in BOLI to manage costs and enhance financial performance. A primary purpose is to informally fund employee benefit programs, such as executive retirement plans, deferred compensation, and post-retirement medical coverage. Income from BOLI’s cash value growth and tax-free death benefits helps offset the increasing expenses of these employee benefits.

The tax advantages of BOLI are a significant draw for banks. Cash value growth within the policies accumulates tax-deferred. Death benefits received by the bank are generally tax-free, provided federal rules are met. These rules often include requirements for employee consent and notification at the time the policy is issued. BOLI also serves as a stable, long-term asset that diversifies the bank’s investment portfolio, offering returns that can exceed those from more traditional bank investments.

Individual’s Relationship with BOLI

Individuals do not participate in Bank Owned Life Insurance as a personal investment. BOLI is a corporate asset, with the bank as the sole owner and beneficiary. An individual’s life is insured under a BOLI policy because they are a key employee or executive.

The insured individual does not receive the policy’s cash value or the death benefit; these proceeds accrue exclusively to the bank. However, BOLI can indirectly support executive compensation and benefit programs. For example, BOLI can informally finance non-qualified deferred compensation plans or supplemental executive retirement plans (SERPs) that directly benefit the employee. This arrangement allows the bank to manage the costs of these benefit promises through BOLI’s tax-advantaged earnings.