What is bank-owned life insurance?

Bank-owned life insurance, which is also commonly referred to as BOLI, is becoming an increasingly popular option for banks that are looking for a tax shelter or for a form of protection against financial losses. It is also a very popular option for employers that are looking for a way to offer group life insurance benefits but who want to keep their portion of the costs down. For a product to be classified as bank-owned, it must meet a specific set of criteria. Only if it meets this criteria can banks, employers and even everyday consumers benefit. Compare life insurance rates now by using our FREE tool above!

Understanding the BOLI system, how is it used, and how it benefits several parties is extremely important if you are learning about various types of insurance or if you are simply learning about different finance funding schemes used by smart businesses. Read this guide to bank-owned life insurance products so that you can learn why they are becoming so attractive to banks who administer them.

When is a life product classified as BOLI?

Bank-owned life insurance is strictly defined as a life insurance product that a bank purchases and also owns. Since the bank pays for the insurance and has control over the policy itself, they have a financial interest in the proceeds that are paid out and can use these proceeds as they see fit.

How does BOLI work?

If you are wondering just who the bank will be insuring, it depends on the institution, but most institutions will structure the funding scheme by requiring that all executives qualify for and continuously carry life insurance both while they are employed and even after they leave or retire.

When there is a BOLI policy in place, the bank will most definitely be a beneficiary and will receive all or a large portion of the policy proceeds when the executive dies.

Since the bank is both a beneficiary and the owner of the policy that has an insurable interest in the life of the insured, the insured cannot make changes to ensure the payout goes to their family. This is a protective barrier for the bank who is paying the premiums in an effort to fund necessary operational costs like employee benefits. These proceeds will be paid to the beneficiary, which is the bank, and used to offset costs in the most tax efficient manner possible.

Can banks require executives to carry this type of insurance?

BOLI is essentially a form of key man life insurance for banking institutions that are looking for tax-free funding methods that will help the bank not just replace the executive, but also cover the high costs to provide their employee base with health, vision, and dental insurance. As a form of specialized key man insurance, the company will purchase a policy on the key executive and pay the premiums in exchange for being the main beneficiary.

According to state law, because a bank could suffer serious financial losses, the institution technically does have an insurable interest in the lives of its executives. This means that it is completely lawful for a bank to require its executives to agree to several different terms before they take on the title, and one of these terms will be to allow the bank to purchase bank-owned life insurance on them.

Reviewing the Terms of the Employment Contract

It is important that executives review the terms of the contract closely before agreeing. Some BOLI terms require that the life insurance must be taken out before you are appointed as an executive and will stay in force if you leave the bank for any reason. Essentially, the bank will benefit from your death from any point forward.

Many times, the terms for BOLI insurance is negotiable and you can require that some of the benefit goes to your family.

This makes it possible for the bank to replace you, contribute to different funds, lower their tax obligations and still help your family if you ever died. By negotiating the contract of your employment, the bank can still remain profitable and implement their strategy and you can feel good knowing that there is insurance to protect those that mean the most to you.

How does BOLI benefit the bank?

Now that you understand how bank-owned life insurance works and the approach that the banks will use to become policy owners and beneficiaries, the next step is learning why. You may have a general idea at how buying life insurance on a key employee or executive can benefit any type of establishment, but you really need to understand the full range of advantages for using this funding approach to lower the bank’s tax liabilities and to retain employees. Here are some of the many benefits to banks and even to their employees and clients:

• Banks Receive a Tax-free Death Benefit

Perhaps the most obvious benefit to the bank will be that the company, as a named beneficiary, will receive life insurance proceeds when a claim is filed. Since the named beneficiary of a life insurance policy is not subject to taxation when the benefit is paid out, the proceeds that the bank receives will not be added to income or considered taxable. Every single penny that the bank receives from the insurer the bank will keep and the government cannot lay claim to any of it.

• Banks Can Take Advantage of Tax-deferred Cash Values

In most cases, a bank that is buying life insurance in an effort to fund something like employee benefits will set up a permanent insurance plan. A permanent insurance plan may be more expensive, but it is an attractive option for banks because it carries both a death benefit component and a savings component that can turn their premium payments into a regular income.

Permanent insurance also referred to as cash value insurance, will accumulate cash values with every premium payment that is made. The growth in the cash account can be accessed at any time and is tax-deferred. The owner can request loans or withdrawals that are taxable if they are unpaid. In most strategies, the bank will not withdraw or take loans from the account, but they will still generate tax-deferred bookable income off of the money that they paying to keep the life insurance active. This bookable income looks good to stockholders and investors.

• Offsetting the Rising Cost of Employee Benefit Programs

One thing that banks are known for is offering their full-time employees a great benefits package. Most of the leading institutions have competitive salaries and will offer insurance and other employee benefits that the best candidates in the workforce are looking for. Many people do not realize that many of these robust benefit programs would not even be possible without BOLI funding schemes.

According to the Office of the Comptroller of the Currency, it is completely legal for a bank to use BOLI policies to fund benefit plans and other types of approved plans. By setting up the insurance contract, the bank can ensure that benefits plans will be paid with the funds from life proceeds. Since the proceeds are tax-free, it is a creative and very legal way for the bank to continue to offer benefits and to pay for these benefits in a tax-free way. It also lowers the likelihood of financial loss.

• Producing Better Returns

BOLI policies offer a much better rate of return than other investment options that have serious tax implications for such a big and profitable business. Since this tax-free policy appreciates by about 3.5% per year on a tax-free basis, it offers the bank investment gain about 5% while still offering a myriad of other benefits.

• Employee Retention and Satisfaction

Yet another indirect benefit of administering a BOLI program is that it can increase a bank’s employee retention rates by keeping employees satisfied. When a company has high turnover rates, it costs that company a significant amount of money to recruit and train the employees.

This is why many companies implement effective employee retention strategies that will boost employee morale while lowering the hiring cost per employee.

One effective retention strategy is to offer a good compensation and benefits package that employees will not want to lose. Since not all employers are offering this, leaving from one company to another may not be as easy. In fact, about 55% of employees consider benefits a good reason to keep working for their current employer. Keep your employees happy, reduce operational costs, and you can retain your clients too.

BOLI systems may benefit banks and also benefit employees, but these policies do not provide the employee with any type of guaranteed cover. If you do not have insurance, it may be time to start shopping. Use an online comparison tool to see how much your individual coverage will cost, and you can reap rewards from your employer while you have peace of mind. Start comparing life insurance rates now by entering your zip code in our FREE comparison tool below!