Bank-Owned Life Insurance, or BOLI, is a type of life insurance that is owned by a bank on the lives of its employees. In this article, we’ll discuss how BOLI works, its advantages for banks and employees, tax implications, risks, and more. Moreover, we’ll also reveal the top companies offering BOLI policies and provide case studies of successful utilization of BOLI by banks.

Understanding Bank-Owned Life Insurance (BOLI)

As mentioned above, BOLI is a form of life insurance that banks purchase on the lives of their employees. The bank is the owner and beneficiary of the policy, and it pays the premiums. In the event of an insured employee’s death, the bank receives the death benefit.

One of the main reasons banks purchase BOLI is to offset the costs of employee benefits, such as pensions and healthcare. By investing in BOLI, banks can earn a return on the premiums paid, which can help cover the costs of these benefits. Additionally, BOLI can provide a tax-free source of income for the bank, which can be used to fund other initiatives or investments.

How BOLI works

Banks typically purchase BOLI policies on key executives or other employees as a way to offset the costs of employee benefits and executive compensation. The policies are often funded with pre-tax dollars and offer death benefits that are typically tax-free.

One of the advantages of BOLI policies is that they can provide a source of liquidity for the bank. If an executive covered by a BOLI policy were to pass away, the bank would receive a death benefit that could be used to cover expenses or invest in the business. Additionally, BOLI policies can be used to retain key employees by offering them a valuable benefit that can help secure their financial future.

However, there are also potential drawbacks to BOLI policies. Some critics argue that they can be expensive and that the tax benefits may not outweigh the costs. Additionally, there have been cases of banks using BOLI policies inappropriately, such as purchasing policies on employees who are not key executives or using the policies as a way to generate income rather than as a legitimate employee benefit.

Advantages of BOLI for banks

There are several advantages to banks for purchasing BOLI policies. For example, the policies can provide a tax-efficient way to offset employee benefit costs and executive compensation expenses. Moreover, the policies can provide a source of earnings that is not tied to traditional banking activities and have very low correlation with the broader equity markets.

Another advantage of BOLI policies for banks is that they can help attract and retain top talent. By offering executives and key employees a valuable benefit like BOLI, banks can differentiate themselves from competitors and create a more attractive compensation package. This can be especially important in industries where talent is in high demand and competition for skilled workers is fierce.

Additionally, BOLI policies can provide banks with a measure of protection against unexpected events. For example, if a key executive were to pass away unexpectedly, the bank could use the death benefit from the BOLI policy to help cover the costs of finding and training a replacement. This can help mitigate the financial impact of such an event and ensure that the bank can continue to operate smoothly.

Benefits of BOLI for employees

BOLI can also provide benefits to bank employees. For instance, the policies can be used to fund non-qualified retirement plans or provide additional death benefits for employees. Additionally, some banks may offer their employees the option to purchase policies on their own lives, providing a voluntary life insurance benefit that can be used to supplement other benefits.

Another benefit of BOLI for employees is that it can provide a sense of financial security. Knowing that their employer has invested in a life insurance policy on their behalf can give employees peace of mind, especially if they have dependents or other financial obligations. This can also help with employee retention, as employees may be more likely to stay with a company that offers such benefits.

BOLI can also be used to provide key person insurance for executives or other key employees. This type of policy can help protect the bank in the event of the unexpected death of a key employee, by providing funds to cover the costs of finding and training a replacement, as well as any lost revenue or other expenses. This can be especially important for smaller banks or those with a limited number of key employees.

Tax implications of BOLI

From a tax perspective, the premiums paid for BOLI policies are typically tax-deductible for banks. Furthermore, BOLI death benefits are usually tax-free, making them an attractive option for both banks and employees.

It is important to note, however, that there may be tax consequences if the BOLI policy is surrendered or sold before the death of the insured employee. In such cases, any gain on the policy may be subject to taxation. Additionally, the tax treatment of BOLI policies can vary depending on the specific circumstances and should be carefully considered before making any decisions.

Risks associated with BOLI investment

Despite its advantages, there are risks associated with investing in BOLI. For example, the policies may carry high fees and commissions, which can significantly reduce their returns. Additionally, the value of the policies’ cash value accounts may fluctuate based on a variety of factors, including interest rates and market volatility. Consequently, it’s crucial to evaluate the financial strength of the carrier to assess the potential for policy performance.

Another risk associated with BOLI investment is the potential for changes in tax laws. If tax laws change, it could impact the tax treatment of the policies, which could affect their returns. It’s important to stay up-to-date on any potential changes in tax laws that could impact BOLI investments.

Furthermore, BOLI investments may not be suitable for all investors. They are typically long-term investments, and if an investor needs access to their funds in the short-term, BOLI may not be the best option. It’s important to consider an investor’s overall financial goals and risk tolerance before investing in BOLI.

Types of policies used in BOLI

There are different types of policies that can be used in BOLI, including universal life, variable universal life, and whole life insurance. The choice of policy typically depends on the bank’s objectives and risk tolerance. Variable universal life insurance offers the potential for greater returns but also higher risk due to the variability associated with equity investments. On the other hand, whole life insurance policies typically offer more stable cash value accounts but may offer lower long-term returns.

It is important for banks to carefully consider their options when choosing a policy for BOLI. Factors such as the bank’s financial goals, the age and health of insured employees, and the bank’s overall risk management strategy should all be taken into account. Additionally, banks should regularly review and adjust their BOLI policies to ensure they continue to align with their objectives and risk tolerance.

How to evaluate the financial strength of a BOLI carrier

When considering a BOLI investment, it’s crucial to evaluate the carrier’s financial strength, claims-paying ability, and policy performance. A thorough analysis of the carrier’s financial statements, ratings, and management team is necessary to determine whether they can meet their repayment obligations concerning the policy. A carrier’s ratings can be obtained from third-party financial rating services, such as Standard & Poor’s or Moody’s.

Another important factor to consider when evaluating the financial strength of a BOLI carrier is their investment portfolio. A carrier with a well-diversified portfolio that includes high-quality assets is more likely to have the financial stability to meet their obligations. It’s also important to consider the carrier’s history of investment performance and their risk management strategies.

In addition to financial strength, it’s important to evaluate the carrier’s reputation and customer service. A carrier with a strong reputation for customer service and responsiveness can provide peace of mind to policyholders and beneficiaries. It’s also important to consider the carrier’s track record of paying claims promptly and fairly, as this can impact the overall value of the policy.

Differences between BOLI and corporate-owned life insurance (COLI)

BOLI and corporate-owned life insurance (COLI) are often compared and contrasted. While they share similarities, such as providing tax-efficient death benefits, there are important differences. BOLI typically involves using a bank’s capital to fund the policies. In contrast, COLI policies are often purchased by companies as a means of key-person protection. As a result, the risks associated with a company’s investment in COLI may differ from those associated with BOLI.

Another key difference between BOLI and COLI is the way in which the policies are structured. BOLI policies are typically owned by the bank, with the employees being named as beneficiaries. In contrast, COLI policies are owned by the company, with the company being the beneficiary. This means that the company has more control over the policy and can use the death benefit in a way that best suits its needs. Additionally, COLI policies can be used to fund employee benefits, such as retirement plans, while BOLI policies cannot.

Top companies offering BOLI policies

Lastly, when considering BOLI investment, it’s crucial to choose the right company. Some of the top companies offering BOLI policies include Northwestern Mutual, New York Life, MassMutual, and Principal. Careful analysis of their policy offerings, financial strength, and other factors should be considered to make an informed decision.

Northwestern Mutual is a top-rated company that offers BOLI policies with competitive rates and flexible options. They have a strong financial rating and a long history of providing quality insurance products. Additionally, they offer personalized service and support to their clients.

New York Life is another reputable company that offers BOLI policies. They have a wide range of policy options and a strong financial rating. They also have a reputation for excellent customer service and support. Their policies are designed to meet the unique needs of businesses and organizations.

Case studies of successful utilization of BOLI by banks

There have been numerous successful utilization of BOLI by banks, to name a few, Webster Financial Corporation, MidFirst Bank, and Union Bankshares, Inc. All three financial institutions were able to achieve high returns from their BOLI investments, offset employee benefit costs, provide additional retirement benefits, and compensate executives more effectively.

In conclusion, BOLI is a complex financial instrument that banks can use to provide benefits to their employees and offset costs. However, careful consideration is required before investing in BOLI. It’s crucial to consider a variety of factors, such as tax implications, policy performance, and financial strength, that influence the likelihood of success.

One of the key benefits of BOLI is that it provides a tax-efficient way for banks to fund employee benefits. This is because the cash value of the policies grows tax-deferred, and the death benefit is generally tax-free. This can result in significant savings for banks, especially those with large employee benefit programs.

Another advantage of BOLI is that it can help banks attract and retain top talent. By offering additional retirement benefits and executive compensation, banks can incentivize key employees to stay with the company long-term. This can be particularly important in a competitive job market, where talented employees are in high demand.