Q&A: Bank Owned Life Insurance (BOLI)

What is Bank-Owned Life Insurance? In short, BOLI is a tax-efficient method banks use to generate additional income as a means to offset employee benefit expenses.

How does BOLI work? The bank purchases and owns a life insurance policy on an executive(s) life and is the beneficiary.  Cash surrender values grow tax-deferred within the policy, providing the bank with monthly bookable income. Upon the executive’s death, tax-free death benefits are paid to the bank.

Why do banks purchase BOLI? Banks purchase BOLI for various reasons.  The primary reasons are to fund executive benefit programs and to recover losses associated with the death of a key person.

How does BOLI help recruit, retain and reward top talent?  When properly structured, BOLI generates earnings used to offset expenses related to executive and employee benefits, including those used to help recruit, retain and reward top talent such as SERPs & Deferred Compensation Plans and other benefits. Additionally, BOLI helps protect against key-person loss.

Why is BOLI so popular? Nearly 75% of banks with $250 MM or greater in assets hold BOLI. For decades BOLI has been used as an efficient tax favored asset to finance employee benefit programs but BOLI’s popularity as of late is likely due to the current market conditions.  High tax rates and ever rising employee benefit costs are driving more banks to evaluate BOLI, which typically provides higher returns than other permissible investments. Additionally, increasing interest rates have improved BOLI yields, making them more attractive.

Are there any benefits for the bank executive insured in a BOLI program? A bank can elect to share a portion of the insurance policy death benefit with the employee’s beneficiary. Shared death benefit programs are common and provide executives, and their beneficiaries, life insurance protection beyond group term life insurance protection which typically has shortfalls for highly compensated employees.  Death benefits can be shared while the individual is employed at the bank or continue into post- retirement years.

Is BOLI a short-term or long-term investment? BOLI is a long-term investment. Unlike other individual life insurance policies which rely on loans for distributions, BOLI is held until death of the key executive. The nature of this design generates consistent bookable income and a tax-free death benefit for the bank which is typically shared with the key executive’s beneficiary.

Can an individual buy BOLI? No, individuals are not eligible to purchase BOLI.  BOLI is a product reserved specifically for the banking industry and is purchased by the organization, not an individual.


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