Bank Owned Life Insurance “BOLI”
Navigating the BOLI maze requires knowledge, experience and attention to detail, all of which are critical components of a successful BOLI purchase and ongoing BOLI administration.
With Bank Consulting Group as your BOLI partner, your bank will be provided with an excellent combination of experience, customer service and plan administration.
Bank Consulting Group, inc. offers the following BOLI services:
- BOLI Education
- BOLI Design
- BOLI Pre-Purchase Analysis
- BOLI Regulatory Compliance
- BOLI Implementation & Communication
- BOLI Administration
- Existing BOLI Review
What is BOLI?
Bank Owned Life Insurance (“BOLI”) encompasses all life insurance that a bank purchases and either owns or in which it has a beneficial interest. For many years, banks have been purchasing life insurance on the lives of Directors, officers and employees with the banks as the owners and beneficiaries of the policies. These policies have been typically acquired to recover all or a part of the costs of the bank’s employee compensation and benefit programs.
BOLI is most commonly designed as a single premium life insurance contract specifically designed to earn tax-free income. BOLI’s tax-free income is generated by the increase in cash value of the policy and insurance proceeds paid to the bank when an insured dies.
Most traditional bank investments create taxable interest income. In contrast, BOLI results in no current income tax liability for the earnings generated each year. Earnings are sheltered inside the life insurance contract and are therefore tax-deferred. When a death occurs, the bank receives life insurance proceeds tax-free. By reinvesting funds from traditional portfolio investments into BOLI, a bank can typically increase its yield by 100 to 350 basis points depending upon marginal tax rates, the size of the transaction, the type of policies selected and the demographics of the key employees to be insured.
Benefits of BOLI
Properly designed and implemented;
- BOLI provides a tax-efficient means to improve overall bank revenue compared to treasuries, municipals, and other bank-eligible financial instruments.
- BOLI income is considered “other income” on the bank’s financial statements.
- The growth of the policy cash value is tax-deferred.
- The BOLI proceeds are tax-free if held until death.
- The purchase of BOLI is considered a minimal credit risk if the policies are placed with a highly-rated life insurance carrier (AAA or AA rated).
BCG has a team of experienced consultants dedicated to assisting banks with the development of BOLI plan designs. Based on an in-depth assessment of your bank, BCG will work directly with you and create a plan to produce results that align with your business goals and the needs of your employees — thereby adding substantial value to your organization and plan participants.
OCC Bulletin 2004-56 and related Interagency guidance stress that a BOLI purchase should follow the same safe and sound banking practice as any other bank decision. When conducting its pre-purchase analysis for risk management and product features, it may serve the bank to conduct the analysis in much the same manner as it would a loan. What are the terms of the loan? What are the assets backing the loan? What are the credit ratings of the collateral?
Before accepting assertions about the various product offerings, all relevant factors must be considered. The regulatory agencies have laid out specific criteria for the evaluation of BOLI, both in a bank’s pre-purchase analysis and its ongoing risk management. A bank may wish to consider such issues as:
- The benefits of a well-diversified underlying portfolio versus a separate account of bank-eligible assets,
- accounting issues with separate account products with a stable value rider that might create uncertainty regarding the realization of a policy’s full cash value, and
- Long-term product performance versus short-term return. Because any purchase of BOLI is a long-term commitment, it is important that the risks, rewards, and unique characteristics of BOLI are understood.
BOLI Regulatory Compliance
The Office of the Comptroller of the Currency bulletin OCC 2004-56 provides banks with comprehensive guidelines for purchasing Bank Owned Life Insurance. In this bulletin, the OCC expresses the fact that BOLI can be a useful product to recover costs associated with providing employee benefits. The bulletin also stresses the importance of the evaluation process and properly assessing the risks associated with BOLI. Navigating through some of the analysis requirements can be challenging, and documentation of the process is critical to show that the proper pre-purchase analysis was completed.
BCG monitors the BOLI regulatory environment on a regular basis, and updates its clients frequently with regard to changes in carrier ratings and product issues, as well as BOLI regulatory changes. In addition, BCG’s comprehensive compliance manual will assist in answering questions that may come from an auditor, and will be a record of the work that was done to ensure compliance with regulatory guidelines.
Review Existing BOLI
For years, bankers have utilized BOLI as a competitive alternative investment to improve the bank’s ROA and P&L. In fact, with proper design and the selection of the right product, bankers have enjoyed after-tax BOLI returns that, many times, have outperformed holdings in treasuries, agencies, and municipal bonds.
Just like other investments in the bank’s investment portfolio, bank management should periodically review its BOLI portfolio to verify that the product design and the BOLI carrier are optimizing performance and maintaining the desired asset credit quality respectively.
In addition, banks should evaluate the services, as well as the quality of those services, being provided by the current BOLI service provider. Getting access to information quickly and easily will help ensure that the bank is fulfilling its oversight responsibilities.
Note: Insurance products are not a deposit or other obligation of or guaranteed by, any bank or bank affiliate, are not insured by the FDIC or any other federal government agency, or by any bank or bank affiliate, and may be subject to investment risk, including possible loss of value.
And, guarantees with the BOLI products are subject to the claims paying ability of the issuing insurance company.