Do Banking Failures Hold Any Implications for Bank Owned Life Insurance (BOLI)?

Do the March 2023 banking failures signal problems for Bank Owned Life Insurance (BOLI)? Should banks, their boards, or their customers be concerned?

With the recent collapse of Silicon Valley Bank (SVB) and Signature Bank, Americans understandably have questioned the security of their money. In fact, nearly all U.S. banks are insured by the Federal Deposit Insurance Corporation (FDIC), which is backed by the full faith and credit of the United States government.

Bank Stability in the United States

The FDIC is an agency created by Congress “to maintain stability and public confidence in the nation’s financial system.” Since the founding of the FDIC in 1933, no U.S. depositor has ever lost a penny of FDIC-insured deposits, and this includes depositors with money in covered account types at both SVB and Signature Bank.

While most people understand that the FDIC insures deposits up to $250,000 per account, they may not realize that through multiple accounts or joint accounts, they may actually be FDIC-insured for up to $1 million on money deposited with a single bank. (Learn more here: Understanding Deposit Insurance)

In addition to potentially benefiting from FDIC insurance coverage on deposits greater than $250,000 at a single bank, people also have the option to increase their peace of mind by banking with more than one financial institution.

At all times, the fundamental financial perspectives of investing for long-term results, diversifying investments to reduce exposure, and understanding associated risk when applicable, remain a prudent approach.

What (if Anything) Do Bank Failures Indicate Regarding Bank Owned Life Insurance?

Bank Owned Life Insurance, or BOLI, is an institutional insurance product that banks typically purchase in connection with director or employee compensation and benefit plans, key person insurance, insurance to recover the cost of providing pre- and post-retirement executive benefits, insurance on borrowers, and insurance taken as security for loans. Additionally, the Office of the Comptroller of the Currency may approve other uses of BOLI on a case-by-case basis.

The FDIC describes the use of BOLI, saying, “Because the cash flows from a BOLI policy are generally income tax-free if the institution holds the policy for its full term, BOLI can provide attractive tax-equivalent yields to help offset the rapidly rising cost of providing employee benefits.”

“A well-designed BOLI policy can be a tax-efficient asset on a bank’s balance sheet, potentially enhancing a bank’s stability. As Chris Nyland, OneDigital Vice President – Retirement states, “In my opinion Bank failures have no direct impact on bank owned life insurance.”

Nearly two decades ago, the FDIC established guidance on safe and sound banking practices for purchasing bank owned life insurance. This guidance remains in effect today.

• Institutions should have a comprehensive risk management process for purchasing and holding bank-owned life insurance (BOLI).
• The safe and sound use of BOLI depends on effective senior management and board oversight.
• Institutions should establish policies and procedures governing their BOLI holdings, including meaningful risk limits.
• A sound pre-purchase analysis helps ensure that institutions understand the risks, rewards and unique characteristics of BOLI.
• Institutions also should monitor BOLI risks on an ongoing basis subsequent to purchase.

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