BOLI: Bank Owned Life Insurance, the What and the Why

Bank Owned Life Insurance: Executive Overview

• Bank Owned Life Insurance (BOLI) is an institutional financial product used by the majority of U.S. banks.
• BOLI involves the purchase of single premium institutionally-priced permanent life insurance on eligible consenting bank officers. The bank is the owner and beneficiary of the policies.
• Initial lump-sum premium investment equals cash surrender value on day one.
• Products are no-load, no-surrender charge and all of the income is tax-free if policies are held to maturity.
• Banks may hold up to 25% of regulatory capital (Tier 1) in BOLI. Many banks own 15% to 25%.
• To emphasize earnings, policies are structured to maximize investment aspects and minimize expense of death benefit portion of policy.
• BOLI generates non-taxable profit and loss (P&L) earnings equal to the growth in cash surrender value.
• A portion of the death benefit may be shared with insured officers via a supplemental life insurance plan.

Why Do Banks Use BOLI?

Bank Owned Life Insurance (BOLI) is a desirable asset for banks. It is used by over 3,200 banks nationwide to offset the rising costs of employee benefits programs. Over $188 billion of BOLI cash values reside on bank balance sheets.

Challenges for Bank Leadership:

• Attracting and retaining quality management talent
• Creating management incentives
• Restoring retirement income shortfalls for key executives
• Balancing risk with reward for directors

BOLI matches the long-term nature of benefit plan liabilities, while typically providing a higher after-tax return than other bank eligible investments. In a BOLI transaction, the bank insures the lives of a group of select management, pays the premium, owns the cash value and is the beneficiary of the death benefit of the policies.

Bank Owned Life Insurance: Achieve Financial Balance

BOLI may be used for benefit purposes such as:

• Provide benefits to key employees
• Retain top directors & executives
• Protect against loss of critical individuals

BOLI as an asset will:

• Offset existing benefit costs
• Post tax advantaged earnings
• Maximize investment yields
• Improve bottom line

BOLI OPPORTUNITY (example only) 

Chart includes representational information for illustrative purposes only.

Data for this article was sourced from the Office of the Comptroller of Currency