Bank-Owned Life Insurance (BOLI): Who Can Invest + An Alternative

Life insurance policies are no longer purchased for life coverage only. Many of them, including Bank-Owned Life Insurance, provide tax advantages and a way to multiply your money

How to invest in BOLI and who can do it is a burning question, and the answer will surprise you.

Let’s dive in!

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    What Is Bank-Owned Life Insurance?

    Banks and other financial institutions purchase Bank-Owned Life Insurance (BOLI) as a type of life insurance policy for their employees. Usually, they buy this insurance coverage for their high-level employees, like senior executives and managers. It is also known as “corporate-owned life insurance (COLI).”

    The purpose of BOLI is to provide the bank with financial benefits, such as tax advantages and a potential source of income. The bank pays the premiums for the insurance policy and becomes the beneficiary. In other words, the bank will receive the death benefit upon the death of the insured employee.

    BOLI policies are typically permanent life insurance policies. Permanent life insurance has two main features: 

    • It lasts for as long as the policy owner pays the premiums (in other words, for an entire lifetime).
    • And it has a savings component called cash value that accumulates over time. 

    A policyholder can use the cash value even during their lives. In the case of BOLI, the bank is a policy owner, and they may use the cash value throughout the employee’s lifetime.

    Banks can use money from bank-owned life insurance policies for a variety of things. Usually, they use it to fund employee benefits, as a source of liquidity, or to defray the cost of insurance premiums

    Advantages of BOLI

    There are several advantages associated with Bank-Owned Life Insurance. Firstly, the BOLI cash value grows on a tax-deferred basis, meaning that the bank does not have to pay taxes on the investment gains until they are withdrawn. 

    More importantly, the bank will have a tax-free death benefit. Moreover, BOLI can help banks recover some of the costs associated with providing employee benefits and potentially generate additional income.

    It’s worth noting that Bank-Owned Life Insurance has been subject to regulatory scrutiny, and certain restrictions have been imposed to ensure that it is used appropriately. The specific regulations and guidelines may vary depending on the jurisdiction.

    Bank insurance premium at the age of 45, 50, 55

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    Different BOLI Accounts

    Bank-Owned Life Insurance (BOLI) is typically held in different types of accounts within the bank. The main types of accounts associated with BOLI include the following:

    General Asset Accounts (GAAs)

    GAAs are the most common type, where the bank’s general assets back the BOLI policies. This means the bank assumes the investment risk and controls the investment strategy.

    Separate Account (SA)

    SA accounts are separate from the bank’s general assets, and the cash value is invested in specific portfolios chosen by the policyholder. The policyholder bears the investment risk and returns potential.

    Hybrid Account

    A hybrid account combines features of both GAAs and SAs, allowing a portion of the cash value to be invested in separate accounts while the bank’s general assets back the remaining portion. 

    The choice of account depends on factors like risk appetite, investment control, and potential returns that align with the bank’s objectives.

    How Does Bank-Owned Life Insurance (BOLI) Work

    Here’s how BOLI works:

    1. Policy acquisition: The bank identifies key employees they want to provide insurance to. These individuals are typically executives or high-ranking personnel who contribute significantly to the bank’s success. The bank purchases life insurance policies on their behalf.
    2. Policyholder and premium payments: When a bank purchases life insurance on an employee, it has the option to pay annual insurance premiums or all premiums in one lump sum upfront. These premiums are typically funded using the bank’s own resources.
    3. Death benefit and tax advantages: In the event of an employee’s death, the bank receives the death benefit from the insurance policy. This benefit is usually tax-free, providing a substantial financial cushion for the bank. The bank can use it to cover potential losses or finance employee benefits.
    4. Cash value growth: BOLI policies often accumulate cash value over time. The cash value grows tax-deferred, meaning the bank does not pay taxes on the gains as long as the policy remains in force. This can serve as an additional source of income for the bank.
    5. Employee retention and recruitment: BOLI can be used as an attractive employee benefit, offering a death benefit to the employee’s beneficiaries. It can also act as an incentive to retain top talent or attract new skilled professionals to the bank.
    6. Regulatory considerations: BOLI is subject to regulatory guidelines, including compliance with banking and insurance regulations. Banks must adhere to applicable laws, disclosure requirements, and proper documentation when implementing BOLI strategies.
    Categories of bank owned life insurance.

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    Key Reasons Banks Purchase BOLI

    Banks purchase bank-owned life insurance for several key reasons, including the following:

    • Tax efficiency: This insurance provides tax-deferred growth on the cash value component, allowing them to accumulate funds without immediate tax implications.
    • Cost offsetting: Banks usually purchase BOLI with the idea of offsetting existing employee benefit expenses.
    • Liquidity: Banks can rely on BOLI as a vital source of liquidity for both emergency situations and strategic opportunities.
    • Financial protection: Because of the death benefit, banks have financial protection in the event of an employee’s death. On top of that, it helps offset employee benefit costs and potential operational disruptions.
    • Asset growth: The cash value component has the potential to grow over time, providing a return on excess capital.
    • Risk management: BOLI policies offer a combination of tax advantages, asset growth potential, and cost-offsetting benefits, contributing to the bank’s overall risk management strategies.
    • Tax-free death benefits: Proceeds are used to fund employee benefits. When the bank is the beneficiary of the policy, and the insured employee dies, the death benefit paid to the bank is typically received tax-free. The tax-free benefits are derived from the tax code section 101(a)(1) of the Internal Revenue Code (IRC), which states that death benefits from life insurance policies are generally considered tax-free income.
    Small bank's BOLI boom

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    BOLI Disadvantages

    While Bank-Owned Life Insurance (BOLI) can offer benefits to banks, it’s important to consider some potential disadvantages:

    • Complexity. It involves compliance with banking and insurance regulations, as well as proper documentation and reporting. The regulatory landscape surrounding BOLI can be intricate, requiring expertise and ongoing monitoring to ensure compliance.
    • Illiquidity. These policies are long-term commitments, and their cash value may not be easily accessible. Banks must be prepared to hold the policies for an extended period to maximize their benefits. If the bank needs immediate access to cash, it may face limitations or surrender charges.
    • Investment risk: BOLI policies often invest the cash value in a variety of assets, such as bonds or other fixed-income instruments. While these investments are generally conservative, there is still some level of investment risk involved. Poor investment performance could result in lower cash value growth than anticipated. The Executive Benefits Network typically recommends diversification when making BOLI purchases.
    • Cost and premiums: Monthly premiums can be substantial, particularly for policies covering multiple employees or high coverage amounts. The cost of premiums can impact the bank’s profitability and cash flow.
    • Employee perception: Some employees may have concerns about BOLI policies. They view it more as a benefit to banks than themselves. Communicating the purpose and benefits of BOLI effectively to employees is essential to mitigate any potential negative perceptions.
    • Regulatory changes: The regulatory environment surrounding BOLI is subject to change. Regulatory updates or shifts in tax laws could impact the tax advantages associated with BOLI policies. Banks must stay informed and be prepared to adapt their strategies accordingly.

    Who Can Invest in BOLI

    If you’re reading this article and think, “This is amazing! How can I invest in BOLI?” We have some bad news.

    BOLI is a specialized insurance product typically available only to banks and other financial institutions. It is designed to meet their unique needs and objectives. As such, individual investors or the general public can’t invest in BOLI policies. 

    BOLI vs. Market Yields

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    Better Alternative to Invest

    But, we also have some great news.

    Even though you, as an individual, can’t invest in BOLI, you can invest in an alternative that is even more advantageous.

    If you regularly read our blogs and watch YouTube videos, you know what we have in mind. If not, get ready to be blown away.

    A much better option for you is a whole life insurance policy. And here is why.

    Whole life insurance benefits

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    With BOLI Unavailable, Learn Everything About Whole Life Insurance

    A whole life insurance policy is also a type of permanent life insurance that has a cash value component. You, as an individual, can buy this type of policy from an insurance company.

    Whole life insurance is a comprehensive and advantageous financial tool that offers individuals and their loved ones a sense of security and protection. This type of insurance provides lifelong protection, ensuring that the beneficiaries are financially supported no matter when the insured dies.

    One of the significant advantages of whole life insurance is the cash value component, which grows over time and can be used during your lifetime. You can use these funds for various purposes, such as supplementing retirement income, paying off debts, or covering unexpected expenses.

    But there is more.

    Whole life insurance policies often come with fixed premiums, meaning your payments remain stable throughout your life, even as you age or face health issues. Also, whole life offers tax-free death benefits, just like BOLI does.

    By purchasing whole life insurance, you can provide your loved ones with a lasting financial safety net while enjoying the benefits of cash accumulation during your lifetime.