Many banks have progressively tapped into bank owned life insurance policies in the past two decades. Since 2004. when The Interagency Statement on the Purchase and Risk Management of life insurance was released, this trend skyrocketed. According to the NFP-Michael White BOLI Holdings Report for Q3 2020, two-thirds of banks in the U.S. hold BOLI assets. The cash surrender value of those policies totals $182.2 billion.
We would like to bring to light some vital information regarding bank-owned life insurance without making it sound too complicated.
In this article, we will cover:
- What is bank-owned life insurance?
- Types of BOLI accounts
- Key reasons banks purchase BOLI
- Who is paying insurance premiums?
- When are benefits paid?
- Advantages and Disadvantages of BOLI.
- Bank-owned life insurance for personal use
- Final thoughts
Now we can have a closer look into the topics we would like to introduce to you.
What Is Bank Owned Life Insurance?
Bank-owned life insurance, or BOLI, is a type of permanent life insurance bank purchases with an idea to offset existing employee benefit expenses.
A bank purchases life insurance on their key employees to fund employee benefit programs. BOLI must be bought from carriers with good credit quality.
What is typical for BOLI accounts is that they don’t have any surrender charges; thus, the cash surrender value is the same as the cash value and can be used interchangeably.
Therefore, BOLI is a great financial tool for generating income from the growth of the policy’s cash value and tax-free insurance proceeds paid to the bank on the death of an insured. Cash value growth is tax-deferred, and the death benefit is tax-free to the bank.
These economic benefits make BOLI an elegant tool to help offset employee benefit costs.
Types of BOLI Accounts
There’re three types of BOLI accounts: general accounts, separate accounts, and hybrid accounts. We’ll show you the purpose of each of them.
General account is one of the most common types of accounts. In this case, BOLI cash value is backed up by assets in the general account of the insurance carrier.
The bank pays an insurance premium to the insurance company. The company uses the funds as it determines fit while taking the responsibility to make strategic investments and obtain the best return.
This type of account is a good solution for financing pre-and postretirement employee benefits liabilities for community banks and regional and large banks.
A general account is very similar to a general account. In this scenario, the carrier separates their assets from their general account into bank-eligible investments managed by notable managers.
The fund managers prepare detailed reporting of the assets within the portfolio. The carrier determines the crediting rate using the lowest possible yield to be received on a bond with an early retirement plan.
Nonetheless, there is no minimum crediting rate guaranteed. To provide downside protection, you can purchase stable value insurance.
There is a more associated risk for the investments with a separate account. On the other hand, there is potential for a more considerable gain.
As you assume by the name, the hybrid account combines the previous two types of accounts.
The hybrid account approach takes the best characteristics of the general and separate accounts. It provides you with the transparency of a separate account, and at the same time, offers the stability of a general account by providing a guaranteed crediting rate.
Neither of these two accounts is subject to the insurance carrier’s creditor, which gives another level of protection to the bank. The hybrid account offers the best of both worlds.
Key Reasons Banks Purchase BOLI policies
Financial institutions often own BOLI to offset the future costs of employee benefits. Banks can buy BOLI with employee compensation and benefit plans, key person insurance, insurance to recover the cost of postretirement employee benefits, insurance on borrowers, and insurance used as collateral for loans.
A well-designed BOLI contract can provide a tax-efficient method that offers the bank a high-rated investment.
Furthermore, enlarged tax-free income generated within BOLI can offset the cost of existing employee benefits. It also offers tax-free death benefits to safeguard the financial institution from the loss of a key employee, and at the same time, protects and increases shareholder value.
Last but not least, Cash Values are backed by the most notable insurance companies in the U.S.
Who Is Paying Insurance Premiums?
The bank is responsible for paying the premiums, owns the cash surrender value of the policies, and is the beneficiary upon the death of an employee.
The bank can pay annual insurance premiums or in one lump sum upfront. Usually, banks opt for a single premium deposit.
When Are Benefits Paid?
The policies are often bought on the lives of the senior executives, and the death benefit is paid when the insured dies. Permanent life insurance death benefits consist of the cash value and the NAR.
Nonetheless, BOLI doesn’t have to last until it results in a death claim. The policy can be surrendered at any time for its cash surrender value, but the bank would be required to pay taxes on all the gains. With that said, since BOLI is an illiquid asset, it works the best when the bank holds the policy until the death of the essential employees.
To conclude, to receive the full economic benefits of the BOLI program, you should treat it as a long-term asset.
Advantages and Disadvantages of BOLI policies
There are always two sides to the coin; bank owned life insurance included. We highlighted the main advantages and disadvantages of BOLI policies you should bear in mind.
BOLI generates quick gains that can help fund employee benefits programs. These benefit plans extend from qualified plans such as pensions to group health benefit plans and supplemental benefits to attract and retain key employees. Investing in such a program provides banks with a tax-deferred cash value growth, while death benefits are tax-free.
Risks when purchasing bank-owned life insurance are well within usual business risks.
Yet another attractive feature of BOLI policy is that it is immediately earnings accretive, which means that it provides a gradual increase in earnings.
Bank-owned life insurance is a long-term asset. However, financial institutions can surrender it at any time without policy charges.
Still, the downside is that the gains within the policy become taxable, and there is a 10% IRS penalty on the gain. On the other hand, if the policy is held to the death of each insured, the gain becomes part of the tax-free death benefit, and no tax is incurred.
In real life, the biggest concern for most banks is the credit quality of the BOLI carrier, which can change over time.
Another concern is the competitiveness of the crediting rate in comparison to the market. In this case, the bank may surrender the policies and pay taxes or execute an IRC Section 1035 exchange of the policy to a different carrier. A 1035 exchange is similar to a tax-free IRA rollover.
Bank-Owned Life Insurance for Personal Use
An individual can purchase BOLI through a financial institution.
For example, you decide to invest $50,000 in a one-year credit of deposit (CD) with a bank, and you’ll receive a return of 1.5% on your investment. You give the bank permission to take a portion of that $50,000 and reinvest it at a fixed rate with an insurance company of choice as BOLI. The current fixed rate for BOLI is 3.65%. In this way, you doubled your return.
Non the less, bear in mind that this is not a replacement for legal or tax advice, and be sure to seek those from an accredited professional.
Invest in Your Future – Infinite Banking
If you are looking for the best way to invest in your future while becoming your own bank manager, we would like to introduce you to Infinite Banking Concept.
Infinite banking is the strategic use of mutual life insurance as a separate perpetual banking system. Instead of borrowing from the bank, this lending feature allows you to borrow money from yourself (the entire life insurance policy) and pay it off over time.
These beneficiaries create the same endless banking system, accumulating household wealth and managing their finances according to their financial goals and needs. The whole system works only if premiums for the entire life insurance policy are paid.
- Overfunding (with after-tax funds) a high cash value whole life insurance policy from a life insurance company
- Accumulation of Cash Value(tax-free) throughout the years you are a policyholder of your Whole Life insurance policy.
- Tax-Free Loans taken out against your whole life insurance policy’s cash value to use for your financial expenses.
Infinite Banking allows individuals and families to strive better and manage their finances to meet their unique financial goals without dealing with bank fees or loan interest rates.
We hope this article has given you all the information you need about BOLI insurance, who it is for, and how it works.
But if you want to secure your life and gain financial freedom, consider infinite banking. Wealth Nation shows you how to manage, earn, use and grow your money completely independently with life insurance. If you would like to become a part of the Wealth Nation community and learn how to advance your financial independence, sign up for our premium membership!