BOLI
Bank Owned Life Insurance

 

 

 What is BOLI?

  • Institutionally priced single premium life insurance for financial institutions that functions like an investment
  • Bank is owner and beneficiary of insurance insuring the lives of officers, directors and key employees
  • BOLI is a mechanism for financing new or existing benefit expenses such as non-qualified or qualified retirement plans, medical and other group insurance benefits
  • Cash value growth is tax deferred and death benefits are tax-free creating a long-term tax leveraged investment that immediately increases earnings

Thousands of community banks and thrifts have successfully implemented a BOLI (Bank Owned Life Insurance) program. BOLI provides financial institutions with the following advantages and opportunities:

  • Ability to fund employee and/or executive benefits on a tax favored basis
  • Attractive investment options managed by top tier investment managers
  • Enhanced “other non-interest income”
  • Stable income statement results
  • Allows the bank to implement a plan to offset the liability of employee benefit expenses, while, at the same time, enhancing the banks financial performance
  • BOLI earns a higher after tax yield than most “bank eligible” investments
  • First year cash value is always in excess of the deposit, thus resulting in a positive impact on the Bank’s profit and loss statement
  • BOLI matches the long term nature of benefit plan expenses

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BOLI Product Types

There are two primary types of BOLI contracts; General Account and Separate Account:

 

General Account

  • General Account products are sometimes referred to as “bundled” contracts because all calculations are done internally by the insurance carrier.
  • General Account products are simpler in nature than Separate Account. The buyer pays a premium to the insurance carrier and the carrier invests the money in their portfolio account.
  • The carrier declares an interest rate for the BOLI product, which is usually guaranteed for the first policy year. For future policy years, the renewal rate will be declared either annually or quarterly. Policy crediting rates have a guaranteed minimum rate of 2% to 4%.
  • In determining the initial and renewal crediting rates, the insurance carrier will deduct a “spread” from the gross crediting rate to cover internal costs.
  • At the end of each month the internal charges are assessed and the interest earned is credited.
  • All general account assets are subject to the carriers creditors, in the event of carrier insolvency.
  • General account products are generally the preferred investment for banks with less than 750 million in assets, because of the simplicity in the product design.
  • General account products are guaranteed to never lose money.

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Separate Account

  • Separate Account products are “unbundled” with all calculations and expenses explicit and contractual.
  • In a Separate Account Product, the BOLI buyer determines the investment strategy and the “risk weighting”.
  • The bank typically selects from Government Security, Mortgage Backed Security, or Fixed Income portfolios.  Risk Weighting ranges from 20% to 100%.
  • Mark to Market volatility is mitigated through the use of a “stable value”accounting treatment. Most stable value features are underwritten by Bank of America or JP Morgan. Some companies offer hybrid products and provide their own internal stable value guarantee.
  • All charges are “asset based” including mortality. The buyer achieves the return of the underlying asset, less the guaranteed explicit expenses.
  • The assets of separate account products are not subject to carrier creditors in the event of carrier insolvency.
  • There is a potential for a loss on the separate account portfolio. However, hybrid products do have minimum guarantees, with no risk of loss.
  • Because of the sophistication needed to manage Separate Account products, they are not generally suggested for banks under $750 million in assets. However, for the sophisticated small bank managers, Separate Account may be a viable investment, coupled with a general account investment to help achieve diversification of risk.

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