Terry Bork CLU ChFC, President   |   Aurum Insurance Services   |   D: 440-605-7230   |   C: 440-666-6032   |   tbork@auruminsurance.com   |   www.auruminsurance.com

Bank-Owned Life Insurance (BOLI)

Bank-Owned Life Insurance (BOLI) is used as a tax-efficient method for offsetting the costs of employee benefit programs. The cash value growth in the policy is tax-deferred (tax-free if held until death) and the death benefits are tax-free. The policies insure the lives of key employees and/or bank directors.

The Reasons for the Popularity of BOLI Financing

  • Tax-favored returns that exceed the after-tax returns of more traditional bank investments by 150 to 300 basis points 
  • Cash values grow tax-deferred (tax-free if held until death) 
  • Death benefits are tax-free 
  • Ability to efficiently generate gains to offset costs associated with employee benefits programs 
  • Products are designed specifically for financial institutions 
  • Products are generally immediately accretive to earnings 
  • Risks are within standard business risks in the bank’s investment portfolio 
  • Well-defined guidance on permissible usage by regulatory authorities 
  • No surrender charges 
  • Diversifies investment portfolio 
  • Ability to immediately increase ROE and ROA 

How BOLI Works

A bank purchases the life insurance with either a single premium, or a series of annual premiums, on a select group of key employees and/or bank directors. The bank is the owner and beneficiary of the policy.

The cash value growth within a BOLI policy produces a return greater than the opportunity cost, or what the bank would have made in an alternative investment and is used to offset the costs of employee benefit programs.

The accounting for BOLI is governed by FASB Technical Bulletin No. 85-4 as incorporated in ASC 325 Investments-Other and should be recorded on the balance sheet as “other assets.” The increase in cash surrender value during a specific period, as well as the final net insurance proceeds at maturity, is recorded as “other income.”

BOLI is a long-term asset and, when properly implemented and administered, offers the bank a highly rated investment option.

Selecting a Vender

One of the critical decisions a bank will make is the selection of an appropriate vendor who will coordinate the bank’s BOLI services over the long-term life of the program. The role of the vendor is crucial to the success of a well-designed, implemented, and administered BOLI financing program.

While there is no requirement that a bank use a vendor’s services, the complexity of the BOLI transaction and extensive ongoing compliance and administrative resource requirements make it highly advisable.

The vendor assists the bank in understanding the insurance products as well as determining the risks associated with the product design features so that the bank fully comprehends the reason for and risks associated with the BOLI purchase.

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