An Overview of Bank Owned Life Insurance

Bank Owned Life Insurance (BOLI) is a tax-advantaged asset widely used by both large financial institutions and community banks to offset executive and employee benefit costs and as a strategic investment.

Bank Owned Life Insurance: A Strategic Asset For Forward-Thinking Institutions

BOLI can provide banks with a disciplined, efficient way to enhance earnings while fulfilling long-term employee benefit commitments. With a BOLI plan, a bank purchases life insurance on selected executives or key employees. The policy names the bank as both the policy owner and beneficiary.

The policy’s cash value grows on a tax-deferred basis. When policies are held to maturity, death benefits are received tax-free, providing a steady source of income that can strengthen overall financial performance. On the balance sheet, BOLI appears in “Other Assets.” Growth in cash value or proceeds from claims is recognized as “Other Income.”

Beyond its favorable accounting treatment, BOLI serves a practical business purpose, helping institutions offset the cost of executive and employee benefits, fund retention or key-person life insurance programs and reinforce competitive compensation strategies. When thoughtfully structured and managed, BOLI can be a strategic balance-sheet asset that aligns with both regulatory guidance and sound risk-management principles.

For banks seeking stable, tax-advantaged income with a long-term horizon, BOLI is a tool that can support financial strength while enabling financial institutions to invest in their most valuable assets: the talented employees who drive the bank’s success.

Why Do Banks Use BOLI?

Banks use BOLI to finance or offset the costs of executive compensation and retention strategies, as well as healthcare and general welfare programs throughout the organization. They may also use it to cover recruiting, training, transition and other expenses that occur following the sudden loss of a key employee. According to Bank Director magazine, Bank Owned Life Insurance has historically typically exceeded the after-tax returns seen in investments generally used by banks.

BOLI affords banks a unique opportunity to potentially strengthen performance through tax-efficient growth. The cash value accumulates on a tax-deferred basis, and when policies are held to maturity, the death benefits are received tax-free. These advantages often make BOLI’s after-tax returns more attractive than many other investment options banks traditionally utilize.

BOLI earnings can be used to recover a portion of employee benefit expenses, helping banks manage long-term liabilities more efficiently. Proceeds may be applied across a range of employee and executive benefit programs, giving a financial institution flexibility in funding and sustaining its total rewards strategy.

Designed specifically for financial institutions, BOLI offers institutional pricing and is generally immediately accretive to earnings. The absence of surrender charges under normal conditions and the ability to diversify within the portfolio can make BOLI a valuable strategy for strengthening financial performance while managing risk.

BOLI enjoys broad regulatory acceptance when managed in accordance with established guidelines. The program aligns with the expectations of the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve for safe and sound banking practices, supported by clear and longstanding supervisory guidance.

While Bank Owned Life Insurance is widely used by financial institutions, both as an investment strategy and a way to offset the cost of executive or employee benefits, bank CFOs, Directors and other key decision makers will want to know and understand BOLI’s associated challenges and risks.

Disadvantages of BOLI

BOLI is an illiquid asset. When a bank holds a BOLI policy until the death of the insured, gains on the policy are included in the tax-free death benefit. Taxes on both the benefit and the accrued growth are avoided.

However, even though a bank can surrender BOLI at any time without incurring policy charges, surrendering the policy before the death of the insured can trigger unfavorable tax consequences. In much the same way as surrendering an IRA before the age of 59 and a half creates exposure to taxes and penalties, when a BOLI policy is surrendered early, any gains become taxable and may be subject to a ten percent IRS penalty. For this reason, Bank Owned Life Insurance is classified as a long-term illiquid asset.

As long as a bank remains stable, there is rarely a reason to surrender the policy before the passing of the insured.

Credit quality and rating are the primary risks in BOLI holdings.

• Carrier Credit Quality. While most insurers are highly rated, circumstances change and creditworthiness can fluctuate.
• Crediting Rate Rates may become less favorable relative to market alternatives.

To mitigate risks, banks may either surrender the policy and pay taxes or perform a tax-free IRC Section 1035 exchange to another carrier. A 1035 exchange functions similarly to an IRA rollover and is typically executed after the tenth policy year to avoid carrier-imposed penalties.

BOLI Regulations

Conducting thorough due diligence is an important step in any Bank Owned Life Insurance transaction. This process helps the bank fully understand the unique risks, rewards and characteristics of the investment before moving forward.

To promote consistency and sound risk management, the Interagency Statement on the Purchase and Risk Management of Life Insurance (OCC Bulletin 2004-56) provides clear supervisory guidance for banks.

The statement outlines the expectations for maintaining practices that align with safe and sound banking principles, including:

• Active oversight from senior management and the board of directors.
• Comprehensive policies and procedures that include prudent limits, ensuring exposures do not exceed the potential risk of loss or cost recovery objectives.
• A complete pre-purchase analysis that evaluates the suitability of BOLI products and the financial strength of the issuing carriers.
• Ongoing risk management and monitoring, supported by strong internal controls, audit processes and compliance reviews.

By following this framework, banks can safeguard that their BOLI programs are well-structured, transparent and aligned with both regulatory expectations and their own long-term strategic goals.

Compliance Frameworks and Summary

BOLI serves as a tax-advantaged funding strategy that positions banks to more efficiently manage employee benefit costs while enhancing long-term earnings and shareholder value. When paired with an executive or director benefit plan, BOLI can help a bank attract, retain, and reward key talent competitively.

A well-structured BOLI program must operate within a strong compliance framework that includes ongoing oversight, sound policies, procedures and risk management.

Guidance from an Executive Benefits team that knows and understands executive and director benefit design may be essential. Financial institutions can benefit from the advisory and consulting services of a team with technical and regulatory experience underpinned by a consultative approach.

To learn more, visit the Bank Owned Life Insurance page or contact a member of OneDigital's Executive Benefits team at executivebenefitssolutions@onedigital.com.

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Investment advisory services offered through OneDigital Investment Advisors LLC (“ODIA”).  Securities offered through M Holdings Securities, Inc., a registered broker/dealer, member FINRA/SIPC. Insurance products offered by G.W. Financial, LLC (NPN# 9721912). “BoliColi” is a d/b/a of ODIA, M Holdings Securities, Inc., and G.W. Financial, LLC.  M Holdings Securities, Inc. is independently owned and operated. ODIA is independent of and unaffiliated with M Holdings Securities, Inc. and G.W. Financial, LLC. Corporate Advisory and/or Tax services offered by Digital Insurance LLC.

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