Bank Owned Life Insurance, or BOLI, is a long-term asset for banks. When properly implemented and administered, BOLI offers banks a reliable investment option with significant tax advantages compared to other permissible bank investments.

The Interagency Statement on the Purchase and Risk Management of Life Insurance (OCC 2004-56) provides general guidance for banks and savings associations regarding the purchase and risk management of BOLI. This document also notes that over the past several years, a growing number of institutions have aggressively increased their BOLI holdings.

BOLI Rules and Regulations

Among the conservative banking practices discussed in this interagency statement is the need for senior management and board oversight of BOLI. Specifically, the document addresses the need for both a thorough pre-purchase analysis of risks and rewards and a post-purchase risk assessment.

The guidance discusses the permissibility of BOLI purchases and holdings, as well as the risks and considerations related to their impact on safety and soundness. The Interagency Statement highlights the following supervisory guidance required before signing a BOLI contract:

Effective senior management and board oversight policy.Comprehensive policies and procedures, including appropriate limits.A thorough pre-purchase analysis of BOLI products. An effective ongoing system of BOLI risk assessment, management, monitoring and internal control processes, including appropriate internal audit and BOLI compliance frameworks.

Senior Management and Bank Oversight

The conservative use of BOLI depends on effective senior management, board oversight and administration. Regardless of an institution’s financial capacity and risk profile, the board must understand the complex risk characteristics of its insurance holdings and the role this asset is intended to play in its overall business strategy.

Although the board may delegate decision-making authority regarding BOLI purchases to senior management, the board remains ultimately responsible for ensuring that the purchase and holding of BOLI are consistent with conservative banking practices.

Policies and Procedures

Consistent with prudent risk management practices, each institution should establish internal policies and procedures governing its BOLI holdings, including guidelines that limit the aggregate cash surrender value (CSV) of policies from any one insurance company as well as the aggregate CSV of policies from all insurance companies. These policies and procedures should include a pre-purchase analysis and ongoing risk management.

Considerations When Purchasing BOLI

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. As the Interagency Statement on the Purchase and Risk Management of Life Insurance, March 20, 2025, notes, “The purchase of life insurance represents a long-term obligation of the carrier, and any deterioration in the financial condition of the carrier can negatively affect policy values and death benefits.”

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 10% 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.

1. Carrier Credit Quality. While most insurers are highly rated, circumstances change, and creditworthiness can fluctuate.
2. Crediting Rate Competitiveness. 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.

To learn more about the advantages and disadvantages of BOLI, or about IRC Section 1035 exchanges, visit the Bank Owned Life Insurance page or contact our 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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