Understanding Bank Owned Life Insurance

What is Bank Owned Life Insurance?

Bank Owned Life Insurance (BOLI) uses tax advantages to create an efficient way to offset employee benefit costs for banks and credit unions. And, most people don't realize this is a strategy that more than 75% of banks utilize.

A bank will purchase and own a life insurance policy on an executive or group of executive’s lives and the bank is listed as the beneficiary of the policy. In many case with guaranteed acceptance underwriting depending on the number of executives to be insured.

Cash surrender values are allowed to grow tax-deferred to provide the bank with monthly bookable income. When the insured executive passes away, the tax-free death benefits are paid to the bank and distributed according to the agreement in place.

These types of policies provide funding for investment to offset the cost of providing benefit packages to employees in a specific organization.

The U.S. Department of the Treasury’s Office of the Comptroller of the Currency (OCC) has ruled that banks are allowed to purchase BOLI policies, “in connection with employee compensation and benefit plans, key person insurance, insurance to recover the cost of providing pre- and post-retirement employee benefits, insurance on borrowers, and insurance taken as security for loans.” OCC may also allow for other uses on a case-by-case basis.

In the past, BOLI plans were bought for companies to protect them against any financial loss that might occur as a result of the death of an important member of their organization. More recently, these policies are now more commonly seen as financial keys to investment money while also sheltering against additional taxes.

The one caveat that must be met is that the policy owner must get informed consent from the employee or employees in question before a bank owned life insurance policy can be taken out.

Common uses for BOLI

1. Executive Benefits
2. Unexpected Loss of a Key Employee
3. Buy / Sell Agreement

BOLI Checklist

There are a number of tasks which need to be completed when implementing a bank owned life insurance policy.

1. Insurance companies: Review the various insurance company vendors
2. Census: Put together the census which includes the proposed executives to be insured
3. Underwriting: Understand the differences between full underwriting and guaranteed issue. You should understand the cost difference and the timing difference of getting the case approved.
4. Approve strategy: Review the product and plan design in order to move forward.
5. Create BOLI Investment Policy: This occurs between the bank and the plan administrator.
6. Insurance Company Approval: Get approval and offer from the insurance companies to move forward with accepting the policy.
7. Prepare Employee Communications: Finalized and complete communications to the insured team of executives.
8. Complete BOLI Consent Forms: Complete the required forms for each covered executive.
9. Final Forms and Outstanding Requirements: Submit final forms to the insurance companies.
10. Wire Premium Payment: Complete wiring of premiums to the insurance companies.
11. Issue policy: Insurance company will issue the policy and copy will be sent to the bank with evidence of insurance coverage.
12. Service and Administration: Begin servicing and managing policy performance.

Which employees can be insured?

Continue reading more about bank owned life insurance.