Bank-owned life insurance (BOLI) is a type of life insurance policy that a bank purchases on the life of one or more of its key employees, executives, or board members¹². The bank pays the premiums and receives the death benefit if the insured person dies¹². The insured person's family or heirs do not receive any benefits from the policy³.
The purpose of BOLI is to provide a tax-advantaged asset for the bank that can help offset the expenses of employee benefits, such as medical plans, 401(k) matches, and group life insurance¹² . BOLI can also be used to informally fund executive benefits, such as deferred compensation plans or split-dollar plans¹ . BOLI can also diversify the bank's portfolio and increase its net income² .
BOLI works by having the bank buy permanent life insurance policies for its selected employees and naming itself as the sole owner and beneficiary of the policies¹². The bank pays the premiums and builds cash value in the policies, which grows tax-deferred and can be accessed by the bank through loans or withdrawals¹². If an insured employee dies, the bank receives the death benefit tax-free and uses it to pay for employee benefits or other purposes¹² .
BOLI has some advantages and disadvantages for the bank.
Some of the advantages are:
- It provides tax-free or tax-deferred growth and income for the bank¹².
- It helps cover the costs of employee benefits and retain key employees¹² .
- It acts as a stable and predictable asset that can balance the bank's risk profile² .
Some of the disadvantages are:
- It requires a large upfront investment and ongoing premium payments by the bank² .
- It exposes the bank to credit risk and interest rate risk from the insurance company that issues the policies² .
- It may raise ethical or reputational concerns if the bank profits from its employees' deaths without their consent or knowledge³ .
(1) Bank-Owned Life Insurance | NFP. https://www.nfp.com/benefits-and-life/executive-benefits/bank-owned-life-insurance. (2) What Is Bank-Owned Life Insurance? - Investopedia. https://www.investopedia.com/terms/b/boli.asp. (3) What Is Bank Owned Life Insurance (BOLI)? - The Motley Fool. https://www.fool.com/the-ascent/insurance/life/bank-owned-life-insurance/.