BOLI– Why the Benefits Outweigh the Concerns
We have been talking about the benefits of Bank Owned Life Insurance (BOLI) for some time now – and although we cannot take all the credit, it seems that banks are listening.
According to the most recent data from Michael White Associates (MWA)*, total U.S. BOLI assets rose to $166.7 billion as of September 30, 2017 – up 3.5 percent from the third quarter of 2016. What’s more, the percentage of commercial banks, savings banks and savings associations reporting BOLI assets increased from 61.7 percent to 63.3 percent.
MWA also reported that the number of banks with more than $10 billion in assets holding BOLI increased 9.6 percent, and their BOLI assets increased 4.9 percent to $128.6 billion. The number of BOLI holders, and BOLI asset totals, also increased for banks with $1 billion to $10 billion in assets, and for banks with $500 million to $1 billion in assets.
Even with the continued rise in banks offering BOLI, why are some banks still reluctant to purchase it? I thought addressing some of the concerns about BOLI might help clear up some misconceptions.
BOLI is by definition a long-term asset, and that alone can sometimes be difficult to line up with a bank’s overall investment strategy and overall portfolio objectives. After all, these policies can typically be in place for anywhere from 20 to 40 years, or beyond, and that can make planning a challenge. The long-term nature is why bankers often use this asset to offset long-term liabilities such as healthcare and retirement costs. In addition, BOLI can be used as a great alternative investment to generate income when there is a lack of loan demand. If your bank is sitting on a significant amount of cash, BOLI may be the answer to help generate tax-free income for the bank’s bottom-line.
Another common concern: How can banks use BOLI to offset benefit expenses in a rising cost environment when every expense must be justified to boards? The short answer is that BOLI can be used to offset the rising cost of pension plans, employer 401(k) contributions and healthcare expenses … plus it is a proven, effective tool for attracting and retaining top talent, something that bankers and boards alike find attractive.
As BOLI is a life insurance policy purchased by the bank on its employees – usually, but not limited to, senior management executives – its death benefits are paid to the bank. This can also give banks pause; making money from a valued employee’s death may not sit well with the bank or its board.
But keep in mind that death benefits need not be applied entirely to the bank’s bottom line. There is nothing to prevent the bank from sharing a portion of the benefit with the decedent’s survivors and/or trusts. While of course not mandatory, it can be viewed as “the right thing to do.”
We have made the argument to our clients and prospects that they can share some of the tax-free death benefit with a charitable organization – perhaps a charitable foundation that the bank already has in place, or one that the decedent and/or his or her survivors have supported. In doing so, not only are you serving the community, but there’s also nothing wrong with making a positive public relations statement.
Finally, there is one simple fact at play here: Many people simply don’t understand what BOLI is, and how it benefits the bank, its people and potentially, the community.
But that is where an educated and informed consultant comes in. As with any financial (and insurance) product, the waters of BOLI can be tricky to navigate. But, as more and more banks seem to be realizing, it can be a trip well worth taking.
*Source: Equias Alliance / Michael White BOLI Holdings Report™ – 2017 edition
About the Author