The BOLI Boom: Is Your Bank a Part of It?
A blog by Andrew Strock, Regional Director, BOLI & Non-Qualified Benefits Plans, Pentegra Retirement Services – September 13,2016
Bank Owned Life Insurance (BOLI) is still on the rise. According to a recent report released first quarter 2016, BOLI assets reached $157.6 billion as of March 31, 2016, reflecting a 4.4 percent increase from $151.0 billion at the end of the first quarter of 2015. And of the 6,122 banks in the survey, 60.9 percent report holding BOLI assets, a two percent rise from the year-ago quarter.
So why are some banks still reluctant to join in? I thought addressing some of the concerns about BOLI might help clear up some misconceptions.
BOLI policies generally insure the lives of bank executives or other highly compensated employees. The bank pays the premiums, owns the policies and is the beneficiary of death benefit proceeds. The bank accrues revenue from investment earnings and bears the risk of investment losses.
One concern we hear about is the potential impact of rising interest rates on BOLI. Of course, different BOLI carriers have different investment strategies, but for the most part those carriers invest heavily in bonds. As we know, when market interest rates rise, yields on new bonds will increase while prices on existing bonds will decline. Some carriers shorten the duration of their portfolios or pursue a hedging strategy to manage risks when they anticipate rising interest rates.
Note that we have been used to seeing low interest rates for a while now, and there has been no sign of any major movement with those rates. Nevertheless, when rates do start to go up, BOLI rates will move up as well, even though the latter’s rise will lag relative to the markets.
BOLI can also 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 some tax-free income for the bank’s bottom-line.
On the other hand, if your bank has liquidity issues, that can make it difficult to purchase BOLI. Indeed, the liquidity issue is a tough one but given today’s interest rates, it may be worthwhile to go out and borrow the money to purchase BOLI.
Another common question is: 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 matching 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 enticing.
One of the other central concerns about BOLI revolve around the moral implications of a bank benefiting from the participating employee’s death. However, there are a number of ways around this objection (and, besides, BOLI can be an asset well before the employee in question dies): The bank can simply hand over the life insurance payment to the participant’s beneficiaries, donate the proceeds to a charity of its or the participant’s choice, or add them to a foundation it already has in place … or, potentially, even start a foundation with those proceeds.
Still, with all of these potential BOLI benefits on the table, the situation at a given bank can still be challenging. Some banks’ boards feel that BOLI is too complicated or it takes too long to understand and implement. But like most things, overcoming such concerns is primarily a matter of education: Educating a bank’s management team before it takes the proposal to its board or a committee is critical, and a versatile trusted advisor will be willing to “hold hands” along the way.
There are various other ins and outs to BOLI, of course, but I hope that this overview will at least serve as the starting point for a conversation at banks that may not be sure about what all the BOLI hubbub is about. Again, consulting a reputable BOLI firm should be the next step.
About the Author