Current Thinking

The BOLI Boon for Community Banks

A blog by Kevin Killian, Vice President & Director of BOLI Services, Pentegra Retirement Services – May 12, 2016

Bank-owned life insurance (BOLI) can be a valuable asset for banks of all sizes, including community banks. Offered by most major insurance carriers, BOLI is a single premium insurance policy in which the bank is the beneficiary and owner. While banks often utilize BOLI as a tax shelter, given BOLI’s status as a tax-free asset, it is also utilized to help offset the ever-increasing costs of employee benefit programs.

Evidence of BOLI’s growth as an alternative asset strategy for financial institutions is offered by the Equias Alliance/Michael White Bank-Owned Life Insurance Holdings Report™, the most recent edition of which found that BOLI assets held by commercial banks, savings banks and savings associations topped $154.5 billion at the end of the third quarter of 2015, a 4.5 percent increase from the $147.8 billion at the end 2014’s third quarter. This continues a multi-year trend: For calendar year 2014, BOLI assets increased by 4 percent year over year to $149.6 billion. Also notable was the report’s finding that for banks with less than $10 billion in assets, the growth rate was 7.1 percent.

Typically, BOLI is purchased for senior executives as a way of offsetting financial losses incurred upon a given executive’s death. While some may find this practice objectionable – “I don’t want to put a price tag on my employees” is a concern I frequently hear – it should be kept in mind that BOLI is, first and foremost, a life insurance policy. As such, it must include a death benefit … which the bank has the option of donating to a charity, perhaps in the decedent’s name. (There are also ways of paying part or all of the benefit to the decedent’s beneficiaries, though this is more complicated.)

It should be noted that the bank retains the policy on the employee’s life even if that employee retires. Most BOLI providers track plan participants on a quarterly basis via their Social Security numbers, and can therefore learn of the retired employee’s death within a reasonable time frame.

The key factor to consider here is the policy’s return on investment. If a BOLI policy can be expected to appreciate in value at around 3.5 percent, remember that since that growth is tax-free, the actual returns are greater – more like 5 percent. Compare that with current returns on taxable fixed income investments.

Senior executives should consider BOLI as a means of driving more net income to the bank’s bottom line … especially in this current era of low interest rates. The additional earnings can be used to increase profitability; pay for the cost of providing certain benefits, including propping up the benefits structure of a pension plan; and/or finance new benefits programs.

Of course, the bank should provide full disclosure to any employee it wishes to purchase BOLI upon; after all, the employee may be required to undergo a medical check-up (paid for by the bank) before the insurance is issued. In addition, an employee has the right to decline the bank’s offer but, as explained above, if the policy’s financial benefits are fully explained to a long-vested employee, chances are good that he will ultimately agree.
Another potential objection from banks is the upfront cost of purchasing BOLI. Additionally, as a long-term investment, BOLI may be viewed as “illiquid” in the short term. The policy can be surrendered at any time, but doing so will almost always involve significant tax consequences to the bank. However, the overall tax benefits — the growth of the cash surrender value is tax-deferred and the death benefits received are tax-free – can go a long way toward overcoming those concerns.

Other potential benefits of BOLI can easily be explained by a reputable financial services provider. If you have not already done so, I encourage you to begin exploring BOLI as soon as you can.

About the Author

Chuck Coldwell

Chuck Coldwell is Vice President – National Director, Consulting and BOLI Services at Pentegra. He oversees Pentegra’s retirement services consulting, marketing and communications business development practice areas. In these roles, he works closely with Pentegra’s teams to develop strategic initiatives designed to enrich the client and participant experience and meet the ongoing needs of clients. He also leads Pentegra’s BOLI business development efforts, working with clients to design customized strategies for benefit financing using BOLI. A Qualified Pension Administrator (QPA), he holds a B.A. in Economics and Psychology.


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