The Case for BOLI
A blog by Fabrizio D’Uva, Regional Director, BOLI & Non-Qualified Benefit Plans – February 3, 2015
With the new year upon us, it may be time for banks to reconsider BOLI, given the most recent positive trends regarding how it’s growing so impressively.
BOLI (Bank-Owned Life Insurance) is a single premium insurance policy in which the bank is the beneficiary and owner. While banks often utilize BOLI policies as a tax shelter, given BOLI’s status as a tax-free asset, it is also utilized to help offset ever-increasing employee benefits and program expenses.
Banks earn income from the growth of the BOLI cash value and from the life insurance proceeds paid to the bank on the death of the insured employee. Note that banks do not purchase BOLI to benefit from an employee’s death, but rather to generate returns in an interest rate environment where rates are historically at their lowest. BOLI can also help offset and recover employee benefit expenses, replace group term life insurance or provide it more efficiently, and provide meaningful tax-free death benefits to families of officers and directors that have non- qualified benefit plans such as supplemental retirement plans, deferred compensation, etc.
And forecasts for BOLI’s industry-wide growth are encouraging. For 2013 (the most recent year for which data is currently available), independent market research firm IBIS Associates, Inc. reported that life insurance companies sold 1,235 new BOLI policies (both to banks purchasing BOLI for the first time and those making additional purchases) representing about $3.18 billion in premiums — an increase of 12 percent over 2012. The average premium per case was about $2.57 million, a 20 percent increase from the previous year.
Banks with assets of $250 million to $1 billion purchased the largest number of products in 2013 (42.3 percent of cases), while a review of FDIC data found that of the 6,812 banking institutions in the U.S., 3,840 (56.4 percent) held BOLI assets in 2013. However, when excluding banks with less than $100 million in assets, the percentage of BOLI-holding banks rose to 64.9 percent.
In addition, BOLI assets totaled $143.84 billion at the end of 2013 (up 4.3 percent from 2012); banks with between $100 million and $10 billion in assets saw a concurrent increase of 7.8 percent in their BOLI assets.
BOLI provides a competitive net yield, currently in the range of 3.0 percent to 3.9 percent after all expenses are deducted, depending on the carrier and product. This translates into a tax equivalent yield of 4.84 percent to 6.29 percent, assuming a 38 percent marginal tax rate. It is easy to see why Banks consider BOLI when comparing that return to an after-tax opportunity cost in a bank’s non-loan investment portfolio: It creates a significant spread. In fact, BOLI yields have historically created a spread of 150 to 200 basis points — and in today’s low interest rate environment, that spread is closer to 250 basis points. It is hard to turn away from the additional GAAP earnings.
And when it comes to liquidity, keep in mind that investing in BOLI does not mean you must “give up” something else; instead it’s a long-term investment that is blended with your other investments. Many banks that are concerned with the ill-liquid nature of BOLI should analyze the taxable return in the event of an early surrender. They will find that those returns still outperform other investments and/or compare favorably.
In addition, as a bank is in business to make loans, we wouldn’t recommend comparing it to a 30-year mortgage loan. For those that do, I maintain that you could borrow from the Fed very cheaply today to fund those loans and at the same time use the excess liquidity to generate the BOLI yields previously mentioned.
As with most such products, education is recommended and required for a given bank’s board of directors, who many times are not otherwise directly involved in the banking or healthcare industries. While regulators provide banks with a roadmap to follow via the OCC 2004-56 Bulletin, when it comes to the purpose and purchase of BOLI, board members may be reluctant to take the time to fully understand those documents. That’s where a company like Pentegra comes in: We can fully explain the ins and outs of BOLI to a bank’s CFO or president, who then can face their board with confidence.
Banks involved with BOLI already know the good news it represents. For those without BOLI, why not start considering it now?
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