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Banks

For over 50 years, community banks have provided plans to attract, retain and incent key employees. Until the late 1980's, most of these plans employed annual premium life insurance to recover the cost of these arrangements.

The use of single premium policies emerged in the late 80's and today its use is dominant. Bank Owned Life Insurance (BOLI) permitted a purchase which produced bookable, non taxable, non interest income which is immediately accretive to earnings.

Even accounting for the after tax cost of funds (usually excess liquidity) benefit programs informally funded with BOLI could be demonstrated as earnings neutral or even earnings positive.

Today, almost 50% of all banks in America own this asset in one or another of its forms.

The BOLI Asset in your Bank

Take a look at a pro forma balance sheet and income statement to see the positive impact of BOLI (PDF)

Regulatory Overview

The current regulatory guidance first appeared in December of 2004: The Interagency Statement on the Purchase and Risk Management of Life Insurance. It focused on two primary directives:

A. Requirements before BOLI implementation
B. Requirements post implementation

A. The Pre-Purchase Analysis:

  • Identify need for insurance and determine economic benefits and appropriate insurance (term vs. permanent)
  • Quantify amount vs. banks' objective
  • Assess vendor qualifications
  • Review different products to match objectives
  • Select carrier by credit quality
  • Determine reasonableness of compensation if additional compensation is being provided to the insured employee
  • Analyze risks and ability to monitor and respond
  • Evaluate alternatives
  • Document decisions

B. Post Purchase - Risk Management:

  • Comprehensive assessment of risks
  • Identification of employees insured
  • Assessment of death benefit relative to employee salaries
  • Calculation of insured persons still employed
  • Assessment of effects of policy exchanges
  • Analysis of mortality performance and impact on income (protect against reputation risk)
  • Evaluation of findings from internal/external audits
  • Identification of reason for and tax implications of any policy surrenders
  • Peer analysis of BOLI holdings

Read the complete study of the Interagency Statement.

Benefit Programs Frequently Associated with a BOLI Purchase

In the implementation of a program, or to use BOLI to offset the costs of existing benefit arrangements like group medical, 401(k), group life, etc., the Interagency Memo states the following:

"There are two common methods of financing employee benefits through the purchase of life insurance. The first is the cost recovery method, which usually involves present value analysis. Typically, the institution projects the amount of the expected benefits owed to employees and then discounts this amount to determine the present value of the benefits. Then, the institution purchases a sufficient amount of life insurance on the lives of certain employees so that the gain (present value of the life insurance proceeds less the premium payments) from the insurance proceeds reimburses the institution for the benefit payments. Under this method, the institution absorbs the cost of providing the employee benefits and the cost of purchasing the life insurance. The institution holds the life insurance and collects the death benefit to reimburse the institution for the cost of the employee benefits and the insurance.
The second method of financing employee benefits is known as cost offset. With this method, the institution projects the annual employee benefit expense associated with the benefit plan. Then, the institution purchases life insurance on the lives of certain employees. The amount earned on the CSV each year should not exceed the annual benefit expense."
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