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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)
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
A. The Pre-Purchase Analysis:
B. Post Purchase - Risk Management:
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.
Kaeding & Company | 420 Lakeside Avenue | Suite 303 | Marlborough, MA 01752 | 508.460.0165