Bank-Owned Life Insurance (BOLI)

Definition

Bank-Owned Life Insurance (BOLI) is a form of life insurance purchased by banks, where the bank serves as the beneficiary and owner of the policy. BOLI policies are primarily used by banks to help offset the costs of employee benefits and other liabilities. These insurance contracts provide tax advantages for the bank while functioning as a long-term, stable asset on its balance sheet.

Phonetic

The phonetic pronunciation of the keyword “Bank-Owned Life Insurance” (BOLI) is:B – æ – ŋ – k – əʊ – n – d – l – aɪ – f – ɪ – n – ʃ – ʊ – r – ə – n – s (BOLI: b – əʊ – l – i )

Key Takeaways

1. Investment and Risk Management: BOLI is a tax-efficient investment vehicle utilized by banks to optimize their income, long-term returns, and risk management. The cash value of BOLI grows tax-deferred, enabling the bank to generate income from interest, dividends, and capital gains without incurring taxes until the policy is surrendered or paid out.
2. Benefit for Employees and Executives: BOLI policies help banks to offset the costs of employee benefits, as well as providing compensation and retirement benefits for key executives under non-qualified deferred compensation arrangements. This allows banks to attract, retain, and reward key employees and executives by offering competitive compensation packages.
3. Regulatory Compliance: Banks need to adhere to strict regulatory requirements when purchasing and managing BOLI policies under the guidelines provided by the Office of the Comptroller of the Currency (OCC) and the Federal Reserve. Compliance with these regulations is essential for proper risk management and financial stability and to avoid potential penalties or fines.

Importance

Bank-Owned Life Insurance (BOLI) is an important financial instrument for banks because it serves multiple purposes in managing their operations and long-term growth. BOLI provides a tax-efficient method for banks to offset the rising costs of employee benefits, as the income generated from BOLI policies is tax-free, thereby reducing their overall tax liabilities. Additionally, the death benefits from these policies can be utilized to recover the costs incurred for offering attractive compensation packages to top executives and key personnel, ensuring the retention and recruitment of essential talent. BOLI also functions as a strategic asset in a bank’s investment portfolio, offering an attractive risk-adjusted and long-term return on capital, which contributes to the overall financial stability and profitability of the institution.

Explanation

Bank-Owned Life Insurance (BOLI) serves as a valuable tool for financial institutions, primarily banks, to enhance their overall profitability and provide additional funding for employee benefits programs. BOLI policies are purchased by banks to insure the lives of key employees, with the financial institution acting as the policyholder and beneficiary. The primary objective of BOLI is to offset the costs associated with employees’ benefits and compensation plans, allowing banks to better manage and fund these expenses. As the bank pays the insurance premiums and receives the death benefits, BOLI can improve the bank’s bottom line by generating tax-free income through the policy’s cash value growth and death benefits. In addition to offsetting employee benefit costs, BOLI serves as a long-term, tax-advantaged investment for financial institutions seeking to diversify their assets. BOLI policies typically offer stable returns that are exempt from taxes, which can significantly increase overall investment returns when compared to taxable alternatives. The interest earned on the cash value of BOLI policies is tax-free, shielding the institution from any federal income tax liabilities. Additionally, the death benefits payout to the beneficiary, in this case, the financial institution, is generally not subject to income taxation. By integrating BOLI policies into their investment portfolios, banks can strengthen their financial position, enhance shareholder value, and better withstand economic fluctuations.

Examples

Bank-Owned Life Insurance (BOLI) is a type of life insurance policy purchased by banks to insure the lives of their key executives or employees. The bank is both the policy owner and the beneficiary, meaning it receives the insurance payout upon the death of the insured. BOLI provides banks with tax benefits and helps offset the cost of employee benefits. Here are three real-world examples: 1. Wells Fargo BOLI Holdings: Wells Fargo, one of the largest banks in the United States, holds a significant amount of BOLI policies on its books. In its 2020 Annual Report, Wells Fargo reported BOLI assets of approximately $18.7 billion. This figure represents the cash surrender value of these policies, which the bank can potentially access at some point in the future. The BOLI policies help offset the costs of employee benefits and supplement the bank’s income. 2. Bank of America’s BOLI Investment: Bank of America, another major player in the U.S. banking industry, also maintains BOLI policies for its key employees. In 2020, the bank disclosed in its annual report that it held approximately $16.3 billion in BOLI assets. Similar to Wells Fargo, these policies help Bank of America offset employee benefit costs and provide additional revenue streams. 3. JPMorgan Chase BOLI Policies: JPMorgan Chase, one of the largest and oldest banks in the United States, uses BOLI policies as part of its overall employee benefits strategy. According to its 2020 Annual Report, JPMorgan Chase held over $12 billion in BOLI assets. These policies allow the bank to offset the cost of employee benefits, fund additional benefits such as non-qualified retirement plans, and receive tax advantages. These examples serve to illustrate the widespread use of BOLI policies among major banks in the United States. The tax advantages and potential for offsetting employee benefit costs make BOLI an attractive strategy for large financial institutions.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Corporate-Owned Life Insurance (COLI)
• Insurable Interest
• Permanent Life Insurance
• Tax-Deferred Growth
• Employee Retirement Income Security Act (ERISA)

Sources for More Information

• Investopedia
• NFP.com
• The Motley Fool
• The Balance