BOLI

“Put simply, BOLI is attractive to the banks because it can produce better returns that the banks couldn’t otherwise achieve.”
– Fool.com, “Bank Owned Life Insurance: A Little Known Way Banks Make Money”

We introduced the phenomenon of BOLI, or bank-owned life insurance that has become a significant Tier 1 asset for many U.S. banks. We looked at how these plans work, the favorable returns and tax treatment compared to other cash equivalents, and how life insurance fits into Tier 1 assets held by banks.

Today, we’ll examine the impressive growth of bank-owned life insurance, the pros and cons of BOLI, and answers to common questions. Then we’ll look at what we can learn from the BOLI trend can be applied to our personal economies.

The Rapid Rise of BOLI    BOLI    Breaking Down BOLI

Banks have had the ability to purchase life insurance since early 1980’s, according to BankDirector.com. From nothing to many billions, it has grown steadily, often with double-digit annual gains in volume of cash surrender value (CSV). By 2008, the research of Barry James Dyke revealed a surprising fact: “According to the FDIC, banks are the largest purchasers of cash value life insurance in the United States.”

Immediately before and after the subprime crisis, both the number of banks purchasing life insurance and the amount of life insurance held by these banks increased dramatically. According to official BOLI holdings reports, BankInsurance.com, and other sources that report numbers from FDIC filings, BOLI assets held by banks and thrifts totaled $65.8 billion by the end of 2004. Two years later, at the end of 2006, the number had skyrocketed to $103.90 billion. By the end of 2011,  BOLI assets had reached $143.67 billion. And in another five years, at the end of 2016, CSV of BOLI policies held by banks and savings associations reached a new high of $161.8 billion. (Assets represent both new policies and cash value growth of existing policies, subtract claims paid, and do not include the value of death benefits.)

Today, over 62% of banks hold BOLI assets, according to reports based on regulatory filings. And as you can see on the chart below from the most recent Equias Alliance / Michael White BOLI Holdings Report, over 74% of banks with assets exceeding $300 million report owning bank-owned life insurance:

Most of the largest financial institutions in the US have used BOLI for many years. In recent years, thousands of community banks and thrifts have also jumped on the BOLI bandwagon, often looking for ways to fund the ever-rising cost of employee benefits, such as healthcare costs.

Who are the top holders of BOLI? The list below shows the top 20 banks and savings institutions in the U.S., measured by volume of CSV reported at the end of 2015:

As detailed in last week’s article, banks hold an average of 13-19% of their Tier 1 assets in life insurance contracts, and up to 25% is within regulatory guidelines.

The Benefits of BOLI

Why are many of the largest banks putting billions into cash value life insurance? Writing for Fool.com, Matthew Frankel names what may be the main benefit, “BOLI… can produce better returns that the banks couldn’t otherwise achieve.” However, as with traditional whole life, bank-owned life insurance provides many benefits that add up to much more than an anticipated rate of return.

Some key advantages of BOLI include:

  • Superior returns to other safe investments, cash equivalents, and typical bank products.
  • Low risk and high liquidity qualifies as Tier 1 capital, which is both required and essential to a bank’s stability and ability to lend.
  • Cash value grows tax-deferred, and is never taxed if held until death.
  • BOLI diversifies the bank’s investment portfolio.
  • BOLI cash values do not need to be marked down if interest rates rise.
  • Some policies offer minimum guarantees for cash value performance.
  • Gains can efficiently offset costs associated with employee benefits programs.
  • Tax-free death benefits indemnify the bank in the case of loss of a key employee.
  • “Split-dollar” policies can provide valuable protection benefits for an executive’s heirs.
  • Employee benefits funded by BOLI (such as healthcare and retirement benefits) allow a bank to attract and retain quality employees.
  • There are broad and well-defined guidelines for permissible usage.
  • As single-premium “MEC” policies, the cash surrender value is high.
  • Policies have no surrender charges (although there may be tax consequences if policies are surrendered prematurely).
  • Cash values are backed by the highest rated insurance companies in the nation.

  • You don’t buy life insurance because you’re going to die,

    but because those you love are going to live!

    The first insurance company in American colonies was formed in Charleston, S.C., in 1735, but it offered only fire insurance at first. It didn’t add life insurance until 1760.

    In 1837 there was a panic that resulted in a financial crisis that spurred a shift toward mutualization for life insurance companies. Between 1838 and 1849, only one life insurance company was considered a public company and raised capital based on it’s stock. Around 17 mutuals, requiring minimal initial capital, were chartered.

    BREAKING DOWN ‘Bank-Owned Life Insurance – BOLI’

    Banks use BOLI contracts to fund ever-increasing employee benefits at a much cheaper rate. The process works like this: the bank sets up the contract, and then makes payments into a specialized fund set aside as the insurance trust. All employee benefits that need to be paid to particular employees covered under the plan are paid out from this fund.

    All premiums paid into the fund, as well as all capital appreciation, are tax free for the bank. Therefore, banks can use the BOLI system to fund employee benefits on a tax-free basis.

    Since the gains and payouts from the life insurance policies are both tax-free, this is a creative tax-free way for the banks to fund their employee benefit programs, while also helping to offset the potential loss of a valuable executive’s services.

    One of the biggest benefits is that BOLI policies produce far superior returns than traditional bank investments, such as municipal bonds, 5- and 10-year Treasuries, and mortgage-backed securities. And, the growth in the cash value of the policies, as well as any death benefits paid out are completely tax-free.

    Furthermore, BOLI policies have low risk levels that fit into banks’ standard investment criteria. They also help to diversify the bank’s investment portfolio, and immediately boost the bank’s return on equity (ROE) and return on assets (ROA)

    Life Insurance has been considered a new asset class for tax free safe money returns.

    New Asset Class     BOLI     Breaking Down BOLI

    This information is not intended to be tax or legal advice, and it may
    not be relied on for the purpose of avoiding any federal tax penalties.
    You are encouraged to seek tax or legal advice from an independent
    professional advisor.