Bank Owned Life Insurance: An Overview

Bank Owned Life Insurance (BOLI) is a type of life insurance policy that banks purchase to insure their employees. This type of insurance allows banks to pay for their employee benefits while also building up their own assets. It is a way for financial institutions to protect themselves against any losses that may occur due to the death of employees.

Why Do Banks Need BOLI?

Banks have a significant amount of employees, and it is essential for them to provide employee benefits such as healthcare and retirement plans. Insuring these plans can be expensive, and traditional life insurance policies may not provide enough coverage to meet the bank’s needs. Additionally, banks can use BOLI to offset the costs of employee benefit plans and generate income that can be used to fund other expenses.

According to a survey conducted by the American Bankers Association, 91 percent of banks with more than $2 billion in assets own BOLI policies. Banks that own BOLI policies can access the tax-deferred benefits and generate income through policy loans and withdrawals.

How Does BOLI Work?

When a bank purchases a BOLI policy, it pays the premiums and is named as the beneficiary of the policy. In the event of an employee’s death, the bank receives the death benefit. Banks can use the death benefit to pay for employee benefits or use it to offset any losses that may have occurred due to the employee’s passing. The premiums that banks pay for BOLI policies are tax-deductible and grow tax-deferred over time.

Policy Loans and Withdrawals

Banks can also access the cash value of their BOLI policies through policy loans and withdrawals. Policy loans allow banks to borrow money from their policy’s cash value, while policy withdrawals allow banks to withdraw funds from the policy. Banks can use these funds to finance other expenses or invest in other projects. These loans and withdrawals are generally tax-free and can be used to generate more income.

FAQ

Is BOLI a good investment for banks?

BOLI can be a good investment for banks, especially if they have a large number of employees. Banks can use BOLI policies to cover the costs of employee benefits and generate income that can be used to fund other expenses. Additionally, BOLI policies are tax-deferred and provide tax-free policy loans and withdrawals, which can be used to generate more income. However, banks should consult with financial advisors to determine if BOLI is right for their specific needs.

What happens if an employee leaves the bank?

When an employee leaves the bank, they no longer have coverage under the BOLI policy. However, banks can continue to pay the premiums on the policy and receive the death benefit if the former employee passes away. Alternatively, banks can sell the policy on the secondary market.

What are the tax implications of BOLI?

The premiums paid for BOLI policies are tax-deductible, and the cash value of the policy grows tax-deferred over time. Additionally, policy loans and withdrawals are generally tax-free. However, banks should consult with tax professionals for further information and guidance on the tax implications of BOLI policies.

Conclusion

BOLI can be a valuable tool for banks to protect themselves against any losses that may occur due to the death of employees. BOLI policies allow banks to pay for employee benefit plans and generate income that can be used to fund other expenses. Additionally, BOLI policies are tax-deferred and provide tax-free policy loans and withdrawals. However, banks should consult with financial advisors and tax professionals to determine if BOLI is right for their specific needs.