What Is a Bank-Owned Life Insurance Policy?
Bank-owned life insurance is a type of insurance where banks can purchase coverage for key employees. Learning the types, benefits and risks can help you understand how it works as a tax-efficient investment tool for banks.
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By Melissa Wylie
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Content and SEO Manager
Melissa Wylie is the Content and SEO Manager at MoneyGeek, with nearly a decade of editorial experience and six years of work in financial content focused on small businesses. She previously held SEO positions at Bankrate and LendingTree, with bylines on ValuePenguin and MagnifyMoney. Wylie has a journalism degree from the University of North Texas. Her strong foundation in journalism helps her craft content that simplifies complex financial topics to help everyone feel confident when making decisions with their money.
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Edited by Rae Osborn
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Dr. Rae Osborn is a MoneyGeek content editor with over seven years of editing experience and over 20 years of experience in publishing and writing science content. She also works as a science researcher, writer and editor and a professional reviewer for Science Reviews and Advances in Entomology.
MW
By Melissa Wylie
MW
Content and SEO Manager
Melissa Wylie is the Content and SEO Manager at MoneyGeek, with nearly a decade of editorial experience and six years of work in financial content focused on small businesses. She previously held SEO positions at Bankrate and LendingTree, with bylines on ValuePenguin and MagnifyMoney. Wylie has a journalism degree from the University of North Texas. Her strong foundation in journalism helps her craft content that simplifies complex financial topics to help everyone feel confident when making decisions with their money.
RO
Edited by Rae Osborn
RO
Dr. Rae Osborn is a MoneyGeek content editor with over seven years of editing experience and over 20 years of experience in publishing and writing science content. She also works as a science researcher, writer and editor and a professional reviewer for Science Reviews and Advances in Entomology.
Updated: May 22, 2024
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Bank-owned life insurance (BOLI) is a special type of life insurance where a bank is both the policy owner and beneficiary. Banks purchase these policies on the lives of certain key employees, essentially investing in their employees' lives. The bank pays the premiums and, in return, receives the policy's death benefit when the insured employee passes away. This arrangement offers banks a tax-efficient investment strategy, as the policy's cash value grows tax-free and the death benefits are typically exempt from income tax. BOLI policies thus serve as a financial tool for banks, balancing investment growth with risk management.
Bank-owned life Insurance (BOLI) policies come in different forms, each with its own features and benefits. Understanding these types can help banks select the BOLI policy that best aligns with their strategic objectives. Here are the three main types of BOLI policies:
Banks may choose their BOLI policy type depending on the level of risk they want to take on and the protection they need from insurer insolvency.
Banks often opt for bank-owned life insurance (BOLI) policies for various strategic reasons. These policies offer financial advantages that can contribute to a bank's overall financial health. Here are some common reasons why banks invest in BOLI policies:
The cash value growth within a BOLI policy is tax-deferred, and the death benefits are generally income tax-free. This provides banks with a tax-efficient investment strategy.
Offsetting Employee Benefit Costs
Banks often provide a range of benefits to their employees, such as health insurance, retirement plans and other perks. These benefits can represent a significant expense for the bank. BOLI policies can help manage these costs. When the bank receives death benefits from a BOLI policy, they get funds that they can use to offset the costs associated with providing different employee benefits.
Stable Return on Investment
BOLI policies typically offer a steady return on investment, which can be higher than returns from other types of investments.
BOLI policies can serve as a risk management tool, providing a death benefit to the bank upon the passing of a key employee.
Financial Performance Improvement
The tax advantages and stable returns from BOLI policies can contribute to the overall improvement of a bank's financial performance.
The tax treatment of BOLI policies is one of the key reasons they are attractive to banks. Here's how it works:
Tax laws can change, and the specifics can vary based on the bank's situation and the structure of the BOLI policy. Banks may want to consult a tax advisor or legal professional when considering BOLI policies.
Although bank-owned life insurance policies can be beneficial, banks must also navigate potential risks associated with these investments. Understanding these challenges is essential for effective risk management. Here are some potential challenges:
Departure of Key Employees
A key employee leaving the bank can impact the BOLI policy. While the policy may stay in place even if the employee leaves, the bank may lose out on the potential death benefit. This could result in a financial loss, especially if the bank has already paid significant premiums on the policy. Employee retention is an important consideration when banks invest in BOLI policies.
BOLI policies are long-term investments, and banks may face penalties for early withdrawal, limiting their liquidity. For instance, if a bank surrenders the policy before its maturity, it may be subject to taxes on any gains from the policy. There could also be a penalty on these gains, further increasing the cost of early withdrawal.
Banks must comply with regulatory requirements when purchasing and maintaining BOLI policies, and failure to do so can result in penalties. For instance, banks that fail to comply with regulations could jeopardize the tax benefits associated with the insurance.
The bank's return on investment depends on the insurance company's financial health. Financial distress or insolvency of the insurer can adversely affect the policy's returns, emphasizing the need for banks to assess the insurer's financial health before committing to a BOLI policy.
Banks purchase BOLI policies for certain key employees. Understanding certain aspects of a BOLI policy can help these employees navigate their employment benefits and personal insurance needs more effectively.
No Direct Benefit to Employee or Family
As the bank is the beneficiary of the BOLI policy, neither you nor your family will receive any death benefits from the policy. A BOLI policy does not replace the need for personal life insurance. It serves a different purpose and benefits the bank, not the employee or their family.
Obtaining a BOLI policy involves gathering insurability information, which might raise privacy concerns among employees. However, it's important to note that consent is a fundamental requirement. For a bank to take out BOLI insurance for individuals, it must have the employees' consent. If an employee does not agree to the policy, the bank cannot proceed with taking out coverage. This consent ensures transparency and respect for the employee's privacy and choice.
A BOLI policy will not cover every bank employee. Banks typically purchase these policies only for certain key employees whose loss could significantly impact the bank's operations. While a BOLI policy may cover some employees, many others will not receive coverage.
These considerations are vital for employees to understand their position within the framework of BOLI policies, highlighting the need for personal insurance planning alongside awareness of the bank’s BOLI strategies.
BOLI policies offer indirect benefits to the bank employees who are covered. While the bank is the policy owner and beneficiary, the financial stability it gains from these policies can positively impact the work environment and employee benefits.
Depending on how their employer utilizes the returns, bank employees may benefit significantly from BOLI policies.
We listed some commonly asked questions about BOLI to help you better understand how bank-owned life insurance policies work.
What is bank-owned life insurance?BOLI, or bank-owned life insurance, is a specialized policy where banks insure key employees, serving as both the policy owner and beneficiary, to improve financial stability and support employee benefits. BOLI is a key person life insurance policy and is similar to how COLI (corporate-owned life insurance) operates within corporations.
Who are the beneficiaries of bank-owned life insurance policies?The bank is the beneficiary of a BOLI policy. If the insured employee passes away, the death benefit from a BOLI policy is paid to the bank, not to the employee or their family. However, the financial stability BOLI policies can provide to the bank may indirectly benefit employees.
Can an individual get a bank-owned life insurance policy?No, there is no BOLI insurance for individuals. Banks/corporations buy BOLI/COLI policies on the lives of their key employees.
Should I participate in bank-owned life insurance?If the bank where you work offers participation in a BOLI policy, it signifies your value to the institution. While you won't receive direct benefits, the policy's presence can enhance overall financial and job security.
Is bank-owned life insurance a good investment?For banks, BOLI can be a good investment. It offers tax advantages, helps offset employee benefit costs and provides a steady return on investment.
Do banks invest in life insurance?Yes, banks invest in life insurance through BOLI policies. They typically do this to secure tax-advantaged growth and fund employee benefits, bolstering their financial health.
How can I invest in BOLI?Individuals cannot invest directly in BOLI. This type of policy is a strategic financial tool banks use to insure key employees, offering tax efficiency and supporting employee benefits programs.
Who provides bank-owned life insurance policies?BOLI policies are available from life insurance companies. The bank purchases the policy from the insurer and pays the premiums.
