BOLI Lessons: How to protect your family and your business
Many commercial banks have more money invested in Bank-Owned Life Insurance (BOLI) policies than they do in land, fixed assets, and all other real estate assets combined? Reports from the third quarter of 2019 show that nearly 3,800 banks owned $190 billion in BOLl policies that year. I’m talking billions of dollars invested by each company every year! But why?
What makes BOLI such a target for these companies? And why does that matter to you?
BOLI is institutionally-priced, permanent life insurance, funded with a single, lump-sum premium. This premium immediately equals the cash surrender. BOLI products have no-loads, no-surrender charges, and all the income is tax-free if policies are held to maturity.
BOLI policies can be a very attractive place for banks to earn higher current yields on their safest capital. But these policies are not purchased just to enhance non-interest income. BOLI is also used as a tax-favored asset. It increases bank earnings and offsets the rapidly rising costs of employee benefits, such as sky-rocketing medical, disability, and workers’ comp insurance premiums.
Here are a few highlights of Bank-Owned Life Insurance policies:
- Bank-Owned Life insurance (BOLI) is an institutional financial product used by most U.S. banks. The first policy was issued in 1983.
- BOLI is used to provide benefits to key employees. it helps businesses retain top bank directors and executives. It also protects against the loss of critical employees, in addition to enhancing non-interest income.
- The bank is the policy owner, premium payer, and beneficiary. The insureds are consenting key executives. When the insured employee passes away, this tax free death benefit can be used to fill the vacuum left by the death of the key executive. It can also fund other business needs.
- Policies are placed with top-quality insurance carriers and funded on a single premium basis. Cash values can grow income tax-deferred and death benefits are paid income tax-free. BOLI is issued by these highly-rated insurance companies, which means that the chance for default, bankruptcy, or other negative situations is remote.
- To emphasize earnings, BOLI policies are structured to maximize the cash value growth and minimize the expense of the death benefit portion of policy.
But the biggest takeaway for you, as an individual is this:
Life insurance companies only issue institutionally-priced BOLI policies to commercial banks. However, some carriers do allow select agents to design retail policies with loads and fee structures that are like BOLI. These policies are used to protect families against the loss of breadwinners. They also protect businesses, including nonprofits, against the loss of owners and key employees. Just like BOLI, these policies also generate higher current yields on cash value compared to those offered by other safe, liquid assets.
Suppose you own a successful business. That business keeps cash and other liquid assets on its balance sheet for emergency purposes and to take advantage of future buying opportunities. Assume you earn 1% on these assets, subject to income tax. By repositioning these dollars to a policy designed like a BOLI contract, your yields increase from 1% to a projected 3-to-6% with gains tax-deferred and positively correlated to interest rates.
The extra income could simply be added to your company’s bottom line. Or, this income could be used to fund a deferred compensation plan for you and your key people. There is also a tax-free life insurance death benefit of 2-to-3 times the deposit that could be used to protect your family and/or your business in the event of your demise.
Another option could be to insure a non-owner key employee and provide a portion of the death benefit to the insured’s beneficiaries as a retention tool. Most people have not seen policies designed like BOLI. But as they learn how and why commercial banks have used them for over 35 years, they see how these specialized life insurance policies can be used to help them meet their business and/or personal asset protection and balance sheet goals.
When you’re ready to get started on creating your financial legacy or if you have more questions, most questions can be answered by watching this video. Start there and then schedule a consult with my team when you’re ready to begin.