At first glance, bank owned life insurance (BOLI Insurance) may look to some like a traditional life insurance program where the bank is the owner and beneficiary of a life insurance policy on a select group of its key executives. However, upon further analysis, BOLI is generally found to be an attractive asset for a bank to hold on its balance sheet. BOLI has some risk characteristics similar to a commercial loan (a loan to an insurance company) with a very high credit rating, while having favorable tax treatment, much like a bank-eligible municipal bond.
An asset that punches four tickets for the bank CFO:
- Need for Diversification: BOLI portfolios of the leading BOLI providers, may hold many different securities. While the CFO of a community bank may not be able to sufficiently diversify the bank’s balance sheet through the direct purchase of individual bank-eligible securities, placing assets in BOLI can be likened to placing assets in many municipal, corporate, mortgage-backed and government securities.
- Need for Non-Interest Income: BOLI earnings increase “Other Non-Interest Income” component of the bank’s income statement, which can have a positive impact on bank valuation, quality of earnings and revenue diversification.
- Need for Balance Sheet Risk Management: With general account and hybrid separate account BOLI, the insurance company bears default and price risk of the underlying assets, eliminating market value risk on the BOLI asset.
- Need for Market Interest Rate Sensitivity: BOLI returns tend to “lag” changes in interest rates. If general market interest rates increase, BOLI returns will eventually increase, likewise, if they decline, BOLI returns will eventually decline. Importantly, with BOLI, banks are not burdened with the potential of declining asset values in a rising interest rate environment.
Additionally, bank owned life insurance (BOLI) offers these three benefits:
- Access to Investments: The insurance company’s portfolio and investment managers have access to many investment opportunities, including private debt instruments, that a community bank CFO generally cannot access, along with the purchasing power of very large portfolios.
- High Credit Rating: BOLI has risk characteristics similar to a commercial loan to a company with a strong credit profile. The leading BOLI providers maintain some of the highest credit ratings available from the various rating agencies.
- Favorable Tax Treatment: The interest earnings that accrue on a bank’s BOLI is not subject to current taxation and ultimately will be received income tax-free if held until maturity. Similar tax-advantaged income for banks is typically available only on investments in bank-eligible municipal bonds. Where else can a bank “lend” money to an entity with high credit ratings and not pay current tax on that interest earned?
Bank C-Suite officers are encouraged to contact Kelly Coughlin to discuss BOLI for their bank:
Kelly Coughlin is an independent consultant with Equias Alliance, LLC (“Equias”). Kelly provides a balanced consultative approach in the design, implementation and administration of bank owned life insurance (BOLI) programs and nonqualified deferred compensation (NQDC) plans that best serve clients’ objectives and needs.
The views expressed here are solely those of Kelly Coughlin and do not in any other way represent the views of Equias Alliance nor any other agent, principal, employer, employee, vendor or supplier of Kelly Coughlin, BankBosun or Equias Alliance.