BOLI Continues to be an Attractive Option for Banks
By: Harry L. "Trey" Deupree III | June, 2015
Bank Owned Life Insurance (“BOLI”) has been available for purchase by financial institutions for over 30 years. And yet, according to FDIC data, the percentage of banks holding BOLI assets continues to increase year after year. During the 1980s and 1990s national and regional banks were the primary purchasers of BOLI, but now community banks are rapidly catching up.
On a national basis, the number of banks holding BOLI increased by 4.0% in 2014 according to the FDIC. At the end of last year, 58% of all US banks now have BOLI on the books. In Arkansas, 66% of all banks now own BOLI. IBIS Associates, an independent marketing research firm, estimates that approximately $3.2 billion in BOLI purchases took place in 2014 as either first-time purchases by banks or additional purchases by banks with BOLI already on their books. BOLI assets nationally totaled over $149 billion at the end of last year and approximately $700 million in Arkansas. The most popular product types selected in recent years have been General Account and Hybrid Separate Account.
The principal reason that BOLI has been so popular is that it is a tax-advantaged product that typically provides a favorable yield in comparison to other bank-eligible investments of a similar risk and duration. For example, in today’s market, BOLI generates a net yield in the range of 3.0% to 4.0% after all expenses are deducted. This translates into a tax equivalent yield of 4.86% to 6.48% (assuming a 38% tax bracket and an insured male age 45). The income earned from BOLI is tax-deferred, and if the BOLI policy is held until the death of the insured, the bank receives the life insurance proceeds tax-free.
BOLI has also been attractive to banks because it is relatively easy to establish and administer on an on-going basis. The bank makes a single lump-sum payment to the insurance carrier and is the owner and beneficiary of the life insurance policies issued by the carrier. The insureds are the officers of the bank (although directors may also participate). Participation in the BOLI plan is voluntary, but most executives do take part since the plan is intended to help banks defray the costs of their benefit programs such as healthcare or retirement. If the bank has 10 or more lives in the plan, Guarantee Issue underwriting may be available (i.e., no medical exams).
An increasing number of banks use the additional earnings generated by a BOLI policy to establish a supplemental executive retirement plan or other non-qualified benefit plan for their key employees. For example, the bank may share a portion of the death benefit with the executive’s named beneficiary through a split-dollar agreement.
Finally, before implementing a BOLI plan, a bank must recognize that BOLI is a long-term financial commitment. Although insurance carriers do not usually impose a penalty if the policies are fully surrendered, the federal government does impose a 10% penalty tax on the gains which is in addition to the normal taxes that would be due. Despite this, BOLI remains extremely popular. If your bank is considering implementation of a BOLI plan, we suggest you contact other banks in your area that already have a BOLI plan in place to ask how satisfied they are with their BOLI plan. Informal studies show that the vast majority of banks with BOLI are very satisfied with the performance of their policies. If you would like further information, please contact Trey Deupree at Equias Alliance, LLC (firstname.lastname@example.org or call 469-252-1038).
Securities offered through ProEquities, Inc., a Registered Broker/Dealer, and member FINRA and SIPC. Equias Alliance LLC is independent of ProEquities, Inc.