Why BOLI in today’s interest rate environment
Texas Banking| August, 2013
Banks continue to be challenged by a shrinking net interest margin as well as high liquidity. Identifying acceptable investment opportunities with high credit quality and diversification continues to challenge many banks today. In addition, most banks are affected by the increasing cost of providing employee benefits.
As we have stated before, bank-owned life insurance (BOLI) continues to be an acceptable and prevalent solution to these challenges. Texas banks continue to explore BOLI and consider the BOLI yields available today as a partial solution to these challenges.
According to the FDIC and Equias Alliance research, 56 percent of Texas banks with assets greater than $100 million own BOLI assets as of March 31. In addition, highly rated insurance companies are offering very attractive BOLI yields and policy structures that many banks find acceptable for their overall portfolio strategy. BOLI generates a return in the range of 3 to 3.50 percent after all expenses are deducted, which translates into a tax equivalent yield of 4.84 percent to 5.65 percent (assuming a 34 percent tax bracket).
The annual yield on a BOLI investment compares favorably to other bank-eligible assets. Also, BOLI provides tax advantaged income not available with traditional bank investments. Banks earn income from the growth of the BOLI cash value and from the life insurance proceeds paid to the bank on the death of the insured employee.
In addition, the income earned from BOLI is tax deferred, and if the BOLI contract is held until the death of the insured, the bank receives life insurance proceeds tax free provided the policy complies with IRC §101(j), state insurable interest laws and has not been exchanged for value under IRC §101(a)(2). Growth in cash value is recorded as “Other Non-Interest Income” on the bank’s financial statements.
The bank is the owner and beneficiary of the BOLI, and the policies cover the lives of bank officers who may or may not participate in any executive benefit plans. BOLI is not tied directly to the employee benefit programs, but BOLI must be used to offset employee benefit expenses. If a bank qualifies, BOLI is also available with no medical underwriting.
For a complimentary analysis of how BOLI can impact your bottom line, or a copy of our recent ABA webinar presentation, contact Ken Derks at firstname.lastname@example.org or 469-252-1037.
Equias Alliance offers securities through ProEquities Inc., member FINRA and SIPC. Equias Alliance is independent of ProEquities Inc.