Jason Fisher With a bank-owned policy, both large-scale and community banks can purchase a life insurance plan on a key senior executive or group of essential employees at a certain company.
Whichever bank purchases the plan is considered the owner, purchaser, and beneficiary of the policy.
These types of policies can be tricky to understand and may lead to confusion on the part of the insured.
Here, we will unravel the questions of the bank-owned life insurance world without diving into any complexities.
How Does Bank-Owned Life Insurance Work?
Bank-owned life insurance (BOLI) policies is one life insurance type typically taken out on key employees of a company.
Since the bank is the beneficiary, the life insurance policy provides protection for the bank if the covered employees were to pass away unexpectedly.
Upon death, the bank will be awarded tax-free death benefits and any cash value build-up associated with the insurance policy.
It is important to remember, however, that a BOLI policy cannot be taken out on anyone at any time.
In accordance with new legislation, the insured must gain informed consent from the employee or employees in question before a bank-owned life insurance policy can be taken out.
What Is BOLI Used For?
Since the 1980s, these policies have been used in a tax-efficient way to offset the costs of employee benefit programs.
Essentially, these policies are used as a way to fund employee benefits at a specific company.
This helps the institution pay for employee benefit packages at a cheaper rate.
Some insurance carriers may even allow banks to allocate bank-owned life insurance policies toward other initiatives, but on a case-by-case basis.
These plans have several advantages for the banks who own them.
The banks will get a much better return on their investments compared to a more traditional investment, such as a bond or mortgage-backed securities.
On top of the performance of the investment, the money is growing inside of the policy tax-free, meaning the deposit gains are actually larger than they appear.
Keep in mind this is a benefit you can get with few other vehicles.
This is why BOLI policies are often referred to as “tax shelters” for banks.
Who Pays The Insurance Premiums?
The bank, as an institution, will pay the insurance premiums of the policy, which have cash accumulation within them.
Premiums can be paid in the form of a single lump sum, or annual premium payments can be set up. However, banks typically choose to move forward with a single premium deposit.
Nonetheless, a specialized funding vehicle is created for these payments, also referred to as the bank’s insurance trust.
With these plans, additional benefits can be offered to the key employees at an organization, while also reaping some of the benefits.
This is one of the main differences between bank-owned life insurance plans and key man policies, which are strictly a life insurance policy on upper management or owners.
What Is Important To Consider About BOLI?
There are a lot of advantages to investing in these types of policies for corporations, but there are a few downsides to consider as well.
For example, some banks try to diversify their investment portfolios by taking a vested interest in bank-owned life insurance policies.
One of the most notable downsides to these policies is their inherent liquidity.
You can sell these policies at any time, but you’ll face a surrender charge and additional taxes on the plan.
By investing in this type of policy, banks can also be subjected to potential associated investment losses, whether big or small.
Therefore, banks should review their current risk profile and corporate objectives before investing.
Overall, the main issue with these policies is that the bank also takes on all of the risks associated with holding the insurance policy. There is a chance all of the premiums deposited into the account could be lost.
That is why it’s crucial for banks to work with reputable and highly rated life insurance companies so they know they’re making a quality investment call at the end of the day.
It’s also important to mention that these plans do not focus on providing insurance coverage to essential employees.
In fact, bank-owned life insurance plans typically do not provide any insurance protection to the employee, but rather provide protection to the company as a whole, which is just an added benefit.
As a result of purchasing a bank-owned life insurance plan, parties may be forced to comply with certain employment laws or other unique tax considerations.
What Types Of BOLI Plans Are There?
There are three different types of bank-owned life insurance plans:
- General account
- Separate account
- Hybrid account
The size of a bank helps determine which type of plan would best suit their needs.
These plans are similar when it comes to their nuts and bolts, but they all have a few distinct advantages and disadvantages.
General Account
This plan is one of the most common and straightforward types of bank-owned life insurance.
With this kind of account, once the bank makes an investment in a general investment account, the deposit then belongs to the insurance provider.
At this point, the insurance company can invest the deposit in whatever ways it sees fit, limited by what is available to them.
Unlike separate or hybrid accounts, general accounts are contingent upon any creditors’ rates associated with the insurance company in question.
General accounts are also less complicated in nature than separate or hybrid accounts, particularly since less parties are involved.
Separate Account
This type of account is very similar to a general account, but the insurance carrier separates the holdings into a general account and allows well-known fund managers to maintain the investments.
With this kind of account, there is more associated risk for the investments, but there is also the potential for more reward.
Hybrid Account
As you can imagine by the name, the hybrid account is a mixture of the general and separate account types.
The hybrid account takes some of the best qualities of the general and separate accounts and creates a new form.
This account gives you the transparency of a separate account, but boasts the stability of a general account.
In other words, the hybrid account is really the best of both worlds.
