Bank-Owned Life Insurance

🏦 Bank-Owned Life Insurance (BOLI) in the U.S. Banking System

📘 What Is BOLI?

Bank-Owned Life Insurance (BOLI) is a permanent life insurance policy – typically whole life or universal life – that a bank purchases on the lives of key employees. The bank:

• Owns the policy
• Pays the premium
• Receives the death benefit

It’s not just for protection: BOLI is a strategic financial tool. Policies generate tax-deferred income and serve as a stable, long-duration asset on the bank’s balance sheet.

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💼 Why Do U.S. Banks Use BOLI?

1. Offset Long-Term Liabilities

BOLI helps banks fund:

• Executive retirement benefits
• Deferred compensation plans
• Post-employment health care costs

Instead of using volatile investments, banks choose BOLI for its predictable cash value growth.

2. Improved Earnings

• BOLI returns typically range from 2.5% to 4.5% annually, outperforming Treasuries.
• Banks record tax-advantaged income from cash value growth.
• Helps maintain profitability in low-interest environments.

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📊 How BOLI Appears on the Balance Sheet

• Recorded under: “Other Assets”
• Income from BOLI is classified as: “Non-interest Income”
• Policies are illiquid, but highly stable

Example: A regional bank invests $15 million in BOLI across 10 executives. The tax-deferred income it earns per year could exceed $600,000.

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🧑‍💼 Who Can Be Insured?

Key personnel such as:

• CEOs, CFOs, and board-level executives
• Senior loan officers or revenue-critical staff
• High-skill employees essential to long-term performance

Consent is mandatory – employees must sign a written agreement acknowledging the coverage.

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📐 Regulatory Guidelines

Banks must follow guidance from:

• FDIC (Financial Institution Letter FIL-66-2004)
• OCC (OCC Bulletin 2004-56)
• Federal Reserve

Key requirements:

• BOLI shouldn’t exceed 25% of Tier 1 capital (though some banks hold more)
• Must document pre-purchase due diligence
• Use highly-rated carriers to minimize credit risk

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⚠️ Risks of BOLI

Risk Type	Description
Credit Risk	If the insurer becomes insolvent, the cash value and death benefits are at risk.
Liquidity Risk	BOLI is long-term; withdrawing early incurs penalties.
Reputation Risk	Public backlash may arise over insuring employees for profit.
Compliance Risk	Failure to meet notice & consent or regulatory caps can result in penalties.

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🏦 Which U.S. Banks Use BOLI?

As of recent industry data:

• More than 3,200 banks hold BOLI assets
• JPMorgan Chase, Wells Fargo, and Bank of America each hold billions in BOLI
• Collective industry holdings exceed $220 billion

BOLI is especially prevalent among regional and community banks, where the income provides critical support for earnings.

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🔑 Key Benefits at a Glance

Benefit	Description
📈 Stable Returns	Outperforms many conservative bank investments
💵 Tax-Deferred Income	Grows without triggering immediate tax liability
🔐 Executive Retention	Often tied to SERPs (Supplemental Executive Retirement Plans)
⚖️ Offsets Long-Term Liabilities	Helps pay for non-qualified retirement benefits and healthcare obligations
🛡️ Strong Risk Profile	Low volatility; backed by highly rated insurers

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✅ Summary

BOLI is not just insurance – it’s a financial strategy. For U.S. banks, it offers protection, investment growth, and long-term liability management. While risks exist, proper oversight, conservative use, and compliance with federal guidelines make BOLI a powerful tool in institutional finance.