Bank-Owned Life Insurance

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

Bank-Owned Life Insurance (BOLI) is a form of permanent life insurance (typically whole life or universal life) that a bank purchases on the lives of selected key employees. The bank owns the policy, pays the premiums, and is the beneficiary of the death benefit. Beyond providing death-benefit protection, BOLI functions as a long-duration, tax-advantaged asset that generates stable, non-interest income and helps offset certain long-term employee benefit liabilities.

Why U.S. Banks Use BOLI

Banks purchase BOLI primarily for these reasons:

1. Funding long-term liabilities
   BOLI helps support the cost of executive retirement benefits, supplemental executive retirement plans (SERPs), deferred compensation arrangements, and other post-employment benefits (OPEB).
2. Stable, tax-advantaged earnings
   Cash value growth inside the policy is generally tax-deferred. Reported yields commonly fall in the 2.5–4.5% range (pre-tax equivalent yields can be higher depending on the bank’s tax rate). This income is recorded as non-interest income and provides a relatively predictable contribution to earnings.
3. Balance-sheet and capital efficiency
   When structured and managed properly, BOLI offers low-volatility returns compared with many other long-duration investments while remaining an eligible bank asset under regulatory guidance.

Accounting Treatment

• Cash surrender value is recorded as an asset (typically under “Other Assets”).
• Increases in cash value are recognized as non-interest income.
• Policies are generally considered illiquid; early surrender can trigger material charges.

Who May Be Insured

Coverage is limited to key personnel whose loss would create a measurable business impact—senior executives, high-revenue producers, and other critical officers. Written employee consent is required. Broad “janitor” or non-key-employee coverage raises significant compliance and reputational concerns and is inconsistent with regulatory expectations.

Regulatory Framework

BOLI is subject to interagency guidance issued by the federal banking agencies (FDIC FIL-127-2004, OCC Bulletin 2004-56, and corresponding Federal Reserve guidance). Key expectations include:

• Thorough pre-purchase analysis and ongoing risk management.
• Board and senior management oversight.
• Concentration limits: it is generally not considered prudent for aggregate cash surrender value to exceed 25% of Tier 1 capital. Holdings above this threshold require board-level justification and heightened scrutiny.
• Use of financially strong carriers and diversification of counterparty risk.
• Proper notice and consent procedures.

The guidance was most recently revised in March 2026 (primarily clarifying certain risk references), but the core concentration and risk-management principles remain in force.

Industry Scale (Recent Data)

As of late 2025 reporting:

• Total BOLI holdings across U.S. banks approximated $230–233 billion.
• Roughly two-thirds of banks hold some form of BOLI.
• Large institutions hold the majority of the total. Approximate cash values at major banks (Q4 2025 data) include:
  • Bank of America: ~$27 billion
  • JPMorgan Chase: ~$23 billion
  • Wells Fargo: ~$20 billion
  • Several regional banks also maintain multi-billion-dollar positions.

Community and regional banks often view BOLI as a meaningful source of non-interest income relative to their size.

Primary Risks

Risk Category	Description
Credit / Carrier	Insurer insolvency or downgrade can affect cash value and death benefits.
Liquidity	Policies are long-term; early surrender typically incurs significant charges.
Concentration	Large holdings relative to capital increase risk if not properly managed.
Compliance	Failure to obtain proper consent, documentation, or board oversight can result in supervisory criticism.
Reputation	Public or media scrutiny of employee life insurance programs can create issues if coverage is perceived as inappropriate.

Mitigation practices include carrier diversification, strict internal concentration limits (often well below the 25% Tier 1 threshold), regular board reporting, and ongoing monitoring of insurer financial strength.

Key Benefits Summary

• Tax-deferred cash value growth and non-interest income contribution
• Predictable long-duration returns that can outperform many low-risk alternatives on a tax-equivalent basis
• Support for executive benefit and OPEB funding
• Alignment with long-term liability matching strategies

Frequently Asked Questions

1. What is BOLI and who receives the death benefit?
BOLI is permanent life insurance owned by the bank on key employees. The bank is the owner and beneficiary; the employee has no ownership interest or claim on proceeds.

2. Why do banks buy BOLI?
Primarily to generate tax-advantaged income that helps fund executive benefits and other long-term obligations while providing a stable balance-sheet asset.

3. What is the regulatory concentration limit?
Interagency guidance indicates that aggregate cash surrender value generally should not exceed 25% of Tier 1 capital without strong justification and board approval.

4. Who can be insured?
Only key employees whose roles are material to the bank. Written consent is mandatory.

5. How is BOLI reported on financial statements?
Cash value appears as an asset (usually “Other Assets”); earnings appear as non-interest income.

6. What are the main risks?
Carrier credit risk, liquidity constraints on early surrender, concentration risk, compliance failures, and potential reputational issues.

7. How does BOLI differ from COLI?
BOLI is the banking-specific form subject to FDIC/OCC/Federal Reserve oversight and capital concentration guidance. COLI is the broader corporate version used by non-bank companies.

8. What returns do banks typically earn?
Cash value growth commonly produces pre-tax yields in the mid-single digits; tax-equivalent yields are higher. Actual results depend on product design, crediting rates, and expenses.

9. Can an employee refuse coverage?
Yes. Consent is voluntary and cannot be a condition of employment.

10. What is the current market size?
Industry holdings stood at approximately $230–233 billion in late 2025, with continued use across large, regional, and community banks.

Conclusion

Bank-Owned Life Insurance remains a widely used tool in the U.S. banking system for generating stable, tax-advantaged income and helping fund long-term employee benefit obligations. When purchased and managed within regulatory concentration limits, with strong carrier selection, proper employee consent, and active board oversight, BOLI can serve as a useful component of a bank’s overall balance-sheet and earnings strategy. Institutions considering or holding BOLI should maintain rigorous pre-purchase analysis, ongoing risk monitoring, and clear documentation consistent with interagency guidance.

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