By, David Hauptman
Many financial institutions have turned to Bank-Owned Life Insurance (BOLI) for higher returns and funding for their executive benefits programs. Made especially attractive by today’s low-interest investment environment, BOLI offers banks and insurance companies more than just life insurance for their “key people.” BOLI programs offer banks the ability to shift current invested assets with low yielding taxable returns to insurance companies general accounts with 3 to 3.5 percent net ROI.
Thanks to the new tax law, financial institutions have more capital to invest in the coming years since the federal corporate tax rate dropped from 35 to 21 percent . For many, diversifying their investment portfolio with BOLI will be a game changer.
An ROI of 3 to 3.5%. A bank’s investment portfolio typically earns anywhere from close to zero in short-term treasuries and money markets to under 3 percent after-tax return in municipal bonds, mortgage-backed securities, real estate and other fixed income instruments. Typically, banks see an uptick in incremental return of 1.5 to 2 percent when comparing the BOLI yield to the average after-tax yield of non-BOLI investments. A bank allocating $20M, for example, to a BOLI program could increase earnings by $300k-$400k annually, while potentially lowering their investment risk.
BOLI is not taxable as long as the insurance contracts remain in place. Like other forms of life insurance, a BOLI cash value increases and death benefits are not taxable. So, when an insured executive passes away, a bank or credit union receives the death benefit tax-free. Cash value in the BOLI contract is used to hedge benefit liabilities from the bank’s executive and employee benefit programs proving liquidity in the event cash is needed.
Insurance protection for your MVPs. A popular risk management strategy, BOLI is life insurance for your most valuable employees. Otherwise known as “key man” insurance, BOLI typically insures each executive, and the bank receives death benefit when the employee dies, whether or not the employee is still active. Interestingly, financial institutions typically keep their BOLI policies even after employees move on from their organization. Whenever that employee dies, the institution receives the death benefit, tax free.
BOLI benefits your executives, too. BOLI programs provide funding for executive benefits, allowing banks to provide competitive executive retirement programs that ensure they are able to attract, retain and reward top performers. Additionally, in exchange for allowing the organization to be the beneficiary of their life insurance policy, insured executives are typically offered a share of the BOLI death benefit in addition to participation in the bank’s other executive benefit programs.
The risk reward drives the desired purchase. BOLI allows banks to diversify their investment portfolios from potentially higher risk investments like mortgage-backed securities, real estate and corporate bonds into the general account of highly-rated insurance companies with equal or higher yields which is a value proposition that banks can not ignore. Over 70 percent of large banks have BOLI programs. The Office of the Comptroller of the Currency (OCC) limits a banks’ BOLI holdings to no more than 25 percent of their Tier I capital. While many banks/credit unions have BOLI programs, many have opportunity to expand those programs and/or shift to better quality and higher returns with alternative insurance companies.
For more information on BOLI and your financial institution’s ability to procure the coverage, contact your HUB financial advisor today.