Big banks like Bank of America (NYSE: BAC), JPMorgan Chase & Co. (NYSE: JPM) and Wells Fargo & Co. have been laying off staff by the thousands, but one thing they haven't cut back on is Bank-Owned Life Insurance. According to Equias Alliance, BOLI assets grew by 4.3% 2013 from the prior year, reaching an incredible $143.8 billion.
What exactly are BOLI assets? Like their brethren, Corporate-Owned Life Insurance, these are life insurance policies that banks buy to insure the lives of their employees – not from any sense of altruism, but in order to reap the profits when these workers die.
According to Equias' report, well over 50% of all U.S. banks and savings and loans, and savings banks hold these assets, with national banks holding more than $91 billion of the total. And, though the employees' own coverage may end when their employment stops, BOLI lives on – regardless of the way in which the worker was terminated.
A bona-fide funding method
BOLI is an entirely legal way to fund employee benefits, including retirement plans. The practice has been sanctioned by the Office of the Comptroller of the Currency, and gained popularity as an investment vehicle during the 1990s, primarily to fund executive bonuses and pensions.
At first, banks insured their most prized executives, those whose passing, assumedly, would have an effect on the business. But banks loved the high returns and tax-free payouts when insured employees died. Soon, banks were insuring even low-paid workers – often without the employee's knowledge – hence the phrases "dead peasant policies" and janitors insurance". This free-for-all was reined in by legislation in 2006, which dictated that only the upper 35% of earners could be insured in this way, and express permission was necessary.
Still, the practice continues, with some estimates saying that a full 20% of new life insurance policies written are company-owned. The spending spree that took place before the 2006 curbs has given the biggest banks very large BOLI assets, as well: Bank of America holds policies with cash surrender value of $17.6 billion, with Wells Fargo coming in second with $12.7 billion. JPMorgan, which had $11.1 billion in early 2009, has only about $5 billion today.
Pros and cons
BOLI assets are beloved by banks for their robust capital profiles, as well. Since the policies are considered somewhat liquid – due to their cash-surrender value – they can be counted as Tier 1 capital under new capital requirement rules. The tax-free benefits can be used by the banks in any way they choose, and are not restricted to employee benefits programs. As a nice bonus, investment income on these policies is also free of tax.
But some banks, notably JPMorgan, have run into some trouble with these products. In an effort to hedge against interest rate fluctuations, the bank created long-term derivatives from BOLI assets, some of 30 years' duration. New banking rules require that these kind of trading vehicles have more capital behind them, a wrinkle that has caused some losses as of late. Because of their duration, these positions are difficult to unwind, as well.
The biggest issue, however, may be the perception that these kinds of insurance policies are just plain morbid. In 2008, the widow of an Amegy Bank employee who died of brain cancer became aware of such a policy when she mistakenly received the bank's payout from its BOLI. She sued, claiming that the bank obtained her deceased husband's consent after his diagnosis, then fired him. His own life insurance policy with the bank terminated upon his dismissal. She settled for an undisclosed amount in 2010.
Bank of America employed 308,000 people when it bought Merrill Lynch in 2008, and has whittled that number down to around 284,000 currently – still several thousand more than JPMorgan's employee count. With that many workers on the payroll, B of A has been a leader when it comes to insuring its employees' lives. According to The Wall Street Journal, the bank had about $16 billion in BOLI by 2008; JPMorgan's $12 billion was obtained by its acquisition of Washington Mutual, which added $5 billion to the BOLI asset coffers.
How many of its 24,000 terminated workers have been insured by Bank of America? Probably, we will never know. As this practice gets more attention, however, being a frontrunner in this particular arena likely won't do the bank's reputation any good.