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You've heard of life insurance and homeowners coverage, but have you ever heard of bank-owned life insurance? By the time you finish reading this article, you'll know what bank-owned life insurance is, how it works, who buys it, and why.
Bank-owned life insurance (BOLI) is a type of insurance coverage purchased by banks. Frequently, a BOLI policy is taken out in the name of a key employee, executive, or board member. Every BOLI program is closely regulated. For example, the federal banking agencies issued guidelines to ensure that each bank uses safe banking practices and focuses on risk management when using a BOLI transaction to fund their employee benefit program.
If that sounds confusing, stay with us. Here are the key facts to remember:
Banks buy BOLI because life insurance policies offer tax-free benefits that banks cannot provide. For example, interest earned through a banking product is taxable, while interest earned investing in a life insurance policy is not. Banks do not offer guaranteed rates on any of their banking products, while many permanent life insurance policies do. In short, life insurance is the most practical, efficient way a bank can invest money and know with a degree of certainty it will pay off.
A bank buys permanent life insurance policies for its top-tier employees and board members. The bank owns each policy and is named as the sole beneficiary. Part of each premium the bank pays goes toward building cash value.
Everything, from premiums paid to the cash value growth, is tax-free. In addition, if a key employee dies, the bank receives the life insurance payout tax-free. Those tax-free funds help offset the cost of employee benefits, like medical plans, 401(k) matches, and group life insurance.
Here’s a quick rundown of the pros and cons associated with bank-owned life insurance:
For banks, it's a great investment because the bank can invest money tax-free (or tax-deferred) and receive a payout if an employee dies. More importantly, a BOLI allows a financial institution to cover employee benefit costs.
BOLI stands for bank-owned life insurance.
Banks purchase BOLI to insure the lives of key employees and to recover the cost of providing employee benefits. Each policy names the bank as the sole beneficiary. A bank benefits by keeping money in a tax-free or tax-deferred investment, and then again when a key employee dies. Banks often keep the insurance policy active even after a key employee retires or moves on to another job.
Individuals are not eligible to purchase BOLI. BOLI is reserved for banks that plan to use the proceeds to fund employee benefits.
It's easy to confuse a BOLI with a COLI, and the two instruments do share some features. However, a BOLI is used to offset benefit plan costs, like medical insurance, 401(k) contribution matching, group term life insurance, and pension plan costs.
COLI stands for corporate-owned life insurance. A COLI also insures the life of employees, but rather than pay for employee benefits, it is used to finance executive benefits.
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