WHAT IS BOLI? PART III – WHY BANKS USE IT
What is BOLI?
BOLI is an acronym for Bank-Owned Life Insurance; a form of permanent life insurance owned by banks to offset the future costs of providing employee benefits. The insureds are highly compensated employees, and the institution retains at least some interest in the death benefit proceeds. When structured correctly, BOLI’s favorable assets/liabilities timing symmetry, accounting treatment and tax advantages make it a valuable balance sheet asset.
How does BOLI differ from COLI?
BOLI is a sub-category of COLI, or Corporate Owned Life Insurance. As explained below, banks can own both BOLI and COLI, whereas, life insurance owned by non-bank employers is generally referred to as COLI1.
The key difference between BOLI and COLI is the type of employee benefit liabilities it is purchased to offset. COLI is used to offset, hedge or finance executive benefit plans (most often referred to as non-qualified deferred compensation plans)2. BOLI is used to partially offset general welfare benefit plan costs, including, but not limited to, the future cost of providing medical insurance, 401(k) matching contributions, other future pension plan costs, group term life insurance, group LTD, etc. So, BOLI is used to counteract benefits for all employees, whereas COLI is limited more narrowly to benefits only for highly compensated employees (bank officers, etc.). The balance of this page focuses on BOLI.
When structured correctly, BOLI can be a valuable addition to a bank’s overall investments/assets. As of 2024-Q2, U.S. banks collectively own ~$225 billion of BOLI. While there is no legal or regulatory barrier to non-banking employers using COLI to finance general welfare benefit costs, it remains extremely rare.
Why do Banks use BOLI?
Banks as employers have many ongoing and future costs of employee benefits and liabilities, including general welfare employee benefits programs (e.g., medical plans, group life, 401(k) match, and other benefit plans), and non-qualified executive benefit obligations. BOLI has attributes that make it an efficient vehicle/asset for financing, hedging, or recovering some of these benefit obligations. When properly designed, BOLI is accretive to earnings – making for an attractive addition to the balance sheet. BOLI also possesses attractive accounting characteristics.
Employee benefit obligations typically have longer average durations than many other liabilities. When structured correctly, the timing of BOLI cash in-flows (tax free death benefits) is favorable for offsetting long term benefit liabilities (see chart below).
BOLI has two additional attributes that can make it an effective vehicle for financing general welfare costs:
- Accounting for BOLI is favorable
- Growth of policy cash value is tax deferred and death benefits are typically exempt from tax
When coupling the favorable accounting and tax treatment, BOLI is immediately accretive to earnings and can make for an attractive, long-term balance sheet asset. That said, BOLI is by no means always the best choice. It may underperform alternatives, especially in low interest rate environments.
Want to know more about BOLI?
We’ve introduced what BOLI stands for, what it is, and why banks choose to purchase and use it. For more high-level information, you’ll find value in the following pages on our site:
As always, if you have any questions or would like to speak to a BOLI expert, please contact us.