RESOURCES AND INSIGHTS / FAQ
FAQ
Whether you're exploring BOLI for the first time or refining a long-standing program, the best decisions are built on clarity. With 30+ years of experience, we're here to help you navigate what's next—with insight tailored to your goals.
What is BOLI?
BOLI stands for Bank-Owned Life Insurance. It’s a form of permanent life insurance owned by a bank to offset the long-term cost of providing employee benefits. Policies are typically placed on highly compensated employees, with the institution retaining an interest in the death benefit. BOLI offers favorable accounting treatment, strong timing alignment with benefit liabilities, and tax advantages that can make it a valuable balance sheet asset.
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How does BOLI work?
Banks purchase life insurance policies—usually on senior executives—with their consent. These policies accrue tax-deferred cash value over time and are recorded as assets. Interest earned helps offset the cost of insurance. Upon death, the bank receives the death benefit, which may exceed the cash value depending on the mortality design.
Why do banks use BOLI?
BOLI is used to help offset the long-term costs of employee benefit obligations, such as medical plans, 401(k) matches, and executive retirement. When structured correctly, BOLI is earnings-accretive and can strengthen the institution’s long-term financial profile.
How is BOLI different from COLI?
BOLI is a subset of Corporate-Owned Life Insurance (COLI), specifically used by banks to fund general welfare benefits. COLI more broadly applies to corporations and is often used to finance executive compensation plans. Both must meet regulatory requirements—but BOLI is tailored to the banking industry.
Who can banks insure with BOLI?
Institutions may insure directors and highly compensated employees, subject to state and federal consent laws. Consent must be obtained in writing before purchase. Compliance with both the COLI Best Practices Act and state-specific insurable interest rules is essential.
What are the main types of BOLI?
General Account (GA):
Backed by the carrier’s general assets. Offers accounting simplicity but concentrates credit risk.
Separate Account (SA):
Legally segregated and tied to market value. Offers more transparency and investment flexibility but comes with volatility.
Hybrid Account:
Combines features of both, with mixed control and complexity.
What’s the difference between experience-rated and pooled mortality designs?
Pooled mortality plans transfer risk to the carrier, with death benefits producing P&L gains upon payout. Experience-rated plans retain mortality reserves as assets, typically minimizing P&L impact but requiring closer oversight.
What is Stable Value Protection (SVP)?
SVP is a mechanism used in separate account policies to stabilize accounting values. It smooths market volatility by ensuring the bank can record BOLI at book value under qualifying conditions. We’ve published extensive white papers on SVP best practices.
Can BOLI include a split dollar arrangement?
Yes. Some plans are structured to share part of the death benefit with heirs of the insured. These structures are complex and require thoughtful legal and accounting review.
What are the key regulations that govern BOLI?
OCC Bulletin 2004-56:
Defines supervisory expectations for BOLI programs.
COLI Best Practices Act (Pension Protection Act, 2006):
Requires affirmative employee consent, defines who may be insured, and mandates recordkeeping to document compliance.
How do banks report BOLI on financial statements?
BOLI is recorded at cash surrender value. Changes in value are reflected in earnings. Policies must also be disclosed in the bank’s quarterly call reports.
What happens to a BOLI policy at maturity?
If the insured lives to maturity (a rare occurrence), the policy’s cash value typically equals the death benefit. Some contracts pay out immediately; others defer payment until a later mortality event. Policies may also be surrendered early or allowed to lapse.
What are the tax implications of BOLI?
Growth in policy value is tax-deferred, and death benefits are typically tax-exempt. However, policy design, compliance with 101(j), and execution of the pre-purchase process all affect tax treatment. Expert structuring is essential.
What is the Net Realizable Value (NRV) standard for BOLI?
Under GAAP (ASC 325-30), BOLI must generally be recorded at its net realizable value. Some products misapply GAAP by inflating carrying values, which can expose institutions to balance sheet write-downs. We’ve published detailed analyses on this issue.
How is BOLI reported on a bank’s financial statements?
BOLI is recorded as an “Other Asset” at its cash surrender value (CSV). Changes in the CSV are typically reflected as non-interest income. Depending on the policy structure, banks may also include mortality credits and reserve interest in their earnings.
What are the tax advantages of BOLI?
The inside buildup (growth in cash value) is tax-deferred. Death benefits are typically received income tax-free, assuming compliance with IRC Section 101(j). These attributes contribute to BOLI’s net earnings accretion and long-term appeal.
Does BOLI impact regulatory capital or risk-based capital ratios?
Yes. The treatment of BOLI under regulatory capital rules depends on the policy type. For example, General Account BOLI typically receives a 100% risk weighting, while Separate Account policies may qualify for look-through treatment. Strategic allocation is essential for optimizing capital impact.
What is the pre-purchase due diligence process for BOLI?
The process involves board-level approvals, legal and tax reviews, insured population analysis, carrier comparison, investment policy alignment, and recordkeeping for consent and compliance. MB Schoen guides clients through this rigorously.
What happens if an insured employee leaves the bank?
If the policy remains in force, the bank retains all policy rights and benefits, including the death benefit. Insurable interest is only required at policy inception—not for the life of the contract.
How often should BOLI programs be reviewed or re-evaluated?
Best practice is to conduct annual reviews. This includes evaluating carrier strength, investment performance, COI trends, mortality assumptions, and regulatory compliance. MB Schoen provides fiduciary monitoring services for this purpose.
Can BOLI be restructured or exchanged?
Yes. In certain cases, under IRC Section 1035, BOLI policies may be exchanged tax-free into a new policy. However, restructuring must be carefully evaluated to ensure alignment with accounting, tax, and economic objectives.
What are Stable Value Wraps and why are they used?
A Stable Value Wrap (SVP) smooths mark-to-market volatility in Separate Account BOLI. It allows policies to be accounted for at book value rather than fair value, supporting more stable earnings and simplified accounting.
What is a Modified Endowment Contract (MEC) and how does it affect BOLI?
An MEC is a policy with excessive premium funding relative to death benefit. MEC status alters the tax treatment of withdrawals and loans. BOLI is typically designed to avoid MEC classification, unless specific liquidity needs justify it.
Can BOLI be used to fund executive compensation plans?
Yes, but that function aligns more closely with COLI. While BOLI is often used to offset broad-based employee benefit costs, it can also support non-qualified executive benefits—provided plan documentation and compliance are in place.
Is there a limit to how much BOLI a bank can own?
Regulators typically suggest BOLI should not exceed 25% of Tier 1 capital and 15% of total capital without additional scrutiny. These are supervisory guidelines—not hard limits—but exceeding them requires enhanced justification and oversight.
How do mortality designs affect earnings?
Experience-rated mortality designs use a reserve owned by the bank to pay claims, reducing P&L impact at the time of death. Pooled mortality plans generate immediate earnings upon claim payout. Strategic design influences both earnings and risk.
What are the risks associated with BOLI?
Key risks include carrier credit risk, investment performance volatility (especially for Separate Account), mortality assumption deviations, regulatory change, and liquidity risk. Proper due diligence and monitoring mitigate these exposures.
What is I-COLI, and how is it different from BOLI or COLI?
I-COLI stands for Insurance Company-Owned Life Insurance, often used by insurers themselves to fund internal benefit obligations. While structurally similar to BOLI/COLI, I-COLI is governed by distinct accounting and regulatory frameworks.
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