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What Is Bank Owned Life Insurance?

Bank owned life insurance, also called BOLI, is a non-traditional life insurance policy that banks and other financial institutions may use for tax incentives. The life insurance policy is placed in the name of a key executive of the bank. However, they are not typically the one who receives the benefits. Instead, the bank uses the policy as a better way to fund employee benefits programs for all bank employees.

The way it works is relatively complex. However, in essence, the bank uses the life insurance policy as an illiquid asset. Since the life insurance policy is a whole life policy, it collects cash value over time. The bank has the ability to withdraw from the cash value and use it for benefits programs. When done properly, this is done in a tax-free manner or a manner that defers the tax obligation.

Benefits Of Bank Owned Life Insurance

The benefits of bank owned life insurance include a way to effectively fund employee benefits programs, obtain cash value growth with tax advantages, and receive a tax-free death benefit that could be used in a multitude of ways.

Effectively Fund Employee Benefits Programs

The majority of banks that use bank owned life insurance do so to offset the costs of employee benefits programs. This can help lower the overall cost for employees and your bank. It is also an asset for your bank as well. Although it cannot be sold (illiquid asset), it helps provide financial security.

Cash Value Growth With Tax Advantages

Bank owned life insurance grows in cash value over time. This cash value is an asset for the bank. The withdrawal is usually tax-free or (at worst) tax-deferred with a whole life policy, particularly when funding employee benefits programs. These tax advantages can save the bank a significant amount of money when compared with investments into other assets or alternative methods of funding employee benefits programs.

Tax-Free Death Benefit

Last but not least, the bank receives a death benefit from the policy as well. The death benefits are tax-free and usually quite significant. Additionally, if the policy is held until the policyholder’s death, then there are no capital gains taxes on the cash value.

When Should You Consider Bank Owned Life Insurance?

Bank owned life insurance is specifically for banks and not for individuals. Here at Vector Financial Group, we recommend that all banks purchase bank owned life insurance as it is a relatively safe asset that offers tax benefits banks cannot receive through other employee benefits funding strategies.

Want To Learn More About The Bank Owned Life Insurance Policy Process?

Bank owned life insurance is a great way to protect your financial institution and optimize the funding for your employee benefits programs. Vector Financial Group offers planning and brokerage services for banks in need of a BOLI policy. To learn more about BOLI and to get the policy process started, contact our team at Vector Financial Group today.

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