.png)
Most people think life insurance has one job: to pay out when someone dies. But that’s only half the story. The wealthiest individuals and institutions know its true power lies in its function as a living asset. Banks, for example, use a special type called Bank-Owned Life Insurance (BOLI) as a cornerstone of their financial strategy. They use it to generate steady, tax-advantaged returns that fund their most significant long-term obligations. This is the core principle of The And Asset®—using a single tool for protection and growth. Understanding how banks vet and select from a list of bank owned life insurance products reveals how you can apply this powerful concept to your own financial life.
You’ve probably heard that banks and large corporations use life insurance as a powerful financial tool, but you might not know exactly how or why. Bank-Owned Life Insurance, or BOLI, is a specific type of life insurance policy that a bank purchases on its key employees. In this arrangement, the bank is the owner and the beneficiary of the policy. If the insured employee passes away, the bank receives the death benefit payout.
But BOLI is much more than just a standard life insurance policy. Banks use it as a strategic asset to strengthen their financial position and fund long-term employee benefit obligations. Think of it as a way for banks to invest their capital in a stable, tax-advantaged asset that supports both their balance sheet and their people. It’s a core component of their financial strategy, helping them manage costs and build a more resilient financial foundation. This same principle of using life insurance as a versatile financial asset is something we help our clients apply in their own lives and businesses.
Banks don't just buy BOLI for the death benefit; they primarily use it as a long-term investment vehicle. The cash value inside a BOLI policy grows over time, tax-deferred. Banks use this accumulating cash value to offset and recover the rising costs of employee benefits, such as health insurance and retirement plans. It’s a way to create a dedicated funding source for these significant, ongoing expenses.
This strategy is particularly effective for funding non-qualified executive benefit plans, which are designed to attract and retain top talent. By using BOLI, banks can provide competitive compensation packages without creating a major drain on their operational funds. It’s a smart, efficient way to manage liabilities while adding a high-quality asset to their books, aligning perfectly with a sound tax strategy.
When you think of conservative investors, banks are at the top of the list. So, why do they choose life insurance over more traditional investments like Treasury bonds or CDs? The answer comes down to efficiency and tax advantages. The cash value growth within a BOLI policy is tax-deferred, and the death benefit is received tax-free. This tax treatment often results in a better after-tax return compared to many other low-risk investments.
Furthermore, BOLI is considered a high-quality, stable asset that enhances a bank's balance sheet. It’s backed by highly-rated insurance carriers and provides predictable growth, which regulators view favorably. For a bank, holding BOLI is a strategic move to diversify its assets and generate steady, tax-favored returns to support its long-term financial goals.
One of the biggest misconceptions about life insurance is that its only value is the death benefit. This is especially untrue for policies like BOLI. Unlike a simple term life policy, a BOLI policy is a tangible asset with a growing cash value that the bank owns and controls. It’s listed right on their balance sheet.
Another common myth is that these policies are illiquid or can't be changed. In reality, BOLI policies can often be sold or transferred, just like other financial assets. This flexibility makes it a dynamic tool, not a static one. Understanding that life insurance can be a powerful asset with living benefits is central to what we call The And Asset®, where you can use it for protection and for growth.
When you hear about Bank-Owned Life Insurance, you might wonder where these policies actually come from. Unlike the life insurance you might buy for your family, BOLI is a specialized financial instrument used by institutions. It’s not something you can just pick up from your local agent. The market for BOLI is primarily served by a few key players who understand the unique regulatory and financial landscape that banks operate in.
The providers of BOLI products and services fall into three main categories: large national banks, smaller regional and community banks, and the insurance carriers that underwrite the policies. Each of these players engages with BOLI for slightly different reasons, but the core purpose remains the same: to use a stable, tax-advantaged asset to offset costs and strengthen their financial position. Understanding who offers these products gives you a clearer picture of how BOLI functions as a high-level strategy for financial institutions.
The big, household-name banks are major purchasers of BOLI. They use these policies as a strategic tool for managing large-scale employee benefit obligations. Think about the massive costs associated with retirement plans, health benefits, and other compensation for thousands of employees. Major banks can purchase BOLI policies to generate tax-advantaged income that helps fund these expenses. They also use BOLI for key person insurance on top executives or as a component of their overall investment strategy. According to the Office of the Comptroller of the Currency, these banks can also hold BOLI in connection with loans, making it a versatile asset on their balance sheets.
BOLI isn't just for the giants of the banking world. Regional and community banks also rely on these policies, often for the same reason: to manage the rising costs of employee benefits. For these smaller institutions, BOLI is an effective way to generate stable, predictable returns to offset long-term liabilities. Most community banks use what are called "general account" policies, which are straightforward assets backed by the insurance company's general investment portfolio. This simplicity makes BOLI an attractive and manageable asset for banks that may not have the vast resources of their national counterparts but still need effective financial planning tools.
At the end of the day, the BOLI policies themselves are created and sold by insurance carriers. These are the companies that design the contracts, manage the underlying investments, and pay out the benefits. They work directly with banks to structure policies that meet their specific financial goals and regulatory requirements. These carriers often provide guidance to ensure banks use BOLI prudently. For instance, a common guideline suggests that a bank’s total BOLI holdings should not exceed 25% of its Tier 1 capital—essentially, its core financial cushion. This helps ensure the bank remains well-capitalized and isn't over-exposed to a single asset class, making life insurance a balanced part of its portfolio.
Banks don't just buy life insurance for the same reasons individuals do; they use it as a powerful financial tool with several key advantages. For these institutions, Bank-Owned Life Insurance (BOLI) is a strategic asset that helps them manage their finances more effectively. The primary benefits fall into three main categories: favorable tax treatment, funding for employee obligations, and strengthening their overall financial position.
One of the biggest draws of BOLI is its tax-advantaged status. The cash value inside a BOLI policy grows on a tax-deferred basis. This means the bank doesn’t pay taxes on the gains as they accumulate each year, allowing the funds to compound more efficiently over time. When you remove the annual drag of taxes, you can build capital much more effectively.
Furthermore, the death benefits paid out from these policies are typically received by the bank income-tax-free. This combination of tax-deferred growth and tax-free payouts makes BOLI an incredibly efficient way for a bank to hold and grow capital. It’s a core reason why this asset is a key part of a bank’s long-term tax strategy.
Banks have significant long-term financial obligations to their employees, such as retirement plans, executive compensation packages, and other benefits. BOLI serves as a highly effective and stable asset to help fund these future costs. Think of it as a financial engine working in the background to ensure the bank can meet its promises to its team down the road.
By allocating funds to BOLI, a bank can create a dedicated pool of assets that grows steadily to offset these liabilities. This is a responsible way to manage future expenses and is a common strategy for financing non-qualified executive benefit plans. It helps banks prepare for their retirement obligations to their key people without creating a drag on their operating capital.
In the financial world, BOLI is considered a high-quality, conservative asset. Holding BOLI on the books can improve a bank's balance sheet and its overall financial standing. Regulators view it as a stable asset, which contributes positively to the bank's capital position. This stability is a welcome addition to any institutional portfolio.
BOLI also plays an important role in diversification. Just like any savvy investor, banks aim to spread their investments across different asset classes to manage risk. BOLI provides a steady, low-volatility asset that performs differently than stocks or bonds, helping to create a more resilient and balanced portfolio. You can explore more financial strategies in our Learning Center.
While Bank-Owned Life Insurance is a powerful tool for financial institutions, it’s not a simple, hands-off asset. Like any significant investment on a bank's balance sheet, BOLI comes with its own set of risks and management responsibilities. Understanding these challenges is crucial for any institution considering this strategy. The primary hurdles fall into three main areas: navigating a complex web of regulations, managing the effects of market fluctuations, and dealing with the long-term nature of the asset.
Successfully using BOLI requires a proactive approach to compliance and ongoing performance monitoring. Banks must have the right systems in place to manage these policies effectively over decades, not just a few quarters. This means dedicating resources to oversight and staying informed about changes in both the market and the regulatory landscape. For banks that are prepared, these challenges are manageable, but for those that aren't, they can create significant financial and reputational problems. It’s about going in with your eyes wide open and having a clear plan for long-term administration.
Banks operate under a microscope, and their use of BOLI is no exception. Federal and state regulators have established strict guidelines to ensure these policies are used appropriately and don't introduce undue risk to the banking system. A bank’s reputation hinges on its ability to maintain compliance. This involves much more than just buying a policy; it requires creating and maintaining effective internal policies that cover everything from tax and accounting rules to the risk-based capital treatments for the asset.
To stay on the right side of regulators, banks must conduct annual reviews to confirm they are following all relevant laws. This continuous oversight ensures the BOLI program remains a sound and stable part of the bank's financial strategy, rather than becoming a source of compliance headaches or penalties down the road.
The performance of a BOLI policy is directly tied to economic conditions, particularly interest rates. The growth of the policy's cash value is largely driven by the interest credited to it by the insurance carrier. When interest rates fall, the growth of BOLI assets can slow, impacting the bank's projected returns. This makes the annual performance of BOLI sensitive to broader market movements that are outside of the bank's control.
Other economic factors, such as corporate tax rates and a bank's own financial leverage, also play a role in the overall effectiveness of a BOLI strategy. This sensitivity to market forces means that BOLI isn't a static asset. It requires ongoing assessment to ensure it continues to meet the bank's financial objectives as the economic climate changes over time.
BOLI is designed as a long-term asset, and this is where the challenge of liquidity comes in. If a bank needs to access the policy's cash value unexpectedly by surrendering it early, it can face significant financial penalties. These potential adverse financial effects include paying income taxes on all the accrued earnings since the policy was purchased, as well as facing steep surrender charges from the insurance carrier. This makes BOLI an illiquid asset, meaning the funds are not easily accessible without cost.
Beyond liquidity, ongoing policy management is critical. Banks must assess the credit risk of the insurance carrier providing the policy and, in the case of separate account BOLI, the underlying investments. This requires careful due diligence not just at the time of purchase, but for the entire life of the policy.
When a bank decides to purchase Bank-Owned Life Insurance, it’s not like picking a product off a shelf with a fixed price tag. The costs associated with BOLI can vary significantly based on several key factors, much like any sophisticated financial instrument. The total cost isn't just about the initial premium; it also includes the ongoing expenses required to manage the policies effectively and ensure they remain compliant with strict regulations.
Think of it as building a custom portfolio. The final price depends on the specific components you choose, the strategy behind it, and the team you hire to manage it. For banks, the primary cost drivers are the premium structure they select, the administrative fees from third-party providers, and the bank's own financial profile and objectives. A large national bank with billions in assets will have different needs and pricing power than a smaller community bank. Understanding these variables is the first step for any institution looking to use BOLI to strengthen its financial position and fund future obligations. It’s a strategic decision where the upfront and ongoing costs are weighed against the long-term benefits, like tax-advantaged growth and offsetting employee benefit expenses.
The most direct cost of a BOLI policy is the premium—the money paid to the insurance carrier. Banks typically fund these policies with a single, large premium payment, which is why BOLI is often seen as a destination for a bank's excess capital. The way a bank plans to use the policy often dictates the funding approach. For instance, a bank can purchase BOLI to finance employee compensation plans, secure key person insurance on essential executives, or recover the costs of providing employee benefits. Each of these goals might require a different policy design and, therefore, a different premium structure. This flexibility in funding allows banks to align the policy with specific financial strategies, turning a simple premium payment into a targeted investment in their future stability.
Beyond the initial premium, BOLI policies come with ongoing administrative costs. These aren't junk fees; they are necessary expenses for proper management and compliance. Banks often work with third-party vendors and service providers to administer their BOLI portfolios, and these services come at a cost. Furthermore, regulators require banks to perform annual reviews to make sure the policies adhere to all applicable laws and regulations. This internal audit and compliance function represents another layer of ongoing expense. These administrative costs are crucial for maintaining the policy's health and ensuring it performs as expected over the long term. Neglecting this side of the equation can lead to compliance issues and diminish the policy's overall value.
Several factors related to the bank itself can influence the pricing of a BOLI policy. Research shows that a bank’s size and leverage often play a significant role; larger institutions may have access to different products or pricing. A bank’s tax situation is another major driver. Because the cash value growth in a BOLI policy is tax-deferred, it becomes a more attractive asset for banks with higher tax rates. This makes them more willing to purchase BOLI as an effective tax strategy. Finally, a bank’s core reasons for buying the policy—such as having excess liquidity to invest or needing an efficient way to offset rising employee benefit costs—will shape the type of policy they purchase and the price they pay.
When you’re looking at Bank-Owned Life Insurance, it’s easy to assume one policy is just like the next. But the details matter—a lot. Choosing the right policy isn't just about the potential returns; it's about stability, structure, and making sure you're following all the rules. Think of it like buying a commercial property. You wouldn't just look at the price; you'd inspect the foundation, understand the zoning laws, and review the property management. The same level of due diligence applies here.
A solid BOLI strategy depends on three core components: the financial health of the company issuing the policy, the way the policy itself is built, and the support system in place to manage it correctly. Getting these three things right is the key to using BOLI effectively as a tool to strengthen your bank's financial position and fund employee benefits. It’s a significant decision that impacts the bank's balance sheet for years to come, so taking a methodical approach is non-negotiable. Let's break down what you need to look for in each of these areas.
Before you look at any policy illustrations or projections, your first step is to vet the insurance carrier. Why? Because when a bank purchases a general account BOLI policy, it’s essentially holding an IOU from the insurance company. The policy is an unsecured obligation, meaning if the insurer faces financial trouble, the bank’s asset could be at risk. You’re placing a significant amount of capital with this company, so you need to be confident it will be there for the long haul. Assessing an insurer’s financial strength involves looking at their ratings from independent agencies like A.M. Best, Moody's, and S&P. A long history of high ratings is a strong indicator of stability and prudent management. This isn't the place to cut corners; the integrity of your entire life insurance strategy rests on the carrier's ability to meet its obligations.
Next, you need to understand how the policy is structured. Most BOLI policies fall into one of two categories: general account or separate account. A general account policy places the cash value into the insurance company's main investment pool. It’s a simpler approach, but as we mentioned, it ties the bank’s asset directly to the carrier’s general financial health. A separate account policy, on the other hand, keeps the policy’s funds apart from the insurer’s general assets. This can offer an additional layer of protection from the company’s creditors and may provide different investment options. The choice between the two depends on the bank's risk tolerance and financial goals. Understanding this distinction is fundamental to building a resilient portfolio, much like the principles behind The And Asset.
Finally, BOLI isn't a "set it and forget it" asset. It comes with a strict set of regulatory requirements from federal and state authorities. A good BOLI provider won’t just sell you a policy; they’ll provide the framework for ongoing compliance and administration. This includes conducting a thorough pre-purchase analysis to justify the purchase and establishing clear objectives for the policy. You’ll also need support with the complex accounting and tax rules that apply to BOLI. This is where experienced third-party administrators and advisors are critical. They help ensure everything is documented correctly and that the bank stays compliant with all reporting requirements. Proper tax strategy and planning is not just an add-on; it's an essential part of a successful BOLI program.
When banks evaluate an investment, they aren't just chasing the highest possible return. They're looking for stability, tax efficiency, and predictable growth that strengthens their balance sheet over the long haul. This is where Bank-Owned Life Insurance (BOLI) really stands out. Unlike more volatile assets tied directly to the stock market, BOLI is designed to be a steady, high-quality asset. Its performance is measured not just in raw numbers, but in its ability to provide consistent, tax-advantaged returns that help the bank meet its financial obligations.
For banks, BOLI is a strategic tool. The cash value within these policies grows on a tax-deferred basis, and the death benefits are received tax-free. This tax treatment alone often makes its net return more attractive than what they could get from other conservative investments like corporate bonds or US Treasuries. It’s a way for them to put their capital to work efficiently, offsetting the costs of employee benefit programs and adding a layer of stability to their financial foundation. This same principle of using life insurance for tax-efficient growth and stability is a cornerstone of creating your own And Asset®.
When you compare investments, looking at returns without considering risk is only seeing half the picture. Risk-adjusted return measures how much profit you earn for the amount of risk you take on. Banks are masters of managing risk, which is why BOLI is such a popular asset on their books. It offers competitive returns with significantly less volatility than equities.
The tax-deferred growth and tax-free death benefits give BOLI a powerful advantage over other conservative, taxable investments like high-yield savings accounts or certificates of deposit (CDs). Once you factor in the tax savings, the effective yield of a BOLI policy is often superior. This allows a bank to achieve steady, predictable growth without exposing its capital to unnecessary market fluctuations, making it a cornerstone for a sound financial plan.
Smart capital allocation is about making sure every dollar is working as hard and as efficiently as possible. BOLI is an incredibly efficient tool for this purpose. Because of its favorable tax treatment, it allows banks to fund their long-term employee benefit obligations in a more cost-effective way. The income generated from BOLI policies can be used to offset the rising costs of healthcare and retirement plans for their key employees.
This isn't just about saving money; it's a strategic move. By using a tax-advantaged asset to cover these expenses, the bank frees up other capital that can be used for its core business: lending. This is a perfect example of how a well-structured tax strategy can improve an organization's overall financial health and operational efficiency, a principle that applies just as much to your business as it does to a national bank.
BOLI is not a short-term, speculative play. It’s a long-term asset designed for steady appreciation. The performance of a BOLI policy is primarily driven by the crediting rates from the insurance carrier, which are influenced by the performance of the carrier's general investment portfolio. This structure provides a buffer from direct market volatility and results in consistent, positive returns over time.
Because of this stability, regulators and financial institutions view BOLI as a high-quality, reliable asset. It helps diversify a bank's investment portfolio and strengthens its balance sheet. The trend for banks is to hold these policies for the long term, allowing the cash value to compound year after year. This patient, long-range approach to building wealth is the same philosophy we apply when helping our clients build their own financial futures and plan for retirement.
Bank-Owned Life Insurance isn't the Wild West of financial products. Because it offers significant tax advantages and is used to manage substantial assets, BOLI is governed by a strict set of rules at both the federal and state levels. These regulations are in place to ensure banks use these policies for their intended purpose—offsetting the costs of employee benefits and managing long-term financial obligations—rather than for pure speculation.
For business owners and investors, understanding these rules provides insight into why BOLI is considered a stable and reliable asset class. The oversight from agencies like the Office of the Comptroller of the Currency (OCC) ensures that the use of BOLI is prudent and aligns with sound banking practices. This framework is designed to protect the bank, its depositors, and the financial system as a whole. Think of it as the necessary guardrails that keep a powerful financial vehicle safely on the road. The core idea is to use life insurance as a strategic tool for stability, not a ticket for high-risk bets.
Federal regulators have drawn clear lines around how banks can and cannot use BOLI. The primary approved use is to recover the costs associated with providing employee compensation and benefit plans. This includes funding retirement and health benefits or using it as key person insurance on essential executives. Banks can also hold policies on borrowers or use them as security for loans.
However, the rules explicitly prohibit using BOLI for speculation. Banks are not allowed to purchase these policies simply to bet on market movements. They also cannot use BOLI to fund normal operating expenses, repurchase shares from a deceased shareholder, or provide unreasonable estate planning perks to insiders. These federal guidelines ensure BOLI remains a tool for managing liabilities, not for generating speculative profits.
On top of federal oversight, BOLI is also subject to state-level insurance laws. One of the most important state-level considerations is the concept of "insurable interest," which requires the bank to have a legitimate financial interest in the continued life of the insured employee. This prevents banks from taking out policies on employees without a valid reason.
State regulations also influence the structure of the policy itself, particularly the distinction between general and separate account products. With a general account policy, the cash value is part of the insurance carrier's general assets, making the bank an unsecured creditor. A separate account policy, however, isolates the policy's assets, offering the bank more protection from the insurer's general creditors. This choice directly impacts the risk profile of the asset.
Proper administration of BOLI requires meticulous record-keeping and reporting. Before a bank even purchases a policy, it must establish a comprehensive pre-purchase analysis and a clear set of objectives. This documentation outlines why the bank is buying BOLI, which products are permissible, and how performance will be measured.
Once the policies are active, the work doesn't stop. Banks must conduct annual reviews to ensure ongoing compliance with all relevant laws, including federal tax codes and state insurable-interest rules. They also need to report the BOLI assets correctly on their financial statements according to Generally Accepted Accounting Principles (GAAP). This rigorous reporting ensures transparency and holds the institution accountable for its tax and financial strategy.
So, can I buy BOLI for my own business? While Bank-Owned Life Insurance is a product specifically designed for and regulated around banking institutions, the strategy itself is not exclusive to them. A very similar tool called Corporate-Owned Life Insurance (COLI) is used by all types of businesses for the same core reasons: to insure key employees, fund future benefit obligations, and hold a stable, tax-advantaged asset on the balance sheet. The principles are directly transferable.
Why should I care about how banks use life insurance? It’s always smart to pay attention to what the most conservative and successful financial institutions are doing with their money. Banks use life insurance as a core asset because it provides stability, tax efficiency, and predictable growth. Understanding their strategy shows that life insurance is far more than a simple protection tool; it’s a powerful financial asset. The same principles they use to strengthen their balance sheets can be applied to your own personal or business financial plan to build a resilient foundation.
What's the biggest takeaway from the BOLI strategy? The most important lesson is the mindset shift it represents. Banks don't view life insurance as a sunken cost; they see it as a high-quality, income-producing asset that belongs on their balance sheet. They leverage it for its living benefits—the tax-advantaged cash value growth—to solve major financial challenges. Adopting this perspective allows you to see how a properly structured policy can be a versatile tool for both protection and growth in your own life.
Is the cash value in BOLI similar to the cash value in a personal whole life policy? Yes, the fundamental concept is the same. In both BOLI and a personal whole life policy, the cash value is a core component that grows over time, separate from direct market volatility and on a tax-deferred basis. This growing pool of capital is what gives the policy its asset-like quality. While the specific products, regulations, and scale are different, the underlying engine of building a stable, accessible store of value works in a very similar way.
You mentioned BOLI is a 'stable' asset. What makes it more stable than other investments? BOLI's stability comes from its insulation from the day-to-day turbulence of the stock market. The growth of the most common type of BOLI is tied to the performance of the insurance carrier's general investment portfolio, which is managed conservatively with a long-term focus. This structure smooths out returns and avoids the sharp ups and downs you might see in equities, providing the steady, predictable performance that banks value so highly.
.png)
.svg){kind=logo}
