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What does a bank do with its money when its vault just isn’t safe enough? They buy life insurance.
That fact often comes as a surprise, especially when you consider the vast array of options and opportunities available to today’s big banks. But bank-owned life insurance (BOLI) is a staple of the industry at every level…
As of 2024, more than 3,000 banks across America held some form of BOLI — nearly 70% of all banks in the country.
If we focus exclusively on the larger banks, those with assets between $500 and $10 billion, the percentage is even higher, with 4 out of 5 banks (80%) holding some form of BOLI.
The total cash surrender value of these policies is estimated at $200 billion, and that’s likely just a fraction of what these policies will ultimately pay out.
Bank-owned life insurance policies allow banks to purchase massive amounts of coverage on key employees. The bank owns the policies, pays the premiums, and collects the cash value growth and death benefits.
In essence, they treat whole life insurance like a stable, long-term asset class sitting inside their tier-one capital structure (the safest assets banks hold). The cash value of BOLI grows tax-advantaged, earns consistent returns, and remains extremely low risk — all while serving as a smart way to offset employee benefit costs.
My friend Dale just so happened to be one of the bank employees to benefit from this practice…
As an executive for a mid-sized regional bank, Dale had a demanding job and worked long hours. His hard work was well-rewarded though, with a competitive base salary and an amazing benefits package — one that included a split-dollar life insurance policy.
With this type of policy, the bank or employer typically splits some or all of the premium payments and death benefit with the employee. In Dale’s case, the bank agreed to cover all of his premium payments as a zero-interest loan (directly supplementing his income). The balance of which would be paid back out of the policy’s death benefit, with the remainder going to Dale’s beneficiaries.
Aside from those details, Dale’s policy worked just like any other whole life insurance policy. His cash value grew tax-deferred, and he was always able to borrow against it tax-free.
In that sense, a split-dollar, bank-owned life insurance policy can be an amazing “win-win” benefit for everyone involved. Dale’s policy was functionally a “Rich man’s Roth/Retirement” account for him … and a powerful asset to the bank.
Many other bank-owned life insurance policies are written as key-person life insurance on high-ranking employees.
These top executives (like Dale) are practically indispensable to their employers. That means the bank has what’s called an “insurable interest” and can take out a policy on the individual. Key-person life insurance policies are typically owned by the bank, who also pays all the premiums and is listed as beneficiary.
Employees will often be notified of this practice, but the primary purpose is to hedge against the potential loss of income and business that can result from the untimely death of an employee.
Regardless of type, every whole life insurance policy’s dividends are scheduled out years in advance. They’re paid by the insurer, independent of what’s going on in with stocks, bonds or interest rates. That’s a critical advantage for banks, whose entire business is otherwise subject to the shifting fate of the global financial system…
For example — back in March of 2022, the US Federal Reserve started hiking rates to tame inflation. What followed was the fastest rate hike cycle in history, with a 5.25% jump in the benchmark interest rate over just 16 months.
A few percentage points’ difference might not sound like much, but banks often live and die on surprisingly narrow margins. Silicon Valley Bank (SVB) in particular had made the critical error of investing heavily into long term Treasury bonds — whose value was smashed when newer issues started offering substantially higher rates.
SVB was forced to sell its Treasury portfolio at a loss, admitting total mark-to-market losses of $15 billion due to rising rates and slowing growth. A bank run followed in short order, and Silicon Valley Bank became the second-largest bank failure in American history. It was soon surpassed by First Republic and joined by Signature bank, with the second-, third-, and fourth-largest bank failures in history all happening in rapid succession.
The Federal Reserve stepped in quickly to calm the markets and establish a “Bank Term Funding Program,” but the damage was already done, and five small-to mid-sized banks simply winked out of existence.
So banks aren’t immune from the unexpected twists and turns of life — and they’re well aware of that fact. Successful, established banks are generally among the most conservative, unemotional investors out there. They don’t buy hype. They don’t chase trends. And that’s why they love life insurance…
When you compare whole life insurance to popular conservative investments like Treasuries and CDs, you’ll find that a well-structured policy typically provides greater benefit over time — especially after taxes.
And it’s not just about the death benefit, either. When structured properly, a bank-owned life insurance policy can be a powerful and unique new source of stability, liquidity, and disciplined, long-term growth.
By investing millions into BOLI policies, these banks are effectively building up a “volatility buffer” around their business that could potentially prove indispensable at some point in the future. The mere existence of these policies (and their cash value) on a bank’s balance sheet could prove enough to discourage a bank run during some future crisis.
Banks have known for generations that whole life insurance can provide a whole new dimension of benefits and flexibility to handle whatever life throws your way. So when will the rest of America catch on?
Ready to see how this could apply to your wealth plan? Click the big yellow Clarity Call button and let’s map it out together.
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