The Legacy Life Executive Benefit® can be used with banks and BOLI.
There are many other benefits to banks as well.
How it works.
Bank Owned Life Insurance (BOLI) consists of policies insuring the Bank’s officers and key employees, typically purchased with a one-time payment. Attractive yields through tax-deferred cash accumulation and tax- free death proceeds make BOLI an alternative asset that more than two-thirds of America’s banks have acquired.
Immediately accretive, unlike traditional life insurance, BOLI translates these earnings to earnings-per-share. These earnings increasing in future years due to compounding.
BOLI should be considered as a part of the Bank’s overall Asset & Liability Management (ALM) strategy. (See the ALM Narrative article and BOLI and Assets Liability Management document - see these downloadable docs on this page).
According to the OCC and FIL-127, the business purpose for BOLI is to informally finance employee benefits. The following benefits being informally financed can include:
The maximum amount of BOLI to be purchased is generally equal to 25% of the Bank’s Tier One Capital amount. Purchase amounts from any one insurance carrier should generally be less than 15% of the Tier One Capital amount. There are instances where banks have more than 25% of Tier One Capital in their BOLI portfolio, however, if the purchase amount was below that guideline, examiners have been fine with the excess. Following the 2008-09 recession, some banks saw their BOLI grow while their assets shrunk creating the disparity.
It is not necessary to create new executive benefits to justify a BOLI purchase although BOLI is often implemented in conjunction with nonqualified benefit plans. BOLI income is recorded as Other Income on the Bank’s income statement. Call Reports have a line item for Life Insurance divided into three categories. General Account of the BOLI carrier (common for community banks), Separate Account, and Hybrid accounts. This income and the policy death benefits are not subject to income tax if the policy is held until maturity.
BOLI policies that are surrendered prior to the death of the insured create taxable income on the gain portion of the cash accumulation; the difference between the premiums paid and the total cash accumulation in the policy. The gain on surrender may also be subject to a 10% MEC tax penalty like an early withdrawal from an IRA prior to age 59½ years old.
BOLI has no legal impact on benefits provided by the Bank to its employees, nor does it impact their personal insurance programs. When death benefits are shared via The Legacy Life Executive Benefit® or Death Benefit Only (DBO) plans, they are still part of the banks’ ownership and beneficiary arrangement, not part of the employee’s personal insurance program.
Important and helpful documents available for download:
These will be helpful for when we talk by phone or in person.