Bank-owned life insurance (BOLI) has been available in the marketplace for over 30 years now. And yet, industry studies show that year after year, the number of banks and savings associations holding BOLI and the amount of BOLI assets held by such institutions continues to increase.
Each year, IBIS Associates, Inc., an independent market research firm located in McLean, Virginia, publishes a report analyzing BOLI sales based on information obtained from the insurance companies that market BOLI products. According to the IBIS Associates BOLI Report for 2013:
- Life insurance companies reported that over 1,100 BOLI cases were sold in 2012 representing approximately $4.4 billion in assets. The 1,100 cases included banks purchasing BOLI for the first time as well as additional purchases by banks that already have BOLI on their balance sheet.
- Of this $4.4 billion in assets, approximately $2 billion was attributable to one very large sale.
- Excluding this large case sale, the average premium per case was approximately $2 million last year.
Based on a review of FDIC data, the Equias Alliance/Michael White Bank-Owned Life Insurance Holdings Report for 2013 shows that:
- Of the 7,083 banks and savings associations in the U.S., 3,782 or 53.4 percent report held BOLI assets in 2012.
- Banks increased their BOLI holdings (i.e., cash surrender values) from $131.95 billion in 2011 to $137.95 billion last year.
- Although the largest portion of BOLI assets was held in variable separate account polices (where the bank assumes the investment risk rather than the insurance company), more banks added hybrid separate account policies (that combines the best features of a general account and variable separate account product) in 2012 (10 percent) than any other policy type.
Attractiveness of BOLI
Some have asked why BOLI is still such an attractive asset choice for banks. Briefly, the tax-deferred interest generated by a fixed income BOLI policy is typically substantially higher than a bank can earn on other investments with a similar risk profile. The higher earnings from BOLI can be used to:
- Help offset the rising cost of employee benefits such as healthcare and retirement programs through use of the tax-deferred income from BOLI assets. For instance, BOLI provides a competitive yield, currently in the range of 3.25 percent to 3.50 percent after all expenses are deducted, which translates into a tax equivalent yield of 5 percent to 5.4 percent. *
- Increase a bank’s earnings as well as shareholder value. For example, if a bank in the 38 percent tax bracket were to hypothetically invest $5 million in a BOLI fixed income account with a net yield of 3.25 percent, it would generate $162,500 in income. A similar investment of $5 million in a 5-year government agency bond yielding .93 percent would generate $46,500 in income, before taxes. Thus, the investment in BOLI would generate more than $116,000 in additional income for the bank which would enhance return on assets, return on equity and shareholder value. *
- Help diversify the bank’s balance sheet by investing 2 percent to 3 percent of its assets in a BOLI policy since investment in the general assets of an insurance company through a BOLI policy would be a new asset class for most banks.
In addition to these benefits, a BOLI policy can enable a bank to earn tax-free income and receive death proceeds from policies when they are held to maturity. A bank may also decide to share a portion of the life insurance coverage with its key executives and directors.
Over the years, BOLI has proven to be a valuable asset since now more than 50 percent of the banks in the U.S. have BOLI on their balance sheet.
What does a bank need to consider in deciding whether to purchase BOLI? The joint banking regulatory Interagency Statement of 2004 identified the factors a bank should consider in making such a decision including why the purchase is being made, the qualifications of the vendors (financial ratings, BOLI experience), the key risks (liquidity, credit, interest rate, etc.), an evaluation of the policy types available (variable separate account, hybrid separate account, general account) and a review of the bank’s capital position as well as risk tolerance.
For the reasons shown above, the number of banks purchasing BOLI for the first time or making an additional purchase of BOLI continues to grow year by year. Hybrid separate account and general account polices (where the general assets of the insurance company support the policyholder’s cash surrender value, but are not protected from claims on the insurer), have been the most popular BOLI product in recent years.
Although BOLI is not suitable for all banks, the statistics show that an increasing number of banks appreciate the benefits it does offer and are making it a part of their investment portfolio.
*The projected yield is based on an average of the interest rates offered by three carriers in the BOLI market as of April 1, 2013 and assumes the bank is in the 38 percent tax bracket.
Ken Derks is a registered representative of, and securities are offered through, ProEquities, Inc., a Registered Broker/Dealer, and member FINRA and SIPC. Equias Alliance is independent of ProEquities, Inc.