Banks and, particularly, community banks, continued to increase their purchases of bank-owned life insurance policies (BOLI) in 2013. Banks are taking advantage of attractive BOLI yields compared to alternative investments, and they are motivated as well by increased liquidity and low interest rates. BOLI provides tax advantaged investment income not available with traditional bank investments. Banks earn income from the growth of the BOLI cash value and from the life insurance proceeds paid to the bank on the death of the insured employee. In addition, BOLI can help offset and recover employee benefit expenses.
Each year, IBIS Associates, Inc., an independent market research firm, publishes a report analyzing BOLI sales based on information obtained from the insurance companies that market BOLI products. According to the most recent IBIS Associates BOLI Report:
- Life insurance companies reported that they sold 1,235 new BOLI cases in 2013, up 12 percent from 2012, representing about $3.18 billion in premium in 2013. The 1,235 cases included banks purchasing BOLI for the first time as well as additional purchases by banks that already own BOLI.
- Of the $3.18 billion in premium sold last year, 59.6 percent was put into general account, 31.8 percent was put into hybrid separate account and 8.6 percent was put into variable separate account.
- The average premium per case was about $2.57 million, a 20 percent increase from last year.
- Banks with assets of $250 million to $1 billion purchased the largest number of products last year (42.3 percent of cases).
Based on a review of FDIC data, the Equias Alliance/Michael White Bank-Owned Life Insurance Holdings Report published in 2014 for the year 2013 shows that:
- Of the 6,812 banking institutions in the U.S., 3,840 or 56.4 percent held BOLI assets in 2013. However, if you exclude banks with less than $100 million in assets from the equation, the percentage of banks holding BOLI jumps to 64.9 percent.
- BOLI assets totaled $143.84 billion at the end of last year, reflecting a 4.3 percent increase from $137.95 billion at the end of 2012. However, banks with between $100 million and $10 billion in assets had an increase of 7.8 percent in their BOLI assets from 2012 to 2013.
- The fastest growing plan type in 2013 was hybrid separate account (which combines many of the best features of a general account and variable separate account product). Almost 1,200 or 30.9 percent of the 3,840 institutions reporting BOLI assets held all or part of their funds in the hybrid separate account. Assets in this type of account grew 9.1 percent from 2012 to 2013 while general account assets grew 6.1 percent during that same time and variable separate account assets increased only 1.9 percent.
- Although the largest portion of BOLI assets was held in variable separate account polices (49 percent of total BOLI assets), this plan type was used by the fewest number of banks. The bank bears the investment risk under this type of plan rather than the insurance company. Further, the number of banks holding variable separate account BOLI assets increased only slightly from 593 at the end of 2012 to 597 at the end of 2013.
Current BOLI Net Yields
BOLI provides a competitive net yield, currently in the range of 3.0 percent to 3.9 percent after all expenses are deducted, depending on the carrier and product. This translates into a tax equivalent yield of 4.84 percent to 6.29 percent, assuming a 38 percent tax rate. Carriers can reset crediting rates annually or quarterly depending on the type of BOLI product used.
In summary, the number of banks purchasing BOLI continues to grow. 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, especially in the current rate environment. Further, income generated by BOLI can help offset the ever increasing costs of a bank’s health care, retirement and other benefit programs.
Equias Alliance offers securities through ProEquities, Inc. member FINRA & SIPC. Equias Alliance is independent of ProEquities, Inc.