Five Common Misperceptions About BOLI

Bank-owned life insurance has been a popular way for banks to earn a tax-deferred or even tax-free return on their capital for many years. In fact, banks can invest up to 25% of their Tier 1 capital in BOLI.

Banks have struggled with low yields on bank-approved investments such as U.S. Treasuries since the Federal Reserve dropped rates to zero. BOLI has been welcome relief to that pressure: As of mid-October, the average highest credit quality general account BOLI yielded 2.37% and the highest yield on average was 2.69%, according to the Newcleus BOLI Index. The taxable equivalent yield, based on a 21% tax rate, is 3% to 3.41%.

Despite its popularity, there are still many misperceptions in the market about BOLI that we want to dispel. Let’s focus on general account BOLI, the most common form of BOLI.

1. “BOLI is janitor insurance. Is it even legal?”
The term “janitor insurance” refers to a time when it was common for companies to buy life insurance for their employees without their knowledge or consent. That’s not legal anymore. With the passage of the Pension Protection Act of 2006, firms need to obtain consent from the employees covered by policies where the company pays the premium. In addition, only the top 35% highest paid employees can be considered for coverage.

For example, a regional bank may send out a notice asking for consent and a signature from 200 of the highest-paid employees in the bank, and 150 of them with sign it. Those 150 employees will be covered by BOLI.

2. “I don’t want my bank to profit off the death of employees.”
Many banks, especially community banks, choose to share a portion of the life insurance benefit with the deceased employee’s estate. In essence, the bank pays the premium, not the employee, and earns tax-deferred interest on the BOLI asset along with a death benefit that it can share with the employee. This can be structured in different ways. The bank may decide to offer a life insurance benefit only to the CEO, the members of the executive team, or the 20 top highest paid employees, for example.

3. “We don’t need to add a life insurance benefit.”
The point of BOLI is not life insurance coverage (yes, we know it’s called bank-owned life insurance). It’s not a regular term-life policy, where you write a premium check every month and receive a benefit when someone dies.

BOLI is an asset class. BOLI stays on the balance sheet and is accretive from Day 1. The day after a bank wires the premium, it is paid interest on the principal. The earned interest is tax-deferred until the death of the employee. If the employee dies, the earnings are tax free. But there are regulatory restrictions on the use of BOLI. For example, the Office of the Comptroller of the Currency requires banks to use the earnings to offset the cost of bank compensation and benefit programs.

4. “BOLI is an illiquid asset.”
This is a common misperception of BOLI. Typically, on a term-life policy, there’s no asset you can sell. That’s not true for BOLI. Like other investment products, banks can sell, or surrender the policy, at any time. In a time of widespread declines in asset values, a bank might find that the value of its asset, similar to a bond portfolio, has fallen. But the insurance company will return 100% of the cash surrender value. There are no fees to sell the asset. If a bank surrenders the policy before the death of the covered employee, the bank may owe unpaid taxes on any earnings received.

5. “Now is a bad time to buy BOLI.”
Given that many predict interest rates to go up in the next few years, banks may assume it’s a bad time to buy BOLI. Why lock in capital at a low interest rate when rates are going to go up? Although BOLI is a fixed-rate asset, it reprices at market rates. Typically, a BOLI portfolio has a duration of 5 to 7 years. Each year, 20% of the portfolio will turn over. By the fifth year, 100% of it has repriced.

We hope to have dispelled some of the common misperceptions about BOLI. If you haven’t maxed out the amount of BOLI you can put on your balance sheet, it might be time to take another look.

BOLI Administration: What Comes Next?



Setting up the right Bank-Owned Life Insurance (BOLI) policy is only part of the story. What happens over the life of the policy is important, too. In this informative video, Jim Calla of Meyer-Chatfield explains how proper maintenance and reporting can make the most of this product.

  • Why is proper BOLI administration an important issue for banks?
  • What are the characteristics of a good BOLI administrator?

The Impact of Rising Interest Rates on BOLI


BOLI-7-9-15.pngSince the Great Recession of 2007-2009, the Federal funds rate has been held near zero to help spur the U.S. economic recovery. However, with the decline in the unemployment rate, strong jobs growth in the second quarter of 2015 and low inflation, the Federal Reserve may begin to raise short-term interest rates before the end of this year.

Although no one can predict exactly when interest rates will rise or by how much, we all understand it will occur at some point. Because we have been in a low interest rate environment for so long, the natural question is how will higher market interest rates impact the credited interest rates on bank-owned life insurance (BOLI) policies?

To understand the impact of rising interest rates on BOLI carriers offering fixed-income products, it is first necessary to understand the carriers’ investment philosophies, portfolio compositions and interest crediting methodologies. Although the investment philosophy of each BOLI carrier differs, there are generally some common threads. The investment objective of most BOLI carriers is to build a diversified portfolio of securities across and within asset classes with a long-term orientation that optimizes yield within a defined set of risk parameters. The portfolio strategy often targets investment grade securities, both public and privately issued, with cash inflows that reasonably match the projected cash outflows of their projected liabilities. Corporate bonds are usually the largest holding in the portfolio along with commercial mortgages/mortgage backed securities, private placements, government/municipal bonds and other holdings. The duration of these portfolios is typically four to ten years.

Insurance companies use different interest crediting methodologies for BOLI business. Some carriers use a portfolio approach while others use a new money rate approach. In most cases, the carriers who use a new money rate approach blend it into the portfolio over time. The crediting rate in products from new money rate carriers is based on the carrier’s expected rate of return on premiums received currently. The crediting rate in products from portfolio rate carriers is based on a combination of the rate of return from new premiums as well as the balance of the general account assets of the company or the assets of the specific BOLI portfolio.

Rising interest rates will affect both new BOLI cases as well as existing BOLI policies. As noted above, insurance companies invest heavily in bonds. When market interest rates rise, yields on new bonds will increase while prices on existing bonds will decline. In anticipation of rising interest rates, some carriers shorten the duration of their portfolios or pursue a hedging strategy to manage risks.

Carriers using the new money approach will see a more immediate and positive impact on their initial credited rate for new BOLI policies as their rates, for newly issued policies,  are based on current investments yields. Assuming a modest increase in rates, carriers using the portfolio approach may see little or no immediate change in their rate, but will likely see an increase in their credited interest rate over time. This will occur as the portfolio turns over and as new premium that is received is invested at a higher rate.

For existing general account and hybrid separate account BOLI policies, whether a new money or portfolio approach was used, there is no mark-to-market risk as the insurance company, not the policyholder, bears the price risk. For new money products, the interest rate credited to a new purchase is not likely to increase for several years after purchase since the underlying investments supporting the new money purchase typically have durations of four to ten years. Assuming slow and steady interest rate increases, both new money and portfolio products will likely increase over time with the portfolio products expected to increase more rapidly than the new money products. This is because the portfolio products will receive more new cash flows to invest at the higher rates.

A significant interest rate increase over a short period of time may cause most new premium to be placed in new money products, thereby reducing the new premium received into a portfolio product and slowing the time period it takes for the crediting rate to grow to market levels. If this were to occur, the crediting rates on portfolio and new money products would be expected to increase at about the same pace.

Please also bear in mind that it is important for directors and senior management of a bank to monitor not only changes in credited interest rates, but also the net yields. The net yield reflects the actual credited rate less mortality charges and, in some cases, policy fees or other administrative expenses. Accordingly, it is possible for one carrier to have a higher interest rate than another, but a lower net yield.

Many BOLI service providers will meet with their clients at least once a year to discuss the status and performance of their policies. At that meeting, it is vital for board members and senior management to review, among other things, the net yield earned on their policies to determine whether those yields are competitive in light of the type of policy purchased (new money, portfolio, blended portfolio) and current market conditions. Your service provider is well positioned to help you with that analysis and discussion of options, if changes are needed.

In conclusion, rising interest rates will occur at some point, but are likely to have a favorable interest rate impact on both new and existing BOLI clients using a fixed account over the long-term.

Equias Alliance offers securities through ProEquities, Inc. member FINRA & SIPC. Equias Alliance is independent of ProEquities, Inc.

What Is Bank-Owned Life Insurance (BOLI)?



You may have heard the term BOLI before, but what is Bank–Owned Life Insurance? How can it benefit your bank?

In this insightful video, Charlie Hicks of Meyer-Chatfield explains what BOLI is, how it works and breaks down the ins and outs of this investment product.

  • What is BOLI?
  • What are the benefits of BOLI?
  • How does BOLI work?
  • Is there information on how the tax-free status of BOLI will be impacted by BASEL III?