Bank-Owned Life Insurance (BOLI) is a policy owned by a bank on one or more employees. It provides funding for employee benefits programs like pensions in addition to tax-free growth for the bank, through the tax protections provided under life insurance contracts. The term “bank-owned life insurance” may be used specifically in discussions about using such insurance as an investment and growth instrument. By contrast, banks can also carry key employee insurance to compensate them for the loss of critical staff members, but this policy may be a business continuity measure rather than part of the bank’s fiscal strategy.
Historic abuses of bank-owned life insurance led regulatory agencies in some areas to issue some guidelines on its use. Banks were taking out policies on numerous personnel, including low-level workers, and carrying policies even after people left, all without the knowledge of these employees. Requirements for banks that want to use this tool may stipulate that they need careful oversight for any insurance purchases, along with a firm internal policy on how to use bank-owned life insurance and who should be insured under such policies.
Life insurance, by design, acts as a tax shield. Originally developed for surviving dependents, it offers a lump sum or series of payouts to compensate for loss of income, with little or no tax penalties, depending on the policy and the law. Banks can take advantage of this to hold policies on their employees and use these policies to fund benefits. Bank-owned life insurance may also be utilized as the collateral on loans in some cases.
Such strategies are within legal and ethical standards, and banks may have sound reasons for holding life insurance on their personnel. Blanket bans on bank-owned life insurance are not recommended because they would make it impossible for firms to buy products like key employee insurance. Restrictions on the use of such policies, however, limit their abuses as tax shelters. Banks are not allowed to hold policies on people who no longer work for them, for example, and need to carefully document policy purchases to demonstrate their need.
Some insurance firms provide BOLI policies and may specialize in this service. Their representatives can help banks decide on the products that will meet their needs, and can discuss the legal ramifications of different policy types to help the bank make a sound financial decision. If there are any doubts about whether a policy would be legally defensible, an attorney can provide additional consulting services.