What is Bank Owned Life Insurance (BOLI) and how does it work? Check out this post to know about this insurance policy. In this coverage, the bank is the policy beneficiary and usually, the owner. BOLI is used as a tax shelter for financial institutions.
So, if You want to know about this insurance, this article is here to guide You. This is because it will bring information that You will find helpful.
What is Bank Owned Life Insurance
Bank Owned Life Insurance (BOLI) policies produced far superior returns than traditional bank investments. With this, death benefits and growth in tax policies are completely tax-free. This permanent life insurance policy is often purchased for board members of the bank or high earners.
This pays for the benefits and policy after the insured individual’s death. However, banks only take out bank-owned insurance for only those key players whose death could cause the bank to lose money as they do not do this for every employer working with them.
This insurance is a type of life insurance created only to benefit banks and not their beneficiaries or insured. Whereas, Bank employees may be offered a traditional at-work life insurance plan to cover their family and loved ones if they die. This is a part of a workplace benefits package.
Banks also use this insurance as a tax shelter and to fund employee benefits. In addition, even if an employee covered by Bank Owned Life Insurance (BOLI) leaves or is terminated, the policy on them remains in place.
Overview of How Bank Owned Life Insurance (BOLI) Works
Banks use Bank Owned Life Insurance (BOLI) contracts to fund employee benefits lower than they might otherwise pay. The bank normally sets up the contract and makes payments into a specialized fund set which is the insurance trust.
If You are a bank employee that is covered under the plan, Your employee benefit will be paid out from this fund. Also, banks can use Bank Owned Life Insurance to fund employee benefits tax-free.
Types of Bank Owned Life Insurance (BOLI) Accounts
There are three types of Bank Owned Life Insurance (BOLI) Accounts. They are “General, Hybrid and Separate”. These three types of Boli insurance are available to banks and corporations. When banks invest in a general account product, it is mainly invested in real estate and bonds.
Also, the carrier of this type of insurance policy has a credit rating and this can change. The use of the bank’s investment deposit is a part of the carrier’s general account. In this type of insurance, the details are shared in broad strokes rather than the in-depth view given with a separate account.
The work of a separate account is that it allows the insurance provider to separate the general account holdings into investments managed by fund managers. In addition, a hybrid account combines aspects of a separate and general type of Boli.
Banks receive a general credit rating with a hybrid account. Also, they get detailed information about investment holdings.
Pros of Bank Owned Life Insurance (BOLI)
So, below You will get to know some of the Pros of Bank Owned Life Insurance (BOLI).
One of the major advantages of Bank Owned Life Insurance (BOLI) is its tax favorability. Another advantage of this is that the policy still stays in place if an employee covered by the plan is fired. With this, funds from the policy can help the bank continue to pay for other benefits.
Cons of Bank Owned Life Insurance (BOLI)
Below You will get to know some of the cons of Bank Owned Life Insurance (BOLI).
There can be downsides to the Boli policy. This is because BOLI is an illiquid asset if a bank purchases a policy from a company with a poor credit rating, it exposes the bank to risk.
Why Do Banks Purchase Bank Owned Life Insurance (BOLI)?
Bank Owned Life Insurance (BOLI) offers banks a tax shelter and a way for them to fund benefit plans. So, banks and companies can use the BOLI system to fund employee benefits on a tax-free basis.
When are BOLI Benefits Paid?
Tax-free death benefits are paid when the executive dies this is because the policy is taken out on an executive’s life.
Can I Purchase Bank Owned Life Insurance (BOLI)?
No, it is not possible for individuals to purchase Bank Owned Life Insurance (BOLI) for themselves. This insurance policy is only available to banks and corporations.
How Much Bank Owned Life Insurance (BOLI) DO Banks Own?
From reports, two-thirds of the United States banks hold BOLI assets and $181 billion is the total cash surrender value of all of the policies.
Why is BOLI Attractive?
Bank Owned Life Insurance (BOLI) comes with a lot of benefits and this is why it is so attractive. This is because banks and large-scale organizations can benefit a lot from it.
Is Bank Owned Life Insurance Widely Used?
A lot of the largest financial institutions in the United States have used BOLI for a lot of years.
How do I Account for Bank Owned Life Insurance?
Bank Owned Life Insurance (BOLI) is governed by FASB Technical Bulletin 85-4. This states that BOLI should be recorded on the balance sheet as an “Other asset” and that both the cash surrender value growth and ultimate net insurance proceed should be recorded as “Other Income”.
What Happens if the Tax Treatment of Bank Owned Life Insurance Changes?
Bank Owned Life Insurance (BOLI) current tax benefits have been unsuccessfully challenged over the years. Also, there are strong bank regulatory guidelines for the proper use of Bank Owned Life Insurance. Existing plans may be grandfathered if the tax treatment changes. However, there may be surrendered for their cash surrender values if existing policies are not grandfathered.
Is Bank Owned Life Insurance Liquid?
Bank Owned Life Insurance (BOLI) can be surrendered at any time for its cash surrender value. But doing so may cause adverse tax consequences to the bank. So, in order to receive the full economic benefits of Bank Owned Life Insurance (BOLI), it should be considered a long-term asset.
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