What Is Bank-Owned Life Insurance (BOLI)?

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DEFINITION
Bank-owned life insurance (BOLI) is a type of permanent life insurance policy banks buy for high-salaried employees or board members.

Bank-owned life insurance (BOLI) is an insurance policy many banks purchase for a group of employees, generally top executives and directors. The bank is the owner and beneficiary. It’s used to offset the cost of its employee benefit program. Below, we discuss more about BOLI policies and how they work.

Definition and Example of Bank-Owned Life Insurance (BOLI)

Bank-owned life insurance (BOLI) is a type of permanent life insurance policy banks buy for high-salaried employees or board members. The bank pays for the coverage and is the beneficiary after the insured person’s death. BOLI is a tax-efficient tool often used to offset the cost of an employee benefit program, making it easier for banks to compete with other employers.

BOLI isn’t the only type of employer-owned life insurance (EOLI) policy. Other types of corporations can purchase corporate-owned life insurance for key employees.

For a bank to take out a BOLI policy on an employee, it must have that individual’s consent. If a person doesn’t like the idea of their employer having a life insurance policy on them, they can decline consent, and the policy can’t be generated. 

If the employee gives consent, the bank can purchase a life insurance policy on that employee. The bank pays for the policy, and the money generated from it is used to offset the costs of the employee benefit program. The policy also protects the bank from the loss it would experience if a critical member of its staff died unexpectedly. When the employee named in the policy passes away, the bank receives a death benefit.

BOLI policies are common. The cash surrender value of these policies reached $182.2 billion as of September 2020. Of the 5,033 banks in the survey, 65% reported holding BOLI assets.

How Bank-Owned Life Insurance Works

Banks can purchase BOLI policies under 12 U.S. Code § 24 (Seventh). Further guidance is found in section 101(j) of the Internal Revenue Code and IRS Notice 2009-48. Some states also have specific laws in place to regulate BOLI policies.

Here’s a look at how this type of insurance works.

The bank asks a highly-compensated employee for permission to take out a life insurance policy on them. If the employee agrees in writing, the bank can purchase a permanent life insurance policy on that person. As the policy owner, the bank pays the premiums and absorbs any expenses related to the insurance.

Banks can’t purchase life insurance policies on every employee. Institutions can only take out policies if there’s “insurable interest,” which means the bank would stand to lose financially if the person dies.

Once the policy is in place, the employee continues working for the bank. Their benefits are funded in part by the BOLI program. Each year that the bank has the policy in place, it must file Form 8925 (Report of Employer-Owned Life Insurance Contracts) with the IRS.

When the employee leaves the company, whether through termination or retirement, the bank keeps the policy in place to continue covering the benefits of other employees. After the eventual death of the employee, a death benefit is provided to the bank.

Typically with a bank-owned life insurance policy, the bank keeps all of the death benefit. In some cases, a bank may choose to share some of the death benefit with the employee’s beneficiaries.

Understanding Bank-Owned Life Insurance (BOLI)

If you’re a highly-compensated employee, director, or manager of a bank, you may be asked for consent to a BOLI policy. Once you understand what the bank is asking, you have the right to approve or deny this request.

If you agree to join the BOLI program, keep in mind that your beneficiaries may not receive a death benefit from the BOLI policy when you pass away. This means you’ll need to have adequate life insurance coverage in place to ensure your loved ones are taken care of.

Bank-owned life insurance plans allow a bank to purchase life insurance for its key employees. As the policy grows over time, income is generated for the bank, which is used to pay for employee benefits. When the insured employee dies, the bank is the beneficiary and typically keeps the death benefit.

Key Takeaways

  • Bank-owned life insurance (BOLI) is a type of insurance policy banks can purchase on highly-compensated employees or directors.
  • The bank pays for the policy and is the beneficiary after the employee’s death.
  • Bank-owned life insurance (BOLI) is used to offset the costs of the employee benefit program, helping banks offer more attractive benefits to employees and insure against the death(s) of essential personnel.

Article Sources

  1. MetLife. “Bank-Owned Life Insurance (BOLI),” Page 2.

  2. NFP. “BOLI Assets Grew 3.3% to $182.2 Billion as of September 30, 2020,” Page 1.

  3. Office of the Comptroller of the Currency. "Bank Owned Life Insurance (BOLI).”

  4. MB Schoen and Associates. “BOLI Insurance—Who Banks Can Insure and Why.”

  5. MetLife. “COLI Best Practices Talking Points,” Page 3.