If you’ve never heard of bank owned life insurance, you’d be among a large crowd. It’s a type of life insurance and contract combo which allows a bank to own a life insurance policy and be its beneficiary, while utilizing the benefits of the life insurance as a benefit package.
Because the benefits are tax-free in nature, and benefits can be paid from a larger pool, it can not only be a cheaper way to afford benefits to employees, but also highly beneficial for the recipients.
If you’re looking to place a bank owned life insurance policy, there is more than meets the eye to analyze a situation to discover if its appropriate.
To set it up properly, other financial and legal professionals will need to be involved as well.
Bank Owned Life Insurance
Bank owned life insurance, as it sounds, it’s a life insurance contract owned by the bank. They are the owner, payer and beneficiary, and can use the policy and it’s proceeds for many purposes, as laid out by the Office of the Comptroller of the Currency:
- Employee Compensation Plans
- Employee Benefit Plans
- Key Man Insurance Policies
- Recovering Expense of Pre/Post-Retirement
- Insurance on Borrowers
- Loan Collateral
To better understand the reasons why a bank would use life insurance as a comprehensive benefit plan, you have to first understand life insurance as a tool.
The Components Of Cash Value Life Insurance
A common term life insurance policy is not what banks use for a bank owned life insurance policy. They aren’t nearly as concerned with the death benefit as they are with the living benefits of universal or whole life.
A cash value life insurance policy, like universal life, whole life or variable universal life insurance have not only a death benefit attribute, but accessible cash value within the contract. This cash inside the policy can help the bank to have additional growth on its cash in a tax advantaged plan, while decreasing its risk. By nature, a fixed life insurance product’s cash value is tied to an insurance company’s general account which grows more aggressively than a banks simple interest account.
Because of the tax-deferred and tax-free access to the cash, it provides additional leverage for the bank provided they are within the modified endowment contract (MEC) rules for a single premium policy. The death benefit also does assist the bank if the policy is held all the way to maturity, because the death benefit proceeds additionally hold a tax-free status.
Limitations Of Bank Owned Life Insurance
A bank can’t simply resort to over-funding a life insurance policy at will. There is a process to first review if it can be used effectively.
Not all banks even utilize bank owned life insurance, or BOLI. A banks financial status and portfolio will largely determine if there is a need, and the banks own risk tolerance and complexity of its accounts will determine if a bank owned life insurance policy will be an acceptable fit.
If the shoe fits, a bank will undergo a pre-purchase analysis which would investigate not only the risk of the bank transitioning a portion of it’s assets towards a BOLI agreement, but it would need to review the possible product line to see which would feature the most advantageous source of benefits in the long run. The product has to be a durable one, as the bank would see the highest benefit return if they were able to hold it to maturity and accept the death benefit proceeds.
Because the high variety of products and product lines are ever-increasing, even the type of insurance company or companies a bank deals with can be difficult to choose. A life insurance policy can be simple and fixed, have variable securities, or even feature a hybrid of general account funds and investment grade funds.
Here are some other factors which could limit the plan benefits in the long run:
- Liquidity Of The Asset
- Continuous Management
- Regulation Changes
- Documentation Requirements
- Cost Management
- MEC Rules For Single Premiums
Other Parties Involved
More than just the bank and insurance carrier are involved in the process of the purchase and full operation. As mentioned above, the bank is the owner, payer and beneficiary. A key employee or executive is involved because they would be the primary insured. This means the life insurance is based on the key persons life, namely the death benefit.
Because of the agreement style of the bank owned life insurance, there is also more than just a life insurance contract. It’s common to have the life insurance policy held in trust, requiring an attorney or legal professional to set up the trust and accounts. An accountant will also be a part of the process for not only persistent bookkeeping, but in order to aid up front approval. There has to be reason financially for a bank to make a purchase, other than investment purposes.
If you have questions about a bank owned life insurance policy or any type of policy such as a decreasing term life insurance policy, we’ll be glad to help you with your questions or concerns. If you need a life insurance quote, we’ll be happy to help you with this as well.