Bank-owned life insurance (BOLI)

Bank-owned life insurance is a form of corporate-owned life insurance in which a bank buys permanent life insurance on a group of its officers or employees, pays the premiums, owns the policies and is the beneficiary. Banks typically pay a large single premium into general account, separate account or hybrid policies.

The appeal is tax treatment. The policies' cash value grows without current income tax, and death benefits are generally received tax-free, so the bank earns a tax-advantaged return it often uses to offset employee benefit costs such as health plans or executive retirement promises. Hypothetical example: a bank puts $10 million into BOLI; the cash value growth appears as noninterest income on its financial statements, and a later death benefit helps cover a former executive's deferred compensation.

BOLI comes with strings. Under Internal Revenue Code Section 101(j), employer-owned policies issued after August 17, 2006 keep the death benefit tax-free only if the employee received notice and gave written consent and an exception applies. Federal bank regulators expect banks to analyze carrier credit, liquidity and concentration risk before buying, and surrendering a policy makes the accumulated gain taxable. See corporate- and bank-owned life insurance and section 101(j) notice and consent.