Bank-Owned Life Insurance (BOLI) Explained: Benefits, Costs & 2025 Insights

Julia Kagan is a seasoned financial journalist and former senior personal finance editor at Investopedia.

What Is Bank-Owned Life Insurance (BOLI)?

Bank-Owned Life Insurance, commonly known as BOLI, is a specialized life insurance policy purchased by banks where the bank itself is both the owner and the beneficiary. This unique insurance product acts as a strategic tax shelter, enabling financial institutions to leverage tax-exempt growth to fund employee benefit programs.

Typically, BOLI policies cover high-ranking executives or board members rather than every employee, focusing on individuals whose loss could financially impact the bank. The bank pays the premiums and receives tax-free death benefits upon the insured person's passing.

Unlike traditional life insurance policies designed to benefit the insured or their family, BOLI is structured solely to benefit the bank. Employees may have separate workplace life insurance plans for their families, but BOLI is distinct and tailored for the institution's financial security.

Key Highlights

• BOLI is a life insurance product tailored for banks.
• It serves as a tax-efficient method to fund employee benefits.
• The creditworthiness of the insurance provider is critical.
• Policies are taken out on selected executives' lives.
• Coverage remains intact even if the insured employee leaves or is terminated.

How Does Bank-Owned Life Insurance Work?

Banks utilize BOLI policies primarily to finance employee benefits more cost-effectively. The bank establishes a contract and funds a dedicated insurance trust by paying premiums on the lives of key executives. The funds in this trust grow tax-free, and all benefits paid out are also tax-exempt.

These tax advantages allow banks to offset the costs of employee benefits without incurring additional tax liabilities. According to the U.S. Treasury's Office of the Comptroller of the Currency (OCC), banks may purchase BOLI for various purposes, including employee compensation plans, key person insurance, and loan security, with approvals granted on a case-by-case basis.

Important Note

Banks can only insure employees with an "insurable interest," meaning their death would cause financial loss to the bank. This typically includes top-tier executives or the highest-paid 25% of staff. Additionally, the insured employee must consent to the policy.

Three Main Types of BOLI Accounts

Banks can choose from three types of BOLI accounts: general, separate, and hybrid. The general account is the most traditional and invests primarily in bonds and real estate. The insurer's credit rating affects these investments, and the bank's deposit forms part of the insurer's general account.

Separate accounts provide more transparency and are managed by fund managers who report detailed portfolio information. However, the credit rating is not guaranteed.

Hybrid accounts blend features of both general and separate accounts, offering guaranteed credit ratings along with detailed investment disclosures. Unlike general accounts, separate and hybrid accounts are protected from creditors, providing additional security.

Key Insight

BOLI acts as a tax shelter, supplying banks with tax-free funds to offset employee benefit costs.

Advantages and Disadvantages of BOLI

According to BoliColi.com, BOLI policies were initially used for senior executives but are increasingly popular for offsetting broader employee benefit expenses.

Tax Advantages

BOLI offers significant tax benefits, with premiums and earnings growing tax-free. The policy remains effective even if the insured leaves the bank, ensuring continuous funding for employee benefits.

Potential Drawbacks

Should a policy be surrendered prematurely, taxes and a 10% penalty on gains apply. The insurer's credit rating is vital; a poor rating increases risk, especially since BOLI is an illiquid asset. Single-premium policies tend to yield the highest returns.

Why Do Banks Invest in BOLI?

Banks purchase BOLI to access tax-free growth and fund employee benefit plans efficiently. Premiums and investment gains are exempt from taxes, making BOLI an attractive financial tool.

When Are Benefits Paid Out?

Death benefits from BOLI policies are paid tax-free to the bank upon the death of the insured executive.

Can Individuals Purchase BOLI?

No. BOLI is exclusively available to banks and corporations for insuring select employees, primarily executives.

Current Market Size of BOLI

As of June 30, 2023, banks held BOLI policies with a total cash surrender value of approximately $202.4 billion, according to FDIC data.

Conclusion

BOLI continues to gain popularity as a tax-efficient method for banks to fund employee benefits and protect key personnel. By partnering with reputable insurers and focusing on high-value employees, banks can leverage BOLI to enhance their benefits offerings and maintain financial stability, even when employees leave.

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