Bank-Owned Life Insurance (BOLI)

What is Bank-Owned Life Insurance (BOLI)?

Definition

Bank-owned life insurance is a type of life insurance that covers a bank both as the owner and beneficiary. Through the use of some cash-value policies established on bank executives and selected employees, the bank is able to use the BOLI to offset the cost of employee benefits and reduce taxation.

Understanding Bank-Owned Life Insurance (BOLI)

Generally, it is perceived of life insurance to act as an agreement of monetary protection for beneficiaries when the benefactor dies. The beneficiary could either be the benefactor’s family or business. This concept can be related to the banking system where banks through the BOLI are able to cut down on excessive taxation and maximize cash flow. Over the past 4 years, banks have increasingly purchased life-insurance and using the cash value system to reduce taxation, protect abrupt liquidity, and offset certain costs. This act has attracted a lot of criticisms, nonetheless, BOLI keeps gaining higher grounds.

Through BOLI, banks are able to grow tax-deferred income yielding more returns in the long run. Where a regular savings account may grow 0.01% interest per year, a bank can earn a 4% interest per year on its income. Since paying employee benefits may be quite demanding financially for many organizations and may even affect the profit rate of any organization, banks can easily offset the costs of employee benefits through BOLI. Basically, all employee benefits are covered and paid from the BOLI, and all premiums are paid into the fund.

Life insurance offers banks quite a handful of juicy benefits that are profitable and consistent. The returns gotten from life insurance by far beats the returns a bank would get from traditional banking investments such as mortgage, bonds, and other securities.