Bank Owned Life Insurance Policy: Understanding and Benefits

Bank owned life insurance (BOLI) policy is a life insurance policy taken out by banks on their employees, wherein the bank is named as the beneficiary. This type of policy is often used to offset employee benefit expenses or to fund various employee benefit plans. In this article, we will discuss the different aspects of BOLI, its benefits, and FAQs.

How Does BOLI Work?

When a bank takes out a BOLI policy, it pays the premiums on the policy and receives the death benefit upon the death of the employee. The amount of the death benefit received by the bank depends on the coverage amount and the policy’s terms and conditions. Generally, the bank is the owner of the policy, and it has complete control over the policy’s cash value and death benefit.

The bank uses the policy’s cash value to offset employee benefit expenses, such as health insurance, retirement plans, and pension benefits. The cash value of the policy grows tax-deferred and can be accessed by the bank to fund various employee benefit plans. Additionally, the bank can borrow against the policy’s cash value without incurring any tax liability.

One important thing to note here is that BOLI is not subject to the same regulations as individual life insurance policies. They are considered investments rather than insurance policies, and as such, they offer tax benefits and other financial advantages over traditional insurance policies.

Table 1: Advantages of BOLI

Benefits of BOLI

BOLI policies offer a range of benefits to banks, including financial, tax, and asset protection advantages. Let’s take a closer look at some of these benefits.

Tax Benefits

BOLI policies offer significant tax benefits to banks. The policy’s cash value grows tax-deferred, which means that the bank does not have to pay taxes on the policy’s earnings until it withdraws the funds from the policy. Additionally, the death benefit received by the bank is tax-free, which means that the bank does not have to pay taxes on the death benefit received from the policy.

Financial Advantages

BOLI policies offer a safe investment option for banks, with higher returns than traditional insurance policies. They also provide the bank with access to tax-free funds that can be used to offset employee benefit expenses, such as health insurance, retirement plans, and pension benefits. Additionally, the bank can borrow against the policy’s cash value without incurring any tax liability, which gives it more flexibility in managing its cash flow.

Asset Protection

BOLI policies offer asset protection to the bank. The policy’s cash value is protected from creditors and lawsuits, which means that the bank can use the policy’s cash value to offset employee benefit expenses without worrying about losing the cash value to creditors or lawsuits.

Employee Retention

By offering better employee benefit plans, banks can attract and retain high-quality employees. BOLI policies allow banks to offer better benefit plans by using tax-free funds to offset employee benefit expenses. This, in turn, leads to higher employee retention rates, which can help banks to maintain a competitive edge in the industry.

FAQs

Q. How is BOLI different from traditional insurance policies?

A. BOLI policies are considered investments rather than insurance policies. They offer higher returns than traditional insurance policies and are subject to different regulations and tax laws.

Q. Can banks borrow against the policy’s cash value?

A. Yes, banks can borrow against the policy’s cash value without incurring any tax liability.

Q. Is the policy’s cash value protected from lawsuits and creditors?

A. Yes, the policy’s cash value is protected from lawsuits and creditors, which means that the bank can use the cash value to offset employee benefit expenses without worrying about losing the cash value to lawsuits and creditors.

Q. What are the tax benefits of BOLI?

A. BOLI policies grow tax-deferred, which means that the bank does not have to pay taxes on the policy’s earnings until it withdraws the funds from the policy. Additionally, the death benefit received by the bank is tax-free, which means that the bank does not have to pay taxes on the death benefit received from the policy.

Q. How does BOLI help with employee retention?

A. By offering better employee benefit plans, banks can attract and retain high-quality employees. BOLI policies allow banks to use tax-free funds to offset employee benefit expenses, which leads to higher employee retention rates.

Conclusion

BOLI policies offer a range of benefits to banks, including financial, tax, and asset protection advantages. They also provide banks with access to tax-free funds that can be used to offset employee benefit expenses. By understanding the benefits of BOLI policies, banks can make informed decisions about whether or not to invest in them.