Bank Owned Life Insurance (BOLI): Client Education Series

Why Do Banks Buy BOLI?

Bank-Owned Life Insurance (BOLI) might sound complicated, but it’s a common tool banks use to strengthen their financial position and provide long-term benefits to both the institution and its employees.

1. Tax-Free Income and Benefits

The earnings banks receive from BOLI grow tax-deferred, and the death benefits are generally received tax-free.

2. Strong, High-Quality Asset

BOLI is considered a high-quality asset that sits on a bank’s balance sheet. It provides steady growth and is backed by financially strong insurance carriers.

3. Boost Non-Interest Income

BOLI helps banks safely grow their non-interest income, an important supplement to traditional revenue.

4. Favorable Accounting Treatment

Under ASC 325-30, BOLI is afforded favorable accounting treatment, which supports transparent and predictable reporting.

5. Increase Earnings and Shareholder Value

BOLI contributes to a bank’s earnings per share (EPS), which can help increase shareholder value.

6. Employee Benefit Potential

Banks can share part of the policy’s death benefit with employees, offering an added benefit that supports retention.

How is BOLI Structured?

Bank-Owned Life Insurance (BOLI) is more than just an insurance policy; it’s a strategic financial asset. Here’s how it works, step by step:

1. The Bank Purchases the Policy

The bank takes out a life insurance policy on key employees, with the bank listed as the beneficiary.

2. The Bank Pays Premiums

The bank pays a one-time or ongoing premium to the insurance carrier.

3. Cash Value Grows Over Time

The policy’s cash value grows tax-deferred and typically at a higher rate than CDs or treasuries.

4. Death Benefit Is Paid to the Bank

The bank receives a tax-free death benefit, usually significantly higher than the premium paid.

5. Optional: Sharing Benefits With Employees

Banks may share part of the death benefit with the employee’s family as an added benefit.

BOLI vs. Other Investment Alternatives

When banks seek efficient, low-risk investment strategies, BOLI is often compared to traditional options. Here’s how it stacks up:

Feature	BOLI	Treasuries	CDs	Municipal Bonds
Tax Treatment	Tax-deferred; tax-free death benefit	Taxable	Taxable	Generally tax-free
Return Potential	Competitive	Low	Low	Moderate
Liquidity	Limited early liquidity	Highly liquid	Fixed term	Varies
Risk	Low (insurance-backed)	Very low	Very low	Credit & interest rate risk
Balance Sheet Value	Favorable accounting treatment	Standard	Standard	Standard
Strategic Benefit	Supports employee benefits	None	None	None

Not every strategy is right for every bank, but BOLI can be a powerful complement to your institution’s portfolio. At Alden Investment Group, we help you evaluate all the options with clarity and confidence.