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Bank Owned Life Insurance

What is Bank Owned Life Insurance?

Bank-Owned Life Insurance (BOLI) is a tax efficient method that offsets employee benefit costs, which is used in the banking industry. The bank purchases and owns an insurance policy on an executive’s life and is the beneficiary. Cash surrender values grow tax-deferred providing the bank with monthly bookable income. Upon the executive’s death, tax-free death benefits are paid to the bank.

Advantages of BOLI

    • BOLI is a tax favored asset
    • Cash values grow tax-deferred
    • Death benefits are tax-free
    • Ability to efficiently off set costs associated with employee benefits programs
    • Products institutionally priced and designed specifically for financial buyers
    • Immediately accretive to earnings
    • Risks within standard business risks in the bank’s investment portfolio
    • Well-defined guidance on permissible usage by regulatory authorities
    • No surrender charges
    • Diversified investment portfolio
    • Ability to immediately increase Return On Equity and Return On Assets

Disadvantages of BOLI

    • BOLI is considered to be a long-term illiquid asset because it can be surrendered at any time without policy charges.
    • BOLI contract is surrendered by the bank the gains within the policy become taxable as well as a 10% IRS penalty on the gain prior to age 59 1/2.
  • What Banks buy BOLI?

National, Regional, Community, or a Credit Union can purchase normally single premium universal life, whole life in hybrid, general, or separate accounts. Bank owned life insurance policy is held as Tier 1 assets on key employees to act as supportive capital for the funding of other deferred compensation plans.

  • Who has to vote to implement a BOLI?

Senior management, board oversight, and administration. Regardless of an institution’s financial capacity and risk profile, the board must understand the complex risk characteristics of the institution’s insurance holdings and the role this asset is intended to play in the institution’s overall business strategy. The board may delegate decision-making authority related to purchases of BOLI to senior management, the board remains ultimately responsible for ensuring that the purchase and holding of BOLI is consistent with conservative banking practices.

  • What types of cash value management is used in the BOLI program?

Normally, there are three types of cash value management strategies offered to banks: general account, separate accounts, and hybrid accounts.

General Account

General account is the most common product in the market. When banks make an investment in a general account product the deposit becomes part of the general account of the insurance carrier. However, the carrier does not provide specific detail on where they are investing the BOLI proceeds rather they provide some detail of the general account holdings of the carrier. The product has a current crediting rate which can be changed from time to time by the carrier as well as a guaranteed minimum crediting rate that it cannot fall below.

Separate Account

This type of account is very similar to a general account, but the insurance carrier separates the holdings into a general account and well-known fund managers maintain the investments. The fund managers provide detailed reporting of the assets within the portfolio. The crediting rate is determined by the carrier using a yield-to-worst ratio. However, there is no guaranteed minimum crediting rate. A stable value insurance rider can be purchased in order to smooth out the mark to market performance and provide downside protection.

Characteristics General Account Separate Account
Investment decisions The insurance company makes all the investment decisions The bank selects the investment style but does not control the investments.
Protection from insurance carrier creditors CV is an obligation of the insurance company The insurer invests in assets that separate by state law
Interest rate risk Interest rate risk is in the policy’s interest crediting rate illustrated Interest rate risk is directly related to the performance of specific investment in several accounts.
Guarantees Backed by Insurance Company offering A wrap could protect against some declines of the CV

Hybrid Account

The hybrid account is a mixture of the general and separate account types.The hybrid account takes some of the best qualities of the general and separate accounts in order to create a new form.This account gives the transparency of a separate account, but boasts the stability of a general account. Both separate and hybrid products are not subject to creditors of the insurance carrier providing another level of protection to the bank.

  • How much does BOLI usually cost?

Depending on the type of BOLI product purchased, costs may include:

• Premium loads: state premium & DAC taxes, commissions

• Asset-based charges: Mortality & Expenses, commissions

• Monthly charges: Policy fees, Cost of insurance

• Investment management fees: separate account manager fees

• Custody & accounting fees: outside managed custody charges

• Stable value fees

  • How much insurance coverage is usually purchased？

A bank is only allowed to use up to 25% of its Tier 1 and allowances for loan and lease losses to buy BOLI. The bank may only purchase up to 15% of its Tier 1 and allowances for loan and lease losses or 1% of the bank’s total assets with any single insurance company because of the concentration risk.

  • What are the benefits of using an advisor like Lions Financial ?

Before purchasing BOLInsurance, a bank’s board and senior management should understand the risks, rewards, and characteristics of BOLI. The six specific risks in its pre-purchase analysis: transaction risk, credit risk, interest rate risk, liquidity risk, compliance risk, and price risk. While the bank is ultimately responsible for its due diligence process, financial advisors can assist you in evaluating and documenting the analysis of each of these risks.

Some areas that could potentially increase the tax risk of BOLI and invite IRS scrutiny include:

Borrowing: A bank cannot directly borrow to fund BOLI or it will lose the interest deductions on the funds that were borrowed to do so. A bank should make clear in its documentation that the source of BOLI funding is not direct borrowings.

Business Objective: A bank must have a valid business purpose for its purchase of BOLI.

Investor Control: This issue is primarily related to separate account plans. A bank may not exercise undue control of the product’s underlying investments. Designing a BOLI purchase that complies with this guideline, and negotiating documentation from the insurance company that the investment control is in compliance with the Code in this area.

Transfer of Risk: In some plans with large groups of participants, a technique known as experience rating is used to relate mortality costs to a specific case, rather than a broad group.

  • Conclusion

The team at Lions Financial looks forward to helping design, implement, and provide the administrative support for your BOLI plan. When assessing the needs for your risk management and insurance needs for your institution; as an independent company Lions Financial works with highly rated insurance companies to make sure your financial assets are secure.

To find out more about how we can help you contact us https://lions.financial/contact/

If you would like to learn more about additional risk management services visit:

PremiumFinancing:

https://lions.financial/services-risk-management-premium-financing/

Key person coverage:

https://lions.financial/risk-management-key-person-coverage/

Deferred Compensation:

Deferred Compensation

As a financial services firm Lions Financial focuses on helping businesses address their risk management considerations through consulting and implementation of insurance products. We have put together an overview of Bank owned life insurance to provide clarity on the solutions they meet and the needs and expectations facing corporate insurance today.

The sources we use for this information include:

https://www.bolicoli.com/boli/

https://www.investopedia.com/terms/b/boli.asp

https://www.fool.com/investing/general/2015/05/18/bank-owned-life-insurance-a-little-known-way-banks.aspx

https://www.bestliferates.org/types/bank-owned/

https://www.nfp.com/corporate-benefits/executive-benefits/bank-owned-life-insurance

 

 

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Ariel Tavor

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Ariel Tavor is the Founder and Principal Managing Director of Lions Financial. His agenda for Lions Financial is to provide his clients a service that maintains the highest professional value. Specializing in the Business-to-Business market has allowed proficient expertise in providing ongoing consulting services in the focus areas of business advisory, capital markets, and risk management. Ariel works with CEO’s, Capital Investment funds, and Boards of Directors where he advises his clients in matters of Executive compensation, Business Plan Design, Mergers & Acquisitions, Due Diligence, and Asset Financing.

Ariel has 10 years of experience in the financial services industry. He has worked in insurance and investment companies to analyze client’s financial and make suggestions on allocations based on defined objectives as well as maintaining long term relationships. Ariel’s comprehensive experience has allowed him to work closely with CEOs of companies and their executive teams from diverse industries such as trucking, hospitality, commercial real estate, Insurance, manufacturing, and technology. He has helped lead companies through the challenging decisions around – Buy-Sell Agreements, Deferred Compensation, Employee Group Benefits, Succession Planning, Mergers and Acquisitions, Valuations, and Business Sales.

Ariel currently oversees their family office investment group and sits on the Board of Directors of several companies and real estate developments. Their Investment group controls a portfolio of companies in multiple industries. They collaboratively have holdings in companies specialized in – Automotive Distribution- Real Estate Asset Management- Corporate Travel- Ink Mailing Manufacturing, E-Commerce, Financial Services, Management Consulting, Enterprise Technology, and Food Concepts. In recent years there has been a transition into fund allocation towards limited partnership investments in Venture Capital, Private Equity, and REITS within individual underwriting opportunities.

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Ariel Tavor is the founder and principal managing director of Lions Assurance Financial. His agenda for Lions Assurance Financial is to provide his clients a service that maintains the highest professional value. Specializing in the business-to-business market has allowed proficient expertise in providing ongoing consulting services in the focus areas of business advisory, capital markets, and risk management.

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Lions Assurance Financial is a highly successful, independent business consulting and wealth management advisory firm that focuses on three key areas of the financial industry: business advisory, capital markets, and risk management. The experienced team at Lions Assurance Financial focuses on serving the business and wealth management needs of privately owned business generating 3-50 million in revenue including independent business owners, family owned businesses, and business partners. Lions Assurance Financial works with capital providers including investment banks, private equity firms, venture capital firms, capital advisory firms, accredited investor platforms, commercial banks, and speciality finance firms.​

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An effective risk management consultant will help individuals and organizations evaluate their risks and develop a plan to counter their losses. Risk management is a complex process, and there is no one-size-fits-all process that all consultants can use. However, there are certain conventional methods that a consultant will use to help you protect your organization from risk. A risk management consultant should be capable of identifying the unique risk that your business is exposed to and carefully evaluating the scenarios. One of the most critical steps in the risk management step is to discover and list all the expected and unexpected risks. There are various advisory firms that can help you mitigate risk and take care of your business’s financial aspect, but one firm that stands out from the rest is Lions Financial. The company is an independent financial services & business advisory firm based in New York. In conversation with Ariel Tavor, Managing Director of Lions Financial. Lions Assurance Financial is a highly successful, independent business consulting and wealth management advisory firm that focuses on three key areas of the financial industry: business advisory, capital markets, and risk management. The experienced team at Lions Assurance Financial focuses on serving the business and wealth management needs of privately owned business generating 3-50 million in revenue including independent business owners, family-owned businesses and business partners. Lions Assurance Financial works with capital providers including investment banks, private equity firms, venture capital firms, capital advisory firms, accredited investor platforms, commercial banks, and specialty finance firms.