Consider 2 Proven Strategies to Optimize Bank-Owned Life Insurance (BOLI) Portfolios for Clients
With interest rates remaining high into 2024, many of your bank clients are reviewing their life insurance portfolios for potential improvement. Some are already restructuring or optimizing their bank-owned life insurance (BOLI) portfolios to improve performance, credit, and risk-weight characteristics.
It’s a great opportunity to demonstrate your value and deepen your client relationships by recommending smart strategies that help them capitalize on the current rate environment.
If you don’t typically focus on BOLI, we’re here to help. Here are 2 proven ideas you can consider and share with your clients.
Transactional optimization
This approach involves restructuring to create a new policy. It requires the due diligence of a new purchase—and must satisfy state insurable interest requirements as well as regulatory pre-purchase obligations.
These transactions include IRC Section 1035 exchanges and surrender/redeploy transactions for in-force policies.
- IRC 1035 exchanges represent the movement of one policy form to another policy form with the same or different carrier covering the same insureds.
State insurable interest laws generally dictate the need to obtain new consent at the time of the exchange. Exchange transactions may also incur costs in the form of exchange charges applied by the incumbent carrier.
- Surrender/redeploy transactions occur when a bank surrenders a policy that no longer meets the bank’s requirements of credit, performance, or administration. The bank uses the proceeds to purchase a new policy. The surrender portion of this transaction is a taxable event, with taxes due on any recognized policy gain.
Key considerations
- Does a new policy better meet the bank’s needs? This might be the case if the bank purchased the policy in a period of lower interest rates and when policy crediting rates have not re-priced into higher market rates. It also could apply if the credit ratings of their incumbent carrier no longer meet the bank’s minimum threshold specified in their BOLI policy statement.
- Will performance of the in-force policy vs. a new policy balance out over time? It’s important for clients to know that any projected increase in yield performance could be short-lived. Over time, policy performance for both the in-force policy and the new policy could harmonize. As part of a bank's due diligence, it should consider if the hard and soft costs associated with the transaction are worth the effort for policies that may perform similarly over the long run.
- How do policy provisions compare? Every bank should compare important policy provisions in each contract and how they may impact performance and optionality in the future—including cash surrender provisions, guaranteed crediting rate provisions, and stable value agreement provisions (if applicable), among others.
Non-transactional optimization
Unlike transactional optimizations, non-transactional optimizations are changes made to an in-force policy that do not require the bank to meet new insurable interest requirements because the policy form allows these changes.
They include:
- Death benefit reductions
- Stable value agreement re-work
- Sub-account reallocations
- Policy upgrades offered on certain carrier products
Get additional support from Newport
Newport has assisted many of our financial advisors and clients with analyzing and executing BOLI optimization strategies.
With more than 30 years of experience and 75 BOLI professionals, we’re ready to partner with you and your bank clients by providing in-depth analysis of optimization strategies. We’ll help you determine the optimal path forward based on each bank’s unique facts and circumstances.
Contact Scott Bethune, senior vice president, BOLI Consulting, at 336-369-2270 for more information.
The recordkeeping, plan administration, trust and custody, consulting, fiduciary consulting, and insurance services are made available through Newport Group, Inc. (“NGI”), an Ascensus Company, and its affiliates. Securities are offered through Ascensus Broker Dealer Services, LLC (“ABDS”), member FINRA/SIPC. Securities in California are offered under the d/b/a Ascensus Corporate Insurance Solutions. Other insurance products may be offered by NGI. For more information, please visit www.ascensus.com. Investment Advisory and fiduciary consulting services are offered through Newport Group Consulting, LLC (“NGS”), an SEC registered investment adviser and subsidiary of NGI. For more information about NGC and its services, please visit www.newportgroup.com or refer to NGC’s Form ADV Part 2 which can be found at www.adviserinfo.sec.gov.
