Four reasons bank-owned life insurance (BOLI) makes sense
In today’s economic environment, banks face increasing pressure to manage risk, retain top talent, and optimize financial performance. These institutions are the core of economic activity at all levels, from local community development to large-scale multinational projects.
One strategic solution gaining renewed attention of late is bank-owned life insurance (BOLI). A well-structured BOLI program provides banks with a tax-efficient asset that can help offset employee benefit costs while improving long-term financial stability and helping to attract and retain key employees.
In fact, now may be one of the best times in the past few years for banks to consider BOLI due to the current higher-interest-rate environment. Higher market interest rates result in higher cash value yields on new BOLI purchases and even higher taxable equivalent yields. As those yields increase, the advantages of the tax treatment of BOLI increases in turn.
Key reasons to consider BOLI
The benefits associated with BOLI are numerous, but the following reasons for using BOLI are among the most compelling.
1) Excess Liquidity
For banks in a strong liquidity position, BOLI provides a strategic option to drive revenue. Instead of holding lower-yielding assets, institutions can deploy funds into BOLI to generate strong risk-adjusted returns while providing a cost offset to long-term benefit obligations. During less-robust economic cycles, BOLI can be a good option for banks holding high levels of capital and looking to take on less risk but still searching for positive returns.
2) Potential tax advantages
Earnings on the BOLI asset (cash surrender value) grow tax-deferred, and any proceeds received via a death benefit are generally tax free. As the cash surrender value of the BOLI policy increases, the growth is treated as non-interest income and is excluded when calculating federal taxable income.
3) Stability and versatility
Although no investment is entirely without risk, BOLI has historically served as a stable asset for banks, particularly during periods of economic uncertainty. BOLI has demonstrated consistently strong risk-adjusted returns, and the BOLI marketplace provides significant product versatility, enabling banks to choose from a wide array of offerings supplied by various insurance carriers. This flexibility allows institutions to construct portfolios tailored to their specific requirements.
4) Efficient offset to ever increasing employee benefit costs
A BOLI program is a tax-efficient way to informally fund executive benefit plans and offset benefit costs for all employees, including health insurance and retirement costs borne by the company on behalf of its employees.
Choosing the right BOLI provider matters
While BOLI is a proven, effective financing tool with many advantages, it can also introduce additional responsibilities for banks, particularly in meeting regulatory requirements related to a BOLI program. Many institutions may not have the necessary expertise or resources to manage these requirements effectively. Allaying those concerns makes choosing the right BOLI provider to set up and administer the program an essential part of the process.
The Newport Difference
As a leader in institutional insurance, Newport, an Ascensus company, has more than 30 years of BOLI expertise and 75 BOLI professionals on staff. We specialize in BOLI and are well-versed in all types of BOLI programs.
Our end-to-end BOLI solutions include:
- Personalized relationship management and 24/7 online access
- In-depth knowledge of the BOLI landscape derived from years of working with banks of all sizes and with all BOLI product types
- Rigorous insurance company credit analysis, which helps address the risk of potential credit-quality concerns
- A thorough due diligence process focused on validating data provided by the insurance carriers
- Full-service, end-to-end management of a decades-long asset, including program design, implementation, and administration
- Ensuring the regulatory compliance of the program
- Close collaboration — from the initial purchase of BOLI through the ultimate maturity of the asset, Newport assures that the program is being managed to help meet each bank’s unique needs
For more information about how Newport can help you identify and craft the ideal BOLI solution, please contact us.
