How to Get Bank-Owned Life Insurance: Understanding Corporate-Owned and Bank-Owned Life Insurance Structures

Bank-owned life insurance, commonly referred to as BOLI, represents a specialized financial tool wherein a financial institution purchases, funds, and is the beneficiary of life insurance policies on key executives, directors, or a broader base of employees. Acquiring and implementing a BOLI program requires navigating complex regulatory frameworks, accounting standards, and insurance markets. While retail consumers cannot purchase "bank-owned" policies for themselves, understanding how institutions establish, manage, and leverage these corporate assets is crucial for financial professionals, corporate executives, and banking stakeholders.

Defining Bank-Owned Life Insurance (BOLI) and Its Purpose

Bank-owned life insurance is fundamentally a specialized class of corporate-owned life insurance (COLI) tailored specifically to the banking and financial services sector. To understand how a bank secures these assets, one must first understand why financial institutions utilize them.

The Core Economic Rationale

Commercial banks face a continuous challenge: generating tax-equivalent yields to offset the rising costs of employee benefit programs, such as healthcare and retirement plans. Traditional investments available to banks—such as U.S. Treasury bonds, municipal securities, and mortgage-backed securities—often yield low after-tax returns, particularly in low-interest-rate environments.

BOLI provides an alternative vehicle. The cash surrender value (CSV) of the life insurance policies grows on a tax-deferred basis. When the insured employees eventually pass away, the bank receives the death benefit completely tax-free under current federal tax codes. This arrangement allows banks to offset the ongoing, non-interest expenses of employee benefit plans, effectively stabilizing institutional margins.

Key Participants in a BOLI Contract

Unlike individual life insurance, where an individual buys coverage to protect their family, a BOLI program involves distinct institutional roles:

• The Policyholder (The Bank): The financial institution that purchases the policy, pays the premiums, owns the asset, and collects the eventual death benefit.
• The Insurer: A highly rated life insurance carrier that issues the policy and manages the underlying general or separate accounts.
• The Insured (The Employees/Executives): Current or former employees, executives, or directors whose lives are insured. Federal and state laws, alongside internal corporate governance, dictate that these individuals must provide informed consent before a policy can be placed on their lives.

Regulatory Framework and Compliance Prerequisites

Because BOLI involves banks utilizing corporate assets to purchase insurance on human lives, federal banking agencies exercise stringent oversight. A bank cannot simply decide to purchase life insurance without rigorous documentation and board-level approval. Regulatory guidance, primarily governed by the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board, and the Federal Deposit Insurance Corporation (FDIC), shapes every step of the acquisition process.

Regulatory Guidance: OCC Bulletin 2004-56 and Interagency Advisories

The foundational rules governing BOLI are outlined in interagency guidance, notably OCC Bulletin 2004-56 (and subsequent updates). These guidelines require banks to treat BOLI purchases with the same diligence applied to any other major asset or investment portfolio.

Before acquiring BOLI, a bank’s board of directors and senior management must establish a comprehensive BOLI risk management process. This includes:

1. Strategic Alignment: Demonstrating how the BOLI program supports the bank's long-term financial and benefit-funding strategies.
2. Vendor Management: Conducting thorough due diligence on insurance carriers, brokers, and administrative platform providers.
3. Concentration Limits: Ensuring that the total cash surrender value of BOLI policies does not expose the institution to undue risk. Generally, regulatory guidelines dictate that a bank’s aggregate BOLI cash surrender value should not exceed 25% of its total capital (Tier 1 capital plus allowance for loan and lease losses).
4. Accounting Treatment: Complying with Generally Accepted Accounting Principles (GAAP), specifically regarding how cash surrender value is recorded on the balance sheet and how earnings are recognized in the income statement.

Insurable Interest and Employee Consent

A critical legal hurdle in obtaining BOLI is establishing an "insurable interest." Under state insurance laws, a policyholder must have a lawful and substantial economic interest in the continued life of the insured. For a bank, the ongoing employment of key executives and the cost of replacing or funding their benefits establish this interest.

Furthermore, federal law mandates the "Notice and Consent" requirement under Section 101(j) of the Internal Revenue Code. Before a bank can issue a policy on any employee:

• The bank must provide written notice to the employee stating that the bank intends to insure their life and maximum face amount.
• The employee must provide explicit, written consent to being insured and to the bank remaining the beneficiary of the death benefit even after employment terminates.
• Consent must be obtained prior to the issuance of the policy; retroactive consent invalidates the tax-exempt status of the policy.

Step-by-Step Acquisition Process for Financial Institutions

Securing and implementing a BOLI program is a multi-phase corporate project that typically spans several months. It requires coordination among executive leadership, legal counsel, risk management committees, and specialized BOLI brokers.

Step 1: Feasibility Analysis and Capital Capacity Assessment

The acquisition journey begins with the bank’s finance and treasury departments evaluating capital adequacy. The institution must calculate its Tier 1 capital base to ensure that the proposed BOLI investment stays well within the 25% regulatory guideline. Management must also model various economic scenarios—such as shifting interest rate environments—to see how the policy's cash value would perform under pressure.

Step 2: Engaging Specialized BOLI Consultants and Brokers

Because standard retail insurance agents do not handle institutional accounts, banks engage specialized financial advisory firms that focus exclusively on BOLI. These consultants help the bank design the program, run competitive bidding processes among top-tier life insurance carriers, and structure the product type (General Account, Separate Account, or Hybrid).

Step 3: Securing Employee Notice and Consent

Once the target group of insured employees is identified, Human Resources and legal teams initiate the consent process. This step must be handled with care to maintain employee morale and strict legal compliance. Employees are informed that the insurance is an asset used by the institution to back employee benefits, and that their personal privacy and employment standing remain fully protected.

Step 4: Medical Underwriting and Structuring

Unlike individual underwriting requiring invasive medical exams for every single executive, BOLI programs often utilize simplified or group underwriting techniques, provided the total volume of lives insured meets carrier thresholds. The structure of the policy is then finalized, choosing between:

• General Account BOLI: The bank’s cash value is backed by the general assets of the insurance carrier. These typically offer a fixed, minimum guaranteed interest rate with potential for excess crediting rates.
• Separate Account BOLI: The bank’s cash value is segregated from the insurer's general assets and invested in specific sub-accounts (such as high-grade corporate bonds or treasuries). This provides greater transparency and protection against carrier insolvency, though the bank assumes the investment risk.
• Hybrid BOLI: A combination designed to balance fixed guarantees with separate account market performance.

Step 5: Implementation, Accounting, and Ongoing Monitoring

Upon policy issuance, the bank wires the premium payment. The finance department records the asset as "Cash Surrender Value of Life Insurance" on the balance sheet, and annual gains or losses are logged as non-interest income. Ongoing monitoring involves annual reviews by the board of directors to assess carrier credit ratings, regulatory compliance, and overall economic performance.

Evaluating Risks and Operational Limitations

While BOLI is a valuable financial strategy, it is not without risk. Regulators inspect BOLI programs rigorously because past economic downturns have exposed vulnerabilities in poorly managed portfolios.

Credit Risk and Carrier Stability

When a bank purchases BOLI, it becomes a major creditor to the life insurance carrier. If the insurance company experiences financial distress or a downgrade in credit ratings, the value of the bank's asset could be impaired. Consequently, banks are restricted to transacting with insurance carriers that maintain high financial strength ratings (typically "A" or better from agencies like A.M. Best, Standard & Poor's, or Moody's).

Liquidity and Surrender Charges

BOLI policies are long-term holding instruments. If a bank attempts to surrender a policy prematurely, it typically faces steep surrender charges that can erode the cash surrender value and trigger negative earnings impacts. Furthermore, federal tax laws penalize policies that fail to meet specific diversification and investment guidelines, potentially turning tax-free gains into taxable income.

Reputational Risk

Because BOLI involves insuring human lives for the financial benefit of the institution, public relations considerations matter. Financial institutions must manage their BOLI programs transparently to avoid public or regulatory criticism regarding executive compensation optics, ensuring that the program is clearly tied to broader employee benefit stabilization rather than excessive individual enrichment.

Frequently Asked Questions About Bank-Owned Life Insurance

Can an individual retail consumer buy bank-owned life insurance?

No. BOLI is strictly a corporate financial product designed exclusively for regulated financial institutions, such as commercial banks, savings associations, and credit unions (often referred to as CUOLI). Retail consumers looking for life insurance must purchase individual or group retail policies from traditional insurance agents.

Why do banks buy life insurance on their employees?

Banks purchase BOLI primarily to generate tax-equivalent income that offsets the rising cost of employee benefit plans, such as health insurance, 401(k) matching, and pensions. The tax-deferred growth of the cash value and the tax-free death benefit provide an efficient financial hedge against these institutional liabilities.

What happens to a BOLI policy if the insured employee leaves the bank?

The bank retains ownership of the policy and remains the beneficiary even after the insured employee resigns, retires, or is terminated. Because the employee signed a valid consent form acknowledging this arrangement prior to policy issuance, their departure does not alter the bank's ownership rights or the policy's status.

Are the earnings from BOLI taxable to the bank?

The annual increase in the cash surrender value of a BOLI policy grows on a tax-deferred basis. When the insured employee passes away, the resulting death benefit is generally received by the bank completely free of federal income tax, provided the policy complies with federal tax code requirements (such as diversification rules and proper employee consent).

What regulatory limits apply to how much BOLI a bank can buy?

Federal banking regulators (OCC, Federal Reserve, FDIC) generally limit a bank's aggregate BOLI cash surrender value to 25% of the institution's total capital (Tier 1 capital plus allowance for loan and lease losses). Banks must also perform rigorous due diligence and document their risk management processes before exceeding lower internal or regulatory thresholds.

Conclusion and Strategic Next Actions

Securing and implementing a bank-owned life insurance program requires a disciplined, multi-disciplinary approach that aligns institutional finance, risk management, legal compliance, and human resources. Financial institutions exploring BOLI must begin by assessing their Tier 1 capital capacity and conducting comprehensive feasibility studies to ensure regulatory compliance. Leadership teams should partner with experienced BOLI advisory firms and top-rated insurance carriers to structure policies that match their long-term benefit-funding objectives while strictly adhering to OCC and interagency guidelines.