Bank Owned Life Insurance
Using BOLI to Increase Bank Profitability
Today’s competitive environment requires community banks to be increasingly
innovative in their approach to traditional business activities to continue being
profitable and independent. One of the best ways to increase bank profitability
and value is through the use of a well-designed BOLI plan. When designed
properly, BOLI is an investment that provides community banks with increased
annual income that can be used to offset the costs of current bank benefit plans
or provide new a benefit plan to bank executives.
What is BOLI and How Does it Work?
BOLI is an investment into a specially designed institutional insurance policy. The
policy is paid for typically with a single up-front premium, which enables it to
produce positive income in the first year. These policies are placed on the lives
of key bank executives and to ensure the tax advantage of the BOLI, these
policies should be held until the death of the executive. Upon the death of the
executive, the bank will receive a tax-free death benefit.
An Example of Repositioning Assets
Traditional Bank Investment
Simply gaining tax deferred income at a rate of 5.49% gives the bank $70,200 or
3.51% of additional income. While we used a crediting rate in this example of
5.49%, the rate on a BOLI contract will continually reset to the market thus
keeping the spread of 3.51% fairly consistent.
Many view BOLI plans strictly as a method of providing supplemental benefits to
bank executives. While it is true that many BOLI plans have been designed to
Additional Net Income: $70,200 (3.51%)
ö Fed Funds $2,000,000
ö Income $ 60,000 (3.00%)
ö Net Income $39,600 (1.98%)
ö Income $109,800 (5.49%)
- 0 -
ö Net Income $109,800 (5.49%)
meet the retirement needs of