"What gets measured gets managed." This management aphorism, often attributed to Peter Drucker, has guided executive decision-making for decades. In the banking sector, management often translates to benchmarking. If 71% of all U.S. banks: and over 80% of the top 50 financial institutions: own Bank Owned Life Insurance (BOLI), the logic follows that your bank should too.
But here is the universal truth that benchmarking often obscures: Average results come from average strategies.
For many bank boards and executive teams, BOLI is viewed through the lens of a peer group report. They look at what the bank across the street is doing, match the Tier 1 capital concentration, and call it a day. However, BOLI is not a "set it and forget it" commodity. It is a sophisticated financing mechanism designed to offset specific, growing liabilities.
To truly leverage this asset, leadership must move beyond simple benchmarking and embrace strategic BOLI optimization.
The Benchmark Trap: Why Peer Groups Aren't Enough
Benchmarking provides a safety net, but it doesn't provide a roadmap. When you rely solely on what your peers are doing, you are essentially letting the "average" bank determine your institution's financial strategy.
Peer reports tell you the what, but they rarely explain the why. They don't account for your specific cost of funds, your unique loan-to-deposit ratio, or the precise trajectory of your employee benefit obligations.
Are you facing a sudden surge in medical insurance premiums? Do you have a significant "What If" regarding top talent leaving for a competitor? Are you prepared for the replacement costs of senior executives as they approach retirement?
Optimization begins when we stop asking "What is everyone else doing?" and start asking "What does our bank specifically need to achieve?" At Schiff Executive Benefits, we call this goal-oriented reverse engineering. We don't start with a product; we start with your intent and your culture.
Reverse Engineering Your Cost Recovery
BOLI is uniquely suited to offset the current and future costs of employee benefits, including pre- and post-retirement medical coverage, group life, and supplemental retirement programs. Because of its tax-advantaged accounting treatment, it often provides a higher net after-tax yield than traditional bank-permissible investments.
However, optimization requires a deeper dive into cost recovery. A "Perfect Plan®" (which you can learn more about on The Perfect Plan® YouTube channel) isn't built on generic assumptions. It is built by identifying the exact dollar amount of your unfunded liabilities and matching those against the projected cash flow of a BOLI portfolio.
This level of precision ensures that you aren't just "offsetting costs": you are strategically recovering them in full.
The Six Pillars of Risk Evaluation
Bank regulators, particularly the OCC, are clear that a bank’s responsibility doesn't end at purchase. According to OCC Bulletin 2004-56, carrier selection is one of the most critical decisions in a BOLI purchase, carrying long-term consequences.
Optimization means moving past the surface-level credit rating of a carrier and conducting a rigorous pre-purchase analysis of the six risks identified by regulators:
- Transaction Risk: Ensuring the plan is designed and implemented correctly from day one.
- Credit Risk: Evaluating the long-term stability and claims-paying ability of the insurance carrier.
- Interest Rate Risk: Understanding how changes in the rate environment will impact the product's performance.
- Liquidity Risk: BOLI is a long-term asset; optimization requires balancing this against the bank’s overall liquidity needs.
- Compliance Risk: Navigating the complex web of IRC 101(j) and 409A regulations.
- Price Risk: Ensuring the underlying costs of the insurance are competitive and sustainable.
By meticulously documenting these risks, you don't just satisfy examiners; you protect the bank’s shareholders and the executive's benefits.
The Compliance Foundation: IRC 101(j) and Beyond
One of the most overlooked aspects of BOLI optimization is the ongoing administrative and regulatory burden. Under IRC 101(j), specific notice and consent requirements must be met before a policy is issued. Failure to comply can turn a tax-advantaged death benefit into taxable income: a catastrophic failure of strategy.
Furthermore, as your bank grows and evolves, so do the rules. We emphasize an integrated approach, working alongside your existing team of accountants, attorneys, and TPAs. We don't just deliver a solution; we ensure that solution stays in alignment with government regulations and your bank’s internal policies.
Customizing the Portfolio: General, Hybrid, or Separate?
There is no "one size fits all" in BOLI. Optimization involves selecting the right account structure based on your bank’s risk appetite and investment objectives:
- General Account: Assets are part of the insurance company’s general investment portfolio. It offers stability and fixed-income-like characteristics.
- Separate Account: Assets are held in a segregated account, often managed by outside investment firms. This offers transparency and may provide higher returns but involves more "investor control" considerations.
- Hybrid Account: Combines elements of both, offering the protection of the general account with some of the transparency of a separate account.
An optimized strategy might involve a mix of these products across multiple highly-rated carriers to ensure you stay within the OCC’s 15% Tier 1 capital concentration guidelines for any single carrier.
Moving Beyond the Status Quo
If your BOLI program hasn't been reviewed in the last three years, it is likely no longer optimized. The economic environment has shifted, regulations have tightened, and your bank’s talent needs have undoubtedly changed.
The goal of BOLI consulting at Schiff Executive Benefits is not simply to facilitate a transaction. It is to help you build a program that acts as a powerful retention tool while strengthening your balance sheet. Whether you are a community bank with 10 employees or a larger institution with thousands, the principles of strategic optimization remain the same.
Are you ready to stop following the benchmark and start leading with a strategy? It’s time to look at the "What Ifs" of your bank’s future and build a plan that answers them with certainty.
Sit back, grab your coffee, and join us as we explore how to turn your executive benefits into a competitive advantage. The path to optimization begins with a single conversation.
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Restoring Alignment and Retention