When BOLI started in the last 1990’s/2000’s, there was only ONE Bank Owned Life Insurance Products available. (General Account BOLI). Since then, three other products have developed, and below are the descriptions of them.
General Account BOLI – These products credit the interest rate of the general account of the carrier. The policy may be a “new money” rate – where the interest credited is based upon what is currently available in the market, or it is a portfolio rate – where the interest that is credited is based upon the overall portfolio of the insurance companies investment portfolio. Over time these rates will narrow and look the same in a stable rate environment, but depending on the trends of interest rates, one product will outperform the other over some period of time. These types of policies carry a 100% risk based capital percentage since the bank would be considered a credit should the insurance carrier go into receivership. Because of this, banks should choose carefully before placing money in non-highly rated carriers.
Separate Account BOLI – These products credit interest according to the performance of a separate investment group of bank permissible investments. They usually carry a risk weighting equal to the underlying investments and in those cases where the bank is concerned about their risk based capital ratios, this product might be advantageous over a general account product. In most cases, a lower guaranteed rate of return is offered than that of a general account product. Another feature of this product is that they usually have a “stable value rider”. This rider fixes the value of the bonds such that fluctuations of the underlying investment product due to changes in the interest rate environment will allow the bank to carry most of the bond portfolio at “par value” irrespective of the changing rate environment.
Hybrid Account BOLI
Hybrid BOLI is a a product that has a 20 to 50% risk weighting when originally issued but since BASEL III, is now considered to be 100% risk weighted on your balance sheet. The assets are held at the insurance company, and the bank is a creditor of the account.
Indexed Universal Life
In the last few years, Banks and Credit Unions have explored the performance of products issued by carriers that offer “market” performance without the risk of being in the market. Many times these products credit ZERO interest in the first year, but after that, may outperform traditional BOLI products because it is market based. The nice thing about these products is that many have a guaranteed crediting FLOOR, that protects the assets while offering upside (usually with a cap) on an annual basis. Long term, this product traditionally will outperform fixed interest products but at a HIGHER risk of performance.