How long has Bank Owned Life Insurance been around?
BOLI has been around since the late 70’s and really took off in the 80’s. Because of the declining interest rate environment from 2000 until early 2020, there has been an explosion in the use of BOLI by even some of the smallest community banks around the United States. Today, BOLI is widely held and out of the approximate 5000 banks, 65% of them have implemented “some” BOLI.
Is there a limit to how much BOLI the bank can buy?
Yes there is. A bank is only allowed to use up to 25% of its Tier 1 and allowances for loan and lease losses to buy BOLI. In addition, the bank may only purchase up to 15% of its Tier 1 and allowances for loan and lease losses or 1% of the banks total assets with any single insurance company because of the concentration risk.
Can the bank access the cash during the life of the employee?
The bank can access the cash in any year, is extremely liquid, but if the policy is designed as a Modified Endowment Contract (MEC), then the bank would recognize the tax deferred earnings of the policy at the time it is accessed as well as a 10% excise tax. It is recommended that the bank use other assets for immediate cash because of these taxes.
**The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding and Federal Tax penalties. Schiff Executive Benefits, its employees and representative are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.