BOLI FAQs

Banks have been buying life insurance on officers since the 1980s, and BOLI spread quickly once long stretches of low interest rates made its tax-equivalent yield stand out against bonds and loans. The supervisory framework that governs it today — the 2004 Interagency Statement on the Purchase and Risk Management of Life Insurance — is more than twenty years old. BOLI is now one of the most widely held assets on bank balance sheets: of the 4,385 banks in the United States, roughly 70% hold it.

There is supervisory guidance rather than a statutory cap. The 2004 Interagency Statement on the Purchase and Risk Management of Life Insurance generally expects aggregate cash surrender value of all life insurance holdings to remain within 25% of Tier 1 capital plus allowances for loan and lease losses, and exposure to any single carrier to remain within 15% of that same measure, because of concentration risk. A bank above those levels is not automatically in violation, but is expected to document why the concentration is prudent and how it is managed — and examiners do look for that documentation.

It can, but BOLI is not designed to be used that way. Gain above the premiums paid is taxable as ordinary income when it comes out, and because most BOLI is purchased with a single premium and is therefore a modified endowment contract (MEC), withdrawals are taxed gain-first and may carry an additional 10% tax. Surrendering also gives up the income-tax-free death benefit that justified the purchase in the first place. For that reason the Interagency Statement expects banks to treat BOLI as an illiquid asset in liquidity planning and to meet cash needs from other assets.

The structure does; the banking supervision does not. An operating company buying the same product is doing Corporate Owned Life Insurance (COLI), governed by the tax rules without the Interagency Statement overlay. An insurance carrier doing it is buying iCOLI. Our comparison of BOLI and COLI works through which applies to you.

The board or a designated committee should approve the purchase before it is made, and the approval should be documented in the minutes. Regulators expect evidence that directors understood what was being bought, why, and what risks it carried. In practice the analysis is usually driven by the CFO with input from HR on the benefit obligation, then presented to the board for a documented decision. Approval after funding is not a substitute. See our BOLI process for how this sequence typically runs.

Under the 2004 Interagency Statement, the analysis should identify the business need, quantify the amount of insurance and how that figure was derived, document vendor and carrier selection including financial strength, describe the product characteristics and crediting method, show the alternatives considered, and assess the full range of risks: liquidity, credit, interest rate, operational, compliance, reputation and price. It must be dated before the purchase. Thin or reconstructed analyses are the single most common examination criticism. The banking rules for BOLI implementation cover the underlying guidance.

Not always. Many institutional BOLI cases are issued on a guaranteed issue or simplified issue basis, which avoids individual medical exams and dramatically shortens the timeline. Eligibility depends on the size of the case, the number of lives, and the carrier’s participation requirements. Smaller cases or unusually large face amounts on individual lives are more likely to require full underwriting.

Generally yes. The IRC 101(j) exceptions cover directors as well as highly compensated employees and individuals as defined in the Code. Directors are frequently insured in BOLI programs, particularly where the bank is offsetting the cost of director deferred fee arrangements. The same written notice and consent requirements apply to them before issue.

For a straightforward case with guaranteed issue underwriting, roughly sixty to ninety days from initial analysis to funding is typical. The variables that stretch it are census collection, obtaining IRC 101(j) notice and consent signatures from every insured, board scheduling, and carrier processing. The consent step is the one most often underestimated, and it cannot be rushed or completed after issue.

Cash surrender value is carried as a life insurance asset rather than as an investment security, and periodic increases in cash value flow through non-interest income rather than interest income. That changes how the contribution appears in margin analysis. Treatment for risk weighting varies by product structure, so the specific reporting and capital treatment should be confirmed with your CFO and external accountants before the first premium is paid.

Nothing happens automatically, but it becomes a risk management issue the board needs to address and document. Options range from monitoring more closely, to halting further premium with that carrier, to a 1035 exchange into a different contract. General account BOLI carries direct exposure to the carrier’s balance sheet, which is why carrier concentration is limited by guidance and why annual review of financial strength matters. Separate account structures insulate the assets differently — see general account versus separate account BOLI.

Compare actual credited rates against what was illustrated at purchase, and against what the same carrier is offering on new business today. A rate that has quietly reset downward while new-money rates rose is one of the more common findings in an independent review. Peer benchmarking is a useful prompt but a poor verdict on its own — our piece on whether your bank is above or below the BOLI average covers why.

At minimum: the dated pre-purchase analysis, board minutes recording approval, signed IRC 101(j) notice and consent for every insured, the carrier illustration as delivered, the policy contracts, annual carrier statements, and the record of each periodic review. The consent forms are the ones that matter most and are most often missing, because the exposure only surfaces at a death claim, often decades later.

Yes, typically through an additional purchase rather than an amendment to existing policies. Each new insured requires its own notice and consent before the new contract is issued, and the additional premium has to be tested against your current concentration position, not the position you were in when the original purchase was made. Capital changes over time, and programs that were comfortably inside guidance at inception can drift.

You inherit the policies, and you inherit their problems. The most common issue is missing IRC 101(j) notice and consent documentation for the acquired institution’s insureds — which, if it cannot be produced, can make the death benefit taxable to the surviving bank. Acquired BOLI should be reviewed as part of diligence: consent files, carrier concentration against your combined Tier 1 capital, product suitability, and whether the original business purpose still applies.

With a file review rather than a product conversation. Confirm that consent documentation exists for every insured, check carrier financial strength as it stands today, compare actual to illustrated performance, and measure aggregate and single-carrier concentration against current Tier 1 capital. Only after that does it make sense to ask whether the structure should change. Our summary of the seven compliance mistakes boards make is a reasonable checklist to start from.