Bank-Owned Life Insurance (BOLI)

What Is Bank-Owned Life Insurance?

Bank-owned life insurance (BOLI) is a product where the bank is the policy beneficiary and also usually the owner.

Such insurance is used as a tax shelter for the financial institutions, which leverage its tax-free savings provisions as funding mechanisms for employee benefits.

1:10

Life Insurance

How Bank-Owned Life Insurance (BOLI) Works

BOLI contracts are primarily used by banks to fund employee benefits at a lower rate than they might otherwise have to pay. In a typical scenario, the bank sets up the contract, and then makes payments into a specialized fund set aside as the insurance trust. The policy is bought on an executive's life.

Key Takeaways

  • Bank-owned life insurance (BOLI) is a form of life insurance used in the banking industry.
  • Banks use it as a tax shelter and to fund employee benefits.
  • A significant concern for banks is the credit quality of the BOLI issuer.
  • The policy is bought on an executive’s life and tax-free benefits are paid on the executive's death.

All employee benefits that need to be paid to particular employees covered under the plan are paid out from this fund. All premiums paid into the fund, in addition to all capital appreciation, are tax free for the bank. Therefore, banks can use the BOLI system to fund employee benefits on a tax-free basis.

Bank-owned life insurance is a kind of tax shelter providing funds (tax free) to the bank to offset costs.

As the U.S. Department of the Treasury's Office of the Comptroller of the Currency (OCC) explains, banks are allowed to purchase BOLI policies, "in connection with employee compensation and benefit plans, key person insurance, insurance to recover the cost of providing pre- and postretirement employee benefits, insurance on borrowers, and insurance taken as security for loans."

OCC may also allow for other uses, it says, "on a case-by-case basis."

Pros and Cons of Bank-Owned Life Insurance

According to BoliColi.com, which helps manage corporate-owned and bank-owned life insurance portfolios, BOLI was traditionally combined with benefit plans for new senior executives. But more recently, "many banks have added BOLI in order to offset existing employee benefit expenses."

As noted, the advantages of BOLI included its tax favorability, and the ability to generate earnings that offset the costs associated with employee benefits programs. But BoliColi.com notes that there are disadvantages too.

For instance, "if a BOLI contract is surrendered by the bank the gains within the policy become taxable as well as a 10 percent IRS penalty on the gain similar to surrendering an IRA prior to age 59 1/2. If the policy is held to the death of each insured, the gain becomes part of the tax-free death benefit and no tax is incurred."

Additionally, "the greatest concerns for most banks is the credit quality of the BOLI carrier. Most carriers in the market are of the highest quality, however, that can change over time. The second concern is the competitiveness of the crediting rate in comparison to the market."

Why do banks purchase BOLI?

BOLI offers banks a tax shelter and a way for them to fund benefit plans. Premiums paid into the fund, in addition to all capital appreciation, are tax free for the bank. Therefore, banks can use the BOLI system to fund employee benefits on a tax-free basis.

When are benefits paid?

Since the policy is taken out on an executive's life, tax-free death benefits are paid when the executive dies.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Office of the Comptroller of the Currency. "Bank-Owned Life Insurance." Accessed Sept. 8, 2021.

  2. BoliColi.com. "What is Bank-Owned Life Insurance?" Accessed Sept. 8, 2021.