Bank-Owned Life Insurance (BOLI)

Key takeaways
* BOLI are life insurance policies purchased by banks on select employees (typically senior executives) with the bank as beneficiary.
* Earnings on BOLI (premiums and capital appreciation) are generally tax-advantaged for the bank and can offset employee benefit costs.
* Main product types: general accounts, separate accounts, and hybrid accounts—each has different investment structures and credit protections.
* Surrendering a policy can trigger taxation and, in some cases, a penalty on gains. Carrier credit quality and liquidity are important risks.
* BOLI is available only to banks and corporations; insured employees must consent.

What is BOLI?

Bank-Owned Life Insurance (BOLI) is a tool banks use to fund employee benefits and provide financial protection against the loss of key personnel. The bank purchases a life insurance policy on an executive or other employee whose death could cause financial loss, names itself the beneficiary, and credits policy proceeds and investment earnings to a dedicated fund used to pay benefit obligations.

How BOLI works

• The bank purchases a policy on an eligible employee and pays premiums into the insurance contract.
• Premiums and any capital appreciation generally accumulate on a tax-advantaged basis for the bank.
• When applicable (typically on the insured’s death), the bank receives the policy benefits tax-free and applies them to fund employee benefits, repay costs, or cover losses.
• The insured employee must consent to being covered. Policies usually remain with the bank even if the employee leaves.

Types of BOLI accounts

1. General account
2. The insurer pools bank deposits into its general account and invests primarily in bonds and real estate.
3. Investment details are presented at a high level and returns depend on the carrier’s overall investment performance and credit strength.
4. Separate account
5. Investments backing the policy are segregated and managed by specific fund managers.
6. Provides greater transparency about holdings and performance; credit protection differs from general accounts.
7. Hybrid account
8. Combines features of general and separate accounts.
9. May offer guaranteed crediting rates and more detailed reporting while providing isolation from insurer creditors like separate accounts.

Advantages

• Tax efficiency: Earnings and death benefits can be tax-advantaged, helping to defray the cost of employee benefit programs.
• Benefit funding stability: Policies remain with the bank even if the insured employee departs, preserving funding for benefit obligations.
• Competitive recruiting: BOLI can help banks offer attractive benefit packages for top talent.

Risks and disadvantages

• Credit risk: Returns depend on the insurer’s financial strength. Purchasing from a weak carrier increases risk.
• Illiquidity: BOLI is generally an illiquid asset; surrendering policies can be costly.
• Tax consequences on surrender: If a policy is surrendered or cannot be maintained, accumulated gains may become taxable and could be subject to penalties.
• Regulatory and operational complexity: Proper structuring, consent, and compliance with banking regulations are required.

Who can purchase BOLI and when benefits are paid

• Only banks and certain corporations purchase BOLI—individuals cannot buy BOLI for personal use.
• Benefits (usually tax-free death benefits) are paid to the bank when the insured individual dies and are used to support employee benefit obligations or offset related costs.

Scale and regulatory context

• BOLI is a widely used product in the U.S. banking sector; reported cash surrender value across banks totaled $202.4 billion as of June 30, 2023.
• Regulators allow BOLI when used for employee compensation and benefit plans, key-person protection, recovering cost of pre/post-retirement benefits, and in some cases as loan collateral, subject to supervisory guidance and risk management expectations.

Bottom line

BOLI is a strategic, tax-advantaged instrument banks use to fund employee benefit programs and protect against losses from key-person deaths. While it can reduce benefit costs and support competitive compensation, banks must manage carrier credit risk, illiquidity, and potential tax consequences carefully. Selecting reputable insurers and structuring policies appropriately are critical to realizing BOLI’s benefits.

Sources
* U.S. Department of the Treasury, Office of the Comptroller of the Currency — guidance on purchase and risk management of life insurance
* Industry data reported to the FDIC / FFIEC (life insurance asset totals)
* Industry resources on BOLI product types and management practices