In this high interest rate environment, the yields on Bank Owned Life Insurance (BOLI) are still attractive. BOLI continues to be desirable and has remained competitive to other bank investments due to the tax-free build up of BOLI earnings. With tight liquidity, banks are purchasing BOLI for the following reasons:
- Helps to offset the costs of a Nonqualified Deferred Compensation (NQDC) Benefit Plan, which is widely used to recruit, reward and retain key employees.
- Provides the bank with much needed Key Person life insurance protection.
- Produces above average tax-free income.
- Tax-free death benefits from BOLI enhance the total return over the life of the policy.
- Due to the tax-free nature of BOLI cash value growth, there is always an inherent earnings advantage.
While the BOLI asset accrues, the bank recognizes noninterest income on a tax preferred basis. BOLI is always carried at book value, and rising earnings in BOLI can improve noninterest income. Higher interest rates will not result in a mark-to-market adjustment, making BOLI a complimentary asset to hold as interest rates fluctuate.
We like to refer to BOLI as the “Swiss Army Knife” asset that banks own, because of the variety of opportunities that it provides. The tax-equivalent yields provided by the highest rated life insurance companies can provide banks with an exceptional investment opportunity. Even in this unique marketplace with tight liquidity, EBN welcomes an opportunity to have a conversation to explore possibilities of BOLI with your bank.