Bank-Owned Life Insurance (BOLI) has proven to be a cost-efficient and effective medium for banks to offset rising employee benefit costs.

By definition, BOLI is life insurance purchased and owned by a bank that can be used to offset a variety of pre-retirement and post-retirement employee benefit obligations. Those obligations may include financing supplemental executive retirement and deferred compensation programs and post-retirement medical obligations - all of which constitute a major expense for most financial institutions.

BOLI has many attributes.

	The bank is both the owner and beneficiary of the policy.
	The program is designed for longer-term investments.
	BOLI can be used as a source of funds to help support deferred compensation and other post-retirement programs.
	The Participant must consent to the bank owning the policies on their life.
	BOLI can be a source of funds that potentially offers annual after-tax returns that are higher than the returns earned on other bank investments.
	Policy earnings come from growth in cash value each year and from life insurance proceeds.
	Policy earnings are tax-deferred until a distribution is made.

BOLI programs are considered to be a longer-term type of investment since the obligations they are designed to help fund become due in future years. The growth within the policy is not subject to current taxation, so increases in the cash surrender value can be booked annually as earnings on an after-tax basis. BOLI policies are typically single premium purchases, which are classified as modified endowment contracts (a special class of life insurance). As such, the bank often holds these contracts until death of the insured(s), since any policy distributions would be taxed on a Last In First Out (LIFO) rather than a First In First Out (FIFO) basis.

In a BOLI program, a bank usually purchases life insurance on a group of key employees. The bank pays the premiums, owns the cash value and is the designated beneficiary. The employees must consent to insurance being purchased on their lives.

Employees realize the costs of their benefit programs keep rising; therefore, they view BOLI as a resourceful way for employers to finance their benefit program costs, without directly impacting them.

A bank may purchase BOLI to finance employee benefit expenses. However, the bank does not usually have a contractual obligation to segregate the BOLI program assets from the bank's general assets or contractually designate the BOLI program assets to satisfy employee benefit expenses. Essentially, the assets provide a profit-and-loss offset to the costs or accruals for such benefits. When insurance proceeds are paid, the cash can be used to help finance benefit costs. Policy earnings come from growth in cash value earnings and from the life insurance proceeds when an employee dies.

For additional information, please contact the Executive Benefits Division at 1 (800) 665-2654 and press 2 for the Sales and Marketing Department.