BOLI: Bank Owned Life Insurance

Bank owned life insurance (BOLI) has become a predominant tool for offsetting the rising costs of employee benefits. In conjunction with our carrier partners, Fulcrum Partners offers a variety of products designed to meet bank needs while also offering competitive yields.

Ask Fulcrum Partners to analyze your needs and develop a portfolio that suits your bank’s investment philosophy, positions you to earn competitive yields, and fulfills regulatory compliance and documentation requirements.

Bank Owned Life Insurance  is an alternative investment option that offers unique advantages

• Cash value earnings accumulate tax deferred, and ultimately tax free, if the policy is held until the death of the employee/insured
• The insurance carrier portfolio generally can offer higher yields due to economies of scale and assets with longer durations
• BOLI assets are not subject to mark-to-market risk
• Interest crediting rates reprice on at least an annual basis
• Earnings are recorded as non-interest income
• The insurance aspect of the policy provides for additional death benefit protection, which has value for the bank and/or employee

BOLI Executive Summary

Bank owned life insurance (BOLI) has become a best practice to informally fund officer and director nonqualified benefit expenses and other employee benefit liabilities. Many of the nation’s largest banks, as well as thousands of community banks, have implemented BOLI strategies. These plans provide tax-advantaged income not available with traditional bank investments.

Achieve at least 4 strategic objectives through BOLI

• Generate tax-advantaged income to offset the liabilities and recover the costs of certain employee benefit plans
• Generate stable revenue from non-loan sources and enhance the “Other Non-Interest Income” component of the Income Statement
• Provide competitive returns with superior credit quality
• Increase Earnings Per Share and Shareholder Values

BOLI Program Overview

Plan Mechanics

• The bank pays a one-time single premium and is the owner and beneficiary of the policies
• The bank insures directors and/or highly compensated officers
• The policies are held to maturity

Regulatory Matters

• BOLI is an allowable transaction under OCC 2004-56
• The actual purchase amount is calculated based on the bank’s insurable interest
• BOLI plan is funded by an asset sale or liquidation
• The business purpose is defined as “Financing Employee Benefit Liabilities”

Tax/Accounting

• The policy’s initial cash value is equal to the initial premium paid (no loads; no surrender charges)
• Growth in cash value is recorded as “Other Non-Interest Income” and inside buildup of the policy’s cash value is tax-deferred income
• The policy’s death benefit proceeds are received tax free by the bank
• Accounting of life insurance is governed by FASB technical bulletin 85-4

COLI: Corporate Owned Life Insurance

Corporate Owned Life Insurance (COLI) is an institutional life insurance product your corporation may purchase to cover a select management group. The purpose of the purchase includes the financing of executive benefit plans and other corporate liabilities. COLI offers income tax advantages that make it highly attractive for most companies. Fulcrum Partners is recognized as one of the largest, independent distributors of Corporate Owned Life Insurance in the US.

Advantages of Corporate Owned Life Insurance

• Tax-deferred cash value growth^1;2
• Tax-free reallocations within the policy (variable COLI) ²
• Tax-free receipt of death proceeds ^3;4
• Low net-cost loans and tax; free withdrawals to basis ^{1; 5; 6}
  • The option to access COLI cash values via tax-free loans and withdrawals provides unique cash flow flexibility

¹ Subject to qualification under US Code §72
² Subject to qualification under US Code §817(h)
³ Subject to qualification under US Code §101
⁴ Subject to qualification under US Code §7702
⁵ Subject to qualification under US Code §7702A
⁶ Subject to qualification under US Code §7702(f)(7)

Corporate Owned Life Insurance (COLI) is an established funding strategy utilized by companies that elect to finance nonqualified benefit liabilities

• COLI receives favorable accounting and Profit and Loss (P&L) treatment relative to taxable investments
• COLI can reduce taxes on invested assets; increasing returns and enhancing shareholder value
• COLI can make the company and the associated benefit plan(s) more financially viable
  • Short term, COLI programs reduce P&L volatility and match plan balance sheet liabilities
  • Long term, COLI can increase benefit security and reduce overall plan costs, delivering more value to plan participants
• In addition to the death benefit protection that is inherent in life insurance, COLI provides unique tax and accounting opportunities

Corporate or Trust Owned Life Insurance

Tax Management

In the example below, both a taxable portfolio and a non-taxable portfolio have an investment allocation in fixed income and equity instruments, the same investment management fees (IMF), and the same  credit quality and duration. The non-taxable portfolio has expenses (policy loads), but eliminates the income taxes generated by the taxable portfolio¹:

* Assumes a 40% effective tax rate on taxable investment.
¹ The rates of return are for illustrative and analytical purposes only and the results are not guaranteed. Results may vary based on actual investment  performance. You should always consult your own tax, legal, and accounting advisors.

Tax Management via COLI

Many plan sponsors utilize the favorable cost/benefit effect of institutional corporate/trust owned life insurance (COLI)

• Fulcrum Partners will provide you detailed analysis to evaluate the financial advantage of a tax-managed COLI strategy compared to a non-tax-managed strategy
• The cost/benefit tradeoff of utilizing COLI is relatively straightforward, i.e., the taxes that would otherwise be paid versus the cost that would be payable to an insurance company to eliminate those taxes
• Typically, when funding or hedging a nonqualified plan liability, COLI assets mirror participant liabilities to neutralize Profit and Loss and balance sheet impact

ICOLI: Insurance Company Owned Life Insurance

ICOLI Executive Summary

The investments available to an insurance company to optimize its risk/return profile while improving earnings, surplus, and financial strength, are limited. Insurance company owned life insurance, (ICOLI) is one of the few options available to an insurance company to enhance its tax adjusted earnings, gain favorable risk based capital (RBC), and expand investment choices available to insurers.

Similar to BOLI, ICOLI includes all life insurance that an insurance carrier purchases and either owns or in which it has a beneficial interest.

Contact Fulcrum Partners and let us help your organization explore the value of using tax-advantaged benefit financing strategies.

*The rates of return are for illustrative and analytical purposes only and the results are not guaranteed. Results may vary based on actual investment performance. You should consult your own tax, legal, and accounting advisors.