Bank Owned Life Insurance

Written by: Heather Colvin

What is the definition of Bank Owned Life Insurance?
Bank Owned Life Insurance (BOLI) is insurance purchased by a Bank "to procure, for its benefit, insurance on the life of any of its directors, officers, or employees, or any other persons whose death might cause financial loss to the bank or trust company; or, pursuant to any contract lawfully obligating the bank or trust company as guarantor or surety, on the life of the principal obligor."

Which Banks are allowed to purchase BOLI?

• Any National Bank or Federal Savings Association is allowed to purchase BOLI only for the purpose of economically hedging their equity-linked obligations under employee benefit plans. The entity must demonstrate that
• It has a specific, equity-linked obligation
• Both the inception of the hedge and, on an ongoing basis, changes in the value of the equity-linked variable life insurance policy are highly correlated with changes in the value of the equity-linked obligation
• Under GA state laws, state chartered banks would be authorized to purchase insurance policies, if all necessary safety and soundness considerations are met in the purchase of the insurance. Safety and soundness factors should be actively monitored and reviewed during the following situations:
• De Novo Institutions
• are required to receive prior GA Department of Banking and Finance approval during its first three years of operations.
• Problem Institutions
• are required to receive prior approval if the purchase of such products is a condition of a Board Resolution, Memorandum of Understanding, or Cease and Desist Order.

How should a Bank account for Boli?

• An institution should report the carrying value (the cash surrender value that is reported to the institution by the carrier, less any applicable surrender charges not reflected by the insurance carrier) of its BOLI holdings as an asset and the change in cash surrender or contract value during the period as an adjustment of premiums paid in determining the expense or income to be recognized under the contract for the period.
• For example, the Bank owns a $100,000 policy on the controller. The current cash surrender value is $78,000 with a $1,000 surrender charge. Premiums paid on the insurance are $5,000. Last period the cash surrender value was $75,000 and the carrying value was $74,000 (75,000-1,000). Your asset is $77,000 (78,000-1,000) an increase of $3,000 (77,000-74,000). Since $5,000 was paid for premiums, $3,000 is attributable to the increase in carrying value and $2,000 is recorded as an expense.

How should a Bank report BOLI on Call Reports?

• Schedule RC, Item 11, "Other assets" and RC-F, Item 5, "All other assets"- Include the amount that could be realized under BOLI policies as of the report date.
• Schedule RC-F, Item 5.b, "Cash surrender value of life insurance"- Include the amount that could be realized under BOLI policies as of the report date if such amount is greater than $25,000 and exceeds 25% of the total of "All other assets" reported in Schedule RC-F, Item 5.
• Schedule RI, Item 5.1, "Other noninterest income"- Include the net change in the cash surrender value of BOLI policies.
• Schedule RI-E, Item 1.b, "Earnings on/increase in value of cash surrender value of life insurance"- Include the net change in the cash surrender value of BOLI policies if such amount is greater than 1% of the sum of total interest income and total noninterest income.
• Schedule RI, Item 7.d, "Other noninterest expense"- Include BOLI expenses for policies in which the institution is the beneficiary.
• Schedule RI-E, Item 2.h, "Other noninterest expense"- Include the BOLI expenses for policies in which the institution is the beneficiary if such amount is greater than 1 % of the sum of total interest income and total noninterest income.

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