Bank-Owned Life Insurance: When and How to Use It (2026)

Understanding Bank Owned Life Insurance and When It Makes Sense

If you’re a bank executive, board member, or financial officer researching bank owned life insurance (BOLI), you’re likely weighing a major decision. BOLI can be a powerful tool on a bank’s balance sheet, but the timing, structure, and carrier selection all matter enormously. Getting this wrong means locking capital into an underperforming asset for decades. When a bank leader considers permanent cash-value coverage, our guide to comparing IUL companies sets carrier differences against cash accumulation goals.

At Insurance By Heroes, we understand the weight of financial decisions like this. Our agency was founded by a former first responder and military spouse, and our team comes from backgrounds in military service, law enforcement, fire departments, EMS, healthcare, and education. That public service mindset shapes everything we do. We believe in doing right by the people we serve, whether that’s an individual family or a community bank looking to strengthen its financial position.

We’re also an independent agency, which matters more than most people realize when it comes to BOLI. We don’t represent one insurance company. We work with dozens of carriers, and every single one of them prices BOLI contracts differently. That means we can shop your bank’s specific situation across the market to find the most favorable terms. More on why that matters shortly.

What Bank Owned Life Insurance Actually Is

BOLI is a life insurance policy purchased by a bank on the lives of its key officers or employees. The bank is both the owner and the beneficiary of the policy. It’s not employee compensation (though it can help fund benefit obligations). It’s a bank asset that sits on the balance sheet, grows tax advantaged, and eventually pays a death benefit that the bank receives income tax free. For banks weighing employee-benefit funding, see Corporate Owned Life Insurance for ownership and beneficiary duties tied to the arrangement.

Banks have used BOLI for decades to offset the rising cost of employee benefits, particularly post retirement healthcare and supplemental executive retirement plans. The cash value grows on a tax deferred basis, and the death benefit proceeds come in free of federal income tax. For a community bank looking to improve earnings and fund long term liabilities, that combination is hard to beat.

But BOLI isn’t something you buy on a whim. The timing has to be right, and the structure has to match your bank’s specific financial goals.

When BOLI Makes Strategic Sense for Your Bank

There are several scenarios where purchasing BOLI becomes a strong move. Not all of them apply to every institution, so understanding which ones fit your situation is critical.

Offsetting rising benefit costs. If your bank offers post retirement benefits, healthcare coverage, or supplemental executive retirement plans, those liabilities show up on your books. BOLI’s tax advantaged growth can help offset those costs over time. The cash surrender value grows each year, improving your bank’s earnings without adding taxable income until surrender.

Improving net income. The yield on BOLI typically exceeds what a bank earns on comparable duration bonds, especially on an after tax basis. In the current 2026 rate environment, this spread can be meaningful. A bank earning 3.5% on a bond portfolio might see 4% or more from a BOLI contract, and that BOLI yield is tax deferred. On an after tax equivalent basis, the difference widens further.

Key person protection. If your bank has executives whose departure (or death) would create a financial hardship, BOLI provides a death benefit that helps cover recruiting costs, lost revenue, or transition expenses. This is the original purpose of key person insurance, and it remains relevant.

Funding deferred compensation plans. Many banks offer deferred compensation or split dollar arrangements to retain top talent. BOLI is frequently the informal funding vehicle for these obligations. The policy’s cash value growth tracks alongside (or ahead of) the liability, keeping the bank’s books balanced. When deferred compensation uses a policy’s cash value, see Split Dollar Life Insurance for the ownership terms governing the arrangement.

Timing Matters More Than You Think

Here’s where banks often stumble. They know BOLI is a good idea conceptually, but they wait too long or buy at the wrong time. A few factors make timing critical.

Every year you delay, the insured officers are older. Older insureds mean higher insurance costs inside the policy, which drags down the net yield. A BOLI contract purchased on a group of officers averaging age 45 will almost always outperform the same contract purchased when they average age 55. The math is straightforward, and it works against you with every passing year.

Interest rate environments also play a role. BOLI contracts, particularly general account products, reflect the carrier’s investment portfolio yields. In a rising rate environment, new money rates on BOLI contracts tend to improve. But waiting for “perfect” rates is a losing game because you’re giving up years of tax advantaged accumulation in the meantime. The best time to evaluate BOLI is when your bank has excess capital and a clear need to fund benefit liabilities or improve after tax earnings.

Regulatory considerations matter too. Your bank’s regulators (OCC, FDIC, or state regulators depending on your charter) have specific guidelines on BOLI concentration limits, typically capping BOLI holdings at 25% of Tier 1 capital. If your bank is growing rapidly, buying BOLI earlier gives you room to add more later as capital increases.

How Carrier Selection Changes Everything

This is where most banks leave money on the table. And it’s where working with an independent agency becomes a genuine advantage.

BOLI is not a commodity product. Two carriers offering what looks like the same general account BOLI contract can have materially different crediting rates, surrender schedules, expense charges, and financial strength ratings. One carrier might credit 4.1% in year one while another credits 3.7% on the same group of insureds. Over 20 or 30 years, that gap compounds into hundreds of thousands of dollars (sometimes millions for larger purchases).

A captive agent, someone who works for a single insurance company, can only show you what their employer offers. If that carrier’s BOLI product isn’t competitive for your bank’s demographics, you’ll never know. You’ll just accept whatever rate they quote.

An independent agency like Insurance By Heroes works differently. We go to the market on your behalf, requesting proposals from multiple carriers simultaneously. Every carrier uses its own underwriting criteria, its own mortality assumptions, and its own investment strategy. The result is that the same group of bank officers can generate very different pricing across carriers. We’ve seen spreads of 40 to 60 basis points between the best and worst offers on identical BOLI cases. On a $10 million purchase, that kind of spread means real money over the life of the contract.

Getting quotes from multiple carriers is free, and it gives you actual numbers to compare instead of guesswork. When you’re ready to explore what BOLI rates look like for your bank, the process starts with a simple conversation.

Types of BOLI and Which One Fits

Banks generally choose between three types of BOLI, and each has different risk and return characteristics.

General account BOLI is the most common. The carrier invests your premium in its general investment portfolio and guarantees a minimum crediting rate, often with a current rate above the minimum. Your bank’s cash value is backed by the carrier’s general account, so financial strength ratings matter here. This is the simplest structure and works well for most community banks.

Separate account BOLI invests in specific sub accounts (similar to mutual funds) and offers potentially higher returns with more volatility. The assets are held separately from the carrier’s general account, providing some protection if the carrier faces financial trouble. Larger banks with higher risk tolerance sometimes prefer this option.

Hybrid BOLI combines features of both, typically offering a guaranteed minimum return with upside potential tied to market performance. These have gained popularity in recent years as banks look for yield without taking on full market risk.

Your bank’s size, risk appetite, and regulatory situation will drive which type makes sense. And again, the specific terms vary widely by carrier, making comparison shopping essential.

Common Concerns Banks Have About BOLI

“We’re locking up capital for too long.” BOLI does have surrender charges, typically lasting 10 to 15 years. But the cash surrender value is still an asset on your balance sheet from day one. It’s not locked away. It improves your bank’s book value and earnings immediately. And if you truly need liquidity, most BOLI contracts allow partial surrenders or policy loans against the cash value.

“The regulatory scrutiny isn’t worth it.” Regulators actually expect well run banks to manage their balance sheets effectively. BOLI, when properly documented and within concentration guidelines, is viewed as a standard bank asset. The key is having proper board resolutions, a pre purchase analysis, and ongoing monitoring. Your independent agent can help you build that documentation.

“We should wait until rates go higher.” Waiting has a cost. Every year of delay means older insureds (higher internal charges), lost tax advantaged accumulation, and continued unhedged benefit liabilities. The 2026 rate environment is already producing competitive BOLI yields. Locking in today protects your bank from the possibility that rates decline again.

Managing Your BOLI After Purchase

Buying the policy is just the beginning. Ongoing management determines whether your BOLI performs as expected.

Review your carrier’s crediting rates annually. If your general account BOLI’s current rate drops significantly below what new contracts are offering, it may be time to explore a 1035 exchange into a better performing contract. These exchanges are tax free and can meaningfully improve your yield, though surrender charges need to be factored in.

Update your insured group as officers retire or leave the bank. Adding new insureds keeps the mortality profile favorable and ensures the death benefit remains aligned with your bank’s obligations.

Monitor your BOLI concentration relative to Tier 1 capital. As your bank grows, you may have room for additional purchases. As regulators update guidance, your limits may shift.

Keep beneficiary designations current and ensure your board reviews the BOLI program at least annually. This isn’t just good practice. Regulators expect it.

Working With the Right Partner

BOLI is a long term commitment. The carrier you choose, the structure you select, and the timing of your purchase all compound over decades. Having an independent agent who shops the entire market on your behalf isn’t a luxury. It’s how you make sure your bank gets the best available terms.

At Insurance By Heroes, we take the time to understand your bank’s balance sheet, benefit obligations, and strategic goals before we go to market. When we come back with proposals, you see real numbers from real carriers, side by side. No obligation, no pressure. Just the information you need to make a smart decision.

If you’re evaluating whether BOLI belongs on your bank’s balance sheet in 2026, the best next step is a conversation. Fill out the short form on our site or click the quote button on this page, and a real person from our team will reach out to walk through the process with you.

Frequently Asked Questions

Is bank owned life insurance only for large banks? No. Community banks are actually among the most common BOLI purchasers. Even banks with $200 million to $500 million in assets regularly use BOLI to offset benefit costs and improve after tax earnings. The minimum purchase amounts vary by carrier, but many accept initial premiums as low as $1 million to $2 million.

Does BOLI require employee consent? Yes. Under federal law (the Pension Protection Act), banks must obtain written consent from each insured employee before purchasing a policy on their life. Employees must also be notified that the bank is the beneficiary. This is a straightforward compliance requirement that your agent can help you manage. For employee consent questions, see Corporate Owned Life Insurance Requirements for the compliance steps that follow written consent.

What happens to the BOLI if our bank is acquired? BOLI policies transfer to the acquiring institution as part of the bank’s assets. The acquiring bank assumes ownership and continues to benefit from the cash value growth and eventual death benefits. This is typically a smooth transition, though the acquiring bank may want to review the policies as part of its overall BOLI strategy.

How do regulators view BOLI concentration? The OCC and FDIC have issued interagency guidance recommending that BOLI holdings not exceed 25% of Tier 1 capital. Holdings above that threshold receive heightened scrutiny but aren’t automatically prohibited. Your bank’s risk management framework, documentation, and board oversight all factor into how regulators evaluate your BOLI program.

For banks managing policy obligations, see When to Cancel a Life Insurance Policy and Accelerated Death Benefit Rider.