BOLI Insurance Explained: Guide for Banks (2025 Update)

Bank-Owned Life Insurance, commonly known as BOLI, represents a significant financial tool utilized by banking institutions across the United States. It’s a specialized form of life insurance purchased by banks where the institution is the owner and often the beneficiary of policies covering the lives of key executives or a select group of employees. As we look towards 2025, understanding the nuances, benefits, and regulatory landscape of BOLI insurance is crucial for banks seeking stable, tax-advantaged assets to offset employee benefit costs. This guide provides a comprehensive overview to help your institution navigate this complex area.

Making the right decision about BOLI requires careful consideration and expert guidance. Not every insurance carrier or policy structure is suitable for every bank’s unique financial situation, risk tolerance, and benefit funding objectives. At Insurance By Heroes, an independent insurance agency founded by a former first responder and military spouse, we understand the importance of diligence and tailored solutions. Our team, many with backgrounds in public service, is dedicated to helping institutions like yours find the most appropriate coverage by leveraging our access to dozens of top-rated insurance carriers. We shop the market on your behalf, ensuring the recommendations we make align perfectly with your specific needs.

What Exactly is BOLI Insurance?

At its core, BOLI is a life insurance policy purchased and owned by a bank on an executive or employee (the insured). The bank pays the premiums and, upon the death of the insured, receives the death benefit tax-free, provided regulatory requirements are met. Critically, the cash surrender value (CSV) of the policies grows on a tax-deferred basis, providing an attractive asset for the bank’s balance sheet.

The primary purpose of BOLI is typically not traditional key person protection (though it can serve that function). Instead, banks primarily use BOLI as a financing vehicle to recover the costs associated with providing employee benefits programs. These programs often include:

• Supplemental Executive Retirement Plans (SERPs)
• Deferred Compensation Plans
• Group Term Life Insurance carve-outs
• Post-Retirement Medical Benefits
• Executive Group Health Insurance

By utilizing the tax-advantaged growth and tax-free death benefits of BOLI, banks can create a more efficient and cost-effective method for funding these long-term liabilities compared to alternative investments that may be taxable or offer lower yields.

Navigating the setup and selection of BOLI requires understanding intricate details. The choice of carrier, policy type, and structuring directly impacts the financial performance and regulatory compliance. Insurance By Heroes specializes in demystifying this process. As an independent agency, we aren’t tied to any single carrier; our loyalty is to you, our client. We leverage our extensive network of insurance providers to compare options and design a BOLI strategy that fits your bank’s specific goals and balance sheet.

How BOLI Programs Work: The Mechanics

Understanding the operational flow of a BOLI program is essential for bank leadership considering its implementation.

1. Identification and Consent: The bank identifies a group of key employees or executives to be insured under the BOLI program. Crucially, under regulations like the Bank Insurance Act provisions within the Consolidated Appropriations Act of 2001 and subsequent guidance (like OCC Bulletin 2004-56), the bank must obtain written consent from each proposed insured employee before purchasing the policy. The consent must inform the employee that the policy may continue even after their employment ends and state the maximum face amount for which the employee could be insured.
2. Underwriting: The chosen insurance carrier(s) underwrite the policies based on the health and other factors of the insured employees. This process determines the premiums required. Often, simplified or guaranteed issue underwriting is available for larger groups, streamlining the process.
3. Policy Purchase and Ownership: The bank purchases the life insurance policies, paying the premiums directly to the carrier(s). The bank is designated as the policy owner and, typically, the sole beneficiary.
4. Asset Management: The cash surrender value (CSV) of the policies grows over time. Depending on the type of BOLI chosen (discussed below), the growth may be tied to the carrier’s general account performance, linked to separate account investment options, or a hybrid structure. The bank records the BOLI asset on its balance sheet, typically based on its cash surrender value.
5. Funding Benefit Costs: The tax-deferred growth in CSV provides an ongoing source of earnings that can be used implicitly or explicitly to offset the accruing costs of the employee benefit programs the BOLI was designed to finance.
6. Death Benefit Payout: Upon the death of an insured employee (whether active or retired), the bank receives the policy’s death benefit proceeds. Under Internal Revenue Code (IRC) Section 101(j), these proceeds are generally received income tax-free, provided the notice and consent requirements were met and certain other conditions apply (e.g., the insured was an employee within 12 months of death, or the payout is made to the employee’s family or trust, or used for purchase of equity).
7. Ongoing Administration: BOLI requires ongoing administration, including monitoring carrier financial strength, tracking policy performance, ensuring regulatory compliance, and managing data related to the insured group. This is an area where partnering with a knowledgeable advisor like Insurance By Heroes adds significant value, ensuring the program runs smoothly and remains compliant over the long term.

The success of a BOLI program hinges on proper structuring and carrier selection. Because Insurance By Heroes works with dozens of carriers, we can objectively evaluate which providers offer the most competitive pricing, strongest financial ratings, and policy features best suited to your bank’s specific objectives and risk appetite.

Types of BOLI Policies

BOLI is not a monolithic product. There are several distinct types, primarily differing in how the policy’s cash value growth is determined and who bears the investment risk. The choice depends heavily on the bank’s risk tolerance, desired return profile, and accounting preferences.

1. General Account BOLI

In a General Account policy, the cash value is credited with interest based on the declared crediting rate of the insurance carrier’s general investment portfolio. The carrier bears the investment risk associated with its general account assets. These policies typically offer a minimum interest rate guarantee, providing a degree of stability and predictability.

• Pros: Generally lower risk, stable returns, simpler accounting (CSV typically reported as the asset value).
• Cons: Returns are dependent on the carrier’s overall portfolio performance and crediting rate decisions, potentially lower upside compared to separate account products, exposure to the carrier’s general creditworthiness.
• Best Fit: Banks seeking stable, predictable asset growth with lower volatility and prioritizing carrier guarantees.

Even within General Account BOLI, carrier performance and strength vary significantly. Insurance By Heroes helps banks analyze carrier financials, historical crediting rates, and guarantee provisions across multiple insurers to identify the strongest options.

2. Separate Account BOLI

With Separate Account BOLI, the cash value is invested in separate investment funds, similar to mutual funds, chosen by the bank from a menu offered by the insurance carrier. The bank assumes the investment risk, meaning the cash value will fluctuate based on the performance of the underlying chosen funds (e.g., equity funds, bond funds, balanced funds).

• Pros: Potential for higher returns linked to market performance, greater control over investment allocation, diversification potential within the policy.
• Cons: Higher risk as the bank bears investment losses, potential for cash value volatility, more complex accounting and reporting (often requires mark-to-market accounting).
• Best Fit: Banks comfortable with market risk, seeking potentially higher yields than general account products, and having the infrastructure to manage the investment choices and associated accounting.

Choosing the right Separate Account structure and underlying funds requires sophisticated analysis. Insurance By Heroes can help evaluate the fund options, risk profiles, and fee structures across different carrier platforms, ensuring alignment with your bank’s investment policy and risk parameters.

3. Hybrid BOLI

Hybrid BOLI products attempt to combine features of both General and Separate Account policies. They might offer a guaranteed minimum return floor (like General Account) while allowing participation in returns above a certain threshold, potentially linked to an index or a reference portfolio (offering upside potential like Separate Account, but often capped).

• Pros: Offers a balance between risk and return, potential for returns higher than traditional General Account while providing some downside protection.
• Cons: Can be more complex to understand and administer, returns may be capped or have participation limits, structure and performance drivers vary significantly between carriers.
• Best Fit: Banks seeking a middle ground, wanting some upside potential beyond fixed crediting rates but with more stability than pure Separate Account products.

The nuances of Hybrid BOLI necessitate careful comparison. Because these structures differ widely, working with an independent agency like Insurance By Heroes is crucial. We can dissect the specific mechanics of hybrid offerings from various carriers to determine which truly aligns with your bank’s objectives, rather than pushing a single company’s proprietary design.

Remember, the “best” type of BOLI is entirely dependent on your institution’s specific financial goals, risk tolerance, existing assets, and benefit liabilities. There is no universal answer, which underscores the importance of independent, tailored advice.

Key Benefits of Implementing a BOLI Program

When structured and managed correctly, BOLI offers several compelling advantages for banking institutions:

1. Favorable Tax Treatment

This is arguably the most significant driver for BOLI adoption.

• Tax-Deferred Growth: The cash surrender value within the BOLI policy grows on a tax-deferred basis. Unlike many other bank investments, the annual earnings are not subject to current income tax, allowing the asset value to compound more efficiently over time.
• Tax-Free Death Benefits: As mentioned earlier, death benefits received by the bank upon the passing of an insured are generally income tax-free under IRC Section 101(a), provided the rules in IRC Section 101(j) (including notice and consent) are met. This tax-free influx of capital can fully or partially recover the cost of the insurance and the employee benefits being funded.

2. Efficient Funding Source for Employee Benefits

BOLI provides a competitive and stable asset class specifically suited for offsetting the long-term, often unpredictable costs associated with executive and employee benefit programs. The yield generated by BOLI assets can significantly outperform traditional bank funding sources (like bank deposits or federal funds) on an after-tax basis, making it a highly efficient tool for managing these liabilities.

3. Potentially Higher Yields than Alternatives

Compared to other conservative, high-quality investments typically held by banks (e.g., municipal bonds, agency securities, Treasuries), BOLI often offers a more attractive yield, especially when considered on a tax-equivalent basis. The spread between BOLI yields and the cost of the liabilities being funded creates positive arbitrage for the bank.

4. Balance Sheet Diversification

BOLI represents a unique asset class that is generally uncorrelated with many other traditional bank assets. Adding BOLI can enhance the diversification of the bank’s investment portfolio and overall asset base, potentially reducing overall portfolio volatility.

5. Carrier Financial Strength

BOLI policies are issued by major life insurance companies, which are subject to stringent state insurance regulations regarding solvency and reserves. While carrier due diligence is crucial (a key role for Insurance By Heroes), investing in policies from highly-rated carriers adds a layer of security.

It’s important to weigh these benefits against the risks and complexities involved. Insurance By Heroes helps banks conduct a thorough cost-benefit analysis, modeling the potential financial impact and ensuring the chosen BOLI strategy aligns with the institution’s overall financial plan. Our independence allows us to focus solely on finding the optimal solution from across the market.

Understanding the Risks and Considerations

While BOLI offers significant advantages, banks must be aware of and manage the associated risks:

1. Carrier Credit Risk (Solvency Risk)

The bank relies on the financial strength and claims-paying ability of the issuing insurance carrier(s). If a carrier faces financial distress, the bank’s BOLI asset value and its ability to receive death benefits could be impaired.

• Mitigation: Thorough due diligence on carrier financial strength ratings (e.g., A.M. Best, S&P, Moody’s), diversification across multiple highly-rated carriers for large programs, ongoing monitoring of carrier financial health. Insurance By Heroes prioritizes working only with financially sound carriers and assists banks in this critical vetting process.

2. Interest Rate Risk

For General Account BOLI, falling interest rates can lead to lower crediting rates from the carrier, reducing the yield on the bank’s BOLI assets. Conversely, rapidly rising rates might make BOLI yields less attractive compared to new alternative investments.

• Mitigation: Understanding the carrier’s crediting rate history and methodology, considering policies with minimum rate guarantees, potentially using Separate Account BOLI for different interest rate sensitivity, aligning policy duration with liability duration.

3. Regulatory and Compliance Risk

BOLI is subject to specific banking regulations (e.g., OCC, FDIC, Federal Reserve) and tax laws (IRC Section 101(j)). Failure to comply can result in adverse regulatory action or loss of tax benefits. Key areas include insurable interest, employee consent, concentration limits (BOLI assets as a percentage of Tier 1 capital), and ongoing risk management requirements.

• Mitigation: Robust pre-purchase analysis documenting the need and rationale, strict adherence to consent and notice procedures, ongoing monitoring of concentration levels, regular reviews of compliance procedures. Partnering with experienced advisors like Insurance By Heroes who understand the regulatory landscape is crucial.

4. Reputational Risk

Poor communication with employees regarding the BOLI program, particularly concerning consent and the fact that the bank benefits from the policy, can lead to negative perceptions or employee relations issues.

• Mitigation: Clear, transparent communication with insured employees about the program’s purpose (funding their benefits), the consent process, and privacy safeguards. Ensuring the program is viewed as a tool to secure employee benefits, not just a corporate investment.

5. Liquidity Risk and Surrender Charges

BOLI is designed as a long-term asset. Surrendering policies, especially in the early years, typically incurs significant surrender charges, potentially resulting in realizing a loss. Accessing policy values through loans may also have limitations or costs.

• Mitigation: Purchasing BOLI only with funds intended for long-term holding, carefully modeling liquidity needs, understanding policy loan provisions and surrender charge schedules before purchase. Insurance By Heroes ensures clients fully understand the long-term nature and liquidity constraints of BOLI.

6. Tax Law Risk

Changes in tax laws regarding the treatment of life insurance cash value growth or death benefits could potentially impact the economics of BOLI programs.

• Mitigation: While unpredictable, staying informed about potential legislative changes, structuring programs robustly based on current law.

Managing these risks requires expertise and ongoing diligence. The team at Insurance By Heroes, bringing a service-oriented perspective from backgrounds like first response and military families, approaches risk management with the thoroughness and care it deserves. We help you understand these risks in the context of your specific institution and implement strategies to mitigate them effectively, leveraging our access to diverse solutions from multiple carriers.

The Regulatory Landscape for BOLI (Updated for 2025)

Navigating the regulatory requirements is paramount for any bank implementing or managing a BOLI program. Federal banking regulators (OCC, FDIC, Federal Reserve) and state insurance departments oversee different aspects of BOLI.

A cornerstone of federal guidance is the OCC Bulletin 2004-56, “Interagency Statement on the Purchase and Risk Management of Life Insurance.” While issued in 2004, its principles remain central to BOLI oversight heading into 2025. Key elements include:

• Comprehensive Pre-Purchase Analysis: Banks must conduct and document a thorough analysis before purchasing BOLI. This includes evaluating the appropriateness of BOLI relative to the bank’s overall financial strategy, understanding the risks, assessing the quantity and type of insurance needed, and performing due diligence on the insurance carrier(s) and potential vendors/brokers.
• Insurable Interest and Consent: Reinforces the need for the bank to have an insurable interest in the lives of the insured employees and to obtain proper written consent as mandated by law (linking back to IRC Section 101(j) requirements which stem from the COLI Best Practices Act provisions of the Pension Protection Act of 2006, building on earlier rules).
• Ongoing Risk Management: Banks must implement systems to monitor BOLI risks continuously. This includes tracking carrier financial strength, monitoring BOLI asset performance, managing concentration risk (typically advising BOLI holdings generally should not exceed 25% of Tier 1 capital, with aggregate CSV from any single carrier often limited to 15% of Tier 1 capital, though specific limits require careful review), and ensuring ongoing compliance with laws and regulations.
• Vendor Management: If using third-party vendors (like brokers or administrators), banks must perform adequate due diligence on these partners as well.

Additionally, banks must adhere to IRC Section 101(j) requirements to ensure the tax-free status of death benefits. This primarily involves the notice and consent procedures mentioned earlier and meeting certain conditions related to the insured’s employment status or the use of proceeds.

State insurance laws also apply, governing policy language, reserves, solvency, and market conduct of the insurance carriers.

Staying abreast of any regulatory updates or interpretations is crucial. The emphasis remains on safety and soundness, ensuring that BOLI is used appropriately as a financing tool and that associated risks are prudently managed. Partnering with an informed advisor is key. Insurance By Heroes is committed to staying current on the evolving regulatory environment to ensure our clients’ BOLI programs remain compliant and effective.

Why Choose an Independent Agency Like Insurance By Heroes for BOLI?

Selecting the right partner to assist with your BOLI purchase and management is as critical as selecting the right policy and carrier. When considering BOLI, banks essentially have two choices: work with a captive agent representing a single insurance company, or partner with an independent agency like Insurance By Heroes.

The advantages of working with an independent agency are significant, especially for a complex product like BOLI:

• Access to Multiple Carriers: This is the cornerstone of the independent model. Insurance By Heroes works with dozens of the nation’s top-rated insurance carriers that offer BOLI products. We are not obligated to promote any single company’s policies. This allows us to objectively survey the entire market to find the carrier(s) offering the most competitive pricing, strongest financial ratings, and policy features that truly match your bank’s specific needs. A captive agent can only offer what their parent company provides, which may not be the optimal fit.
• Unbiased Advice: Our loyalty is solely to our client – your bank. Because we aren’t tied to one carrier, our recommendations are driven by your best interests, not by corporate sales quotas. We provide objective analysis and comparisons of different options, empowering you to make an informed decision.
• Tailored Solutions: BOLI is not one-size-fits-all. Your bank’s size, capital structure, risk tolerance, benefit liabilities, and strategic goals are unique. Insurance By Heroes takes the time to understand these nuances. We then leverage our broad market access to tailor a BOLI strategy – including the type of policy (General Account, Separate Account, Hybrid) and carrier selection – specifically for your situation.
• Expertise in Complex Products: BOLI involves intricate financial, regulatory, and insurance concepts. Our team possesses the specialized knowledge required to navigate these complexities. We can explain the differences between policy types, analyze carrier illustrations, and guide you through the regulatory requirements.
• Long-Term Partnership: BOLI is a long-term asset requiring ongoing service and administration. Insurance By Heroes is committed to building lasting relationships, providing continuous monitoring, reporting, and support throughout the life of your BOLI program.

Choosing an independent path ensures your bank receives advice focused purely on optimizing your BOLI strategy based on the best available options in the market, not just the options available from a single provider.

The Insurance By Heroes Difference: Service and Integrity

At Insurance By Heroes, our approach is shaped by our unique background. Founded by a former first responder and military spouse, and staffed by professionals who often share a history of public service, we bring a distinct perspective rooted in diligence, integrity, and a commitment to serving others. This ethos permeates how we conduct business, especially in complex areas like BOLI insurance.

We understand that trust is paramount when dealing with significant financial decisions and long-term institutional assets. Our background instills a deep sense of responsibility to our clients. We believe in:

• Transparency: Clearly explaining the pros, cons, risks, and costs associated with different BOLI options.
• Thoroughness: Conducting comprehensive due diligence on carriers, policies, and regulatory compliance.
• Client Focus: Putting your bank’s needs and objectives first in every recommendation we make.
• Education: Empowering your team with the knowledge needed to understand and manage your BOLI program effectively.

In the world of finance and insurance, this service-driven mindset sets us apart. We aren’t just transaction facilitators; we are long-term partners dedicated to helping your institution achieve its financial objectives safely and soundly. We apply the same level of care and attention to detail required in public safety and service to safeguarding your bank’s interests through appropriate BOLI strategies.

Finding the Right BOLI Policy for Your Institution

The process of selecting and implementing the right BOLI strategy requires a structured approach. It’s a journey that goes beyond simply picking a product off the shelf.

First, it’s essential to reiterate: There is no single “best” BOLI policy or carrier for every bank. The optimal solution depends entirely on a careful analysis of your specific circumstances.

The process Insurance By Heroes typically follows includes:

1. Needs Analysis and Feasibility Study: We start by understanding your objectives. What specific employee benefit liabilities are you looking to offset? What is your bank’s risk tolerance, capital position, and return expectations? We analyze whether BOLI is a suitable and prudent strategy for your institution.
2. Regulatory Review: We assess the potential purchase within the context of regulatory guidelines, particularly concentration limits relative to your Tier 1 capital.
3. Market Search and Carrier Due Diligence: Leveraging our independent status, we survey the BOLI marketplace, soliciting proposals from multiple highly-rated insurance carriers whose products align with your preliminary needs (General Account, Separate Account, Hybrid). We perform rigorous due diligence on the financial strength, stability, and track record of potential carriers.
4. Product Analysis and Comparison: We analyze the specifics of the proposed policies – pricing, crediting rate histories (or fund options for Separate Accounts), guarantees, fees, surrender charges, and other features. We prepare clear, side-by-side comparisons to illustrate the differences.
5. Recommendation and Structuring: Based on the analysis, we recommend the carrier(s) and policy structure(s) that best meet your defined objectives and risk parameters. We assist in structuring the purchase appropriately.
6. Implementation Support: We guide your bank through the application, underwriting (if applicable), and consent processes, coordinating with the chosen carrier(s) to ensure a smooth implementation.
7. Ongoing Service and Reporting: Post-purchase, we provide ongoing support, including performance monitoring, carrier financial strength updates, regulatory compliance checks, and consolidated reporting to help you manage your BOLI asset effectively.

This comprehensive process ensures that your BOLI decision is well-informed, strategically sound, and fully compliant. Because we work for you, not the insurance company, you can be confident that the strategy is tailored to your bank’s success.

Take the Next Step Towards Optimizing Your Bank’s Assets

Bank-Owned Life Insurance can be a powerful tool for enhancing your institution’s financial performance and efficiently managing employee benefit costs, especially in the economic landscape of 2025 and beyond. However, its complexity and the associated risks demand careful consideration, expert guidance, and a strategy tailored to your unique situation. Choosing the wrong product, carrier, or structure can lead to suboptimal results or compliance issues.

At Insurance By Heroes, we combine deep expertise in BOLI with a unique commitment to service and integrity, stemming from our founders’ and team’s backgrounds in public service. As an independent agency, we have the freedom and capability to search the entire market, analyzing options from dozens of top carriers to design the BOLI solution that truly fits your bank’s needs. Don’t navigate this complex decision alone or rely on advice limited to a single carrier’s offerings.

Let us put our independence and expertise to work for you. Contact Insurance By Heroes today for a confidential, no-obligation consultation to discuss how a well-structured BOLI program could benefit your institution. Fill out the quote request form on this page, and one of our dedicated specialists will reach out to schedule a time to explore your specific needs and how we can help you find the right BOLI solution from the broad marketplace.