What Is Bank Owned Life Insurance (BOLI) and How Does It Work?

Bank Owned Life Insurance is a type of permanent life insurance policy—typically whole life or universal life—purchased by a bank to cover a group of employees. Unlike traditional life insurance, where the payout benefits an individual’s family or estate, BOLI designates the bank as the policyholder and beneficiary. When an insured employee passes away, the death benefit is paid directly to the bank, tax-free under current U.S. tax laws. This payout can then be used to offset costs, fund employee benefits, or bolster the bank’s financial reserves.

BOLI emerged in the United States during the 1980s as banks sought innovative ways to manage rising employee benefit costs, particularly for executive compensation and retirement plans. Over time, it evolved into a broader financial strategy, offering banks a way to earn tax-advantaged returns on their investments. Today, BOLI is a multi-billion-dollar market, with thousands of banks holding policies valued collectively in the hundreds of billions of dollars.

The insurance policies used in BOLI are typically cash-value life insurance products. These policies accumulate a cash value over time, which grows at a guaranteed or variable rate, depending on the policy type. This cash value serves as an asset on the bank’s balance sheet, providing a stable, long-term investment that can be accessed if needed, though most banks hold BOLI policies until maturity (i.e., the death of the insured).

How Does BOLI Work?

The mechanics of BOLI are straightforward but involve several key steps and considerations. Here’s a breakdown of how it operates:

1. Policy Purchase

A bank identifies a group of employees to insure—often executives, directors, or a larger pool of staff—and works with an insurance carrier to design a BOLI program. The bank pays a premium, either as a single lump sum or over a series of payments, to fund the policy. The size of the premium depends on factors like the number of employees insured, their ages, health statuses, and the desired death benefit.

2. Cash Value Accumulation

Once the policy is active, it begins to accrue cash value. This cash value grows tax-deferred, meaning the bank does not pay taxes on the interest or investment gains as they accumulate. The rate of growth depends on the policy type: whole life policies offer a fixed rate, while universal life policies may tie returns to market performance or other indices, often with a guaranteed minimum.

3. Asset Recognition

The cash value of the BOLI policy is recorded as an asset on the bank’s balance sheet. This provides a tangible financial benefit, as it boosts the bank’s Tier 1 capital—a key measure of financial strength under regulatory standards. Unlike volatile investments like stocks, BOLI’s cash value tends to be stable and predictable, making it an attractive asset for risk-averse institutions.

4. Death Benefit Payout

When an insured employee dies, the insurance carrier pays the death benefit to the bank. Under Section 101(a)(1) of the U.S. Internal Revenue Code, this payout is generally tax-free, providing a significant financial windfall. The bank can use these proceeds for various purposes, such as funding employee benefit plans, offsetting operational costs, or reinvesting in the business.

5. Ongoing Management

Banks must monitor their BOLI portfolios to ensure compliance with regulatory requirements and to assess the policies’ performance. While the cash value can be borrowed against or surrendered for liquidity, most banks retain BOLI as a long-term investment, given its tax advantages and stability.

Benefits of BOLI

BOLI offers several compelling advantages that explain its widespread adoption in the banking sector:

Tax Advantages

The tax-deferred growth of the cash value and the tax-free death benefit are among BOLI’s most significant perks. These features allow banks to maximize returns without the burden of immediate taxation, a rarity in the world of financial investments.

Cost Recovery

Banks often use BOLI to recover the costs of employee benefits, such as health insurance, retirement plans, or deferred compensation for executives. The death benefit provides a mechanism to offset these expenses over time, effectively turning a liability into an asset.

Stable Investment

Compared to equities or other market-driven investments, BOLI offers a low-risk option with predictable returns. This stability aligns with the conservative nature of most banking institutions, which prioritize capital preservation.

Enhanced Financial Metrics

The cash value strengthens a bank’s balance sheet by increasing its Tier 1 capital ratio, a critical metric for regulators and investors. This can improve the bank’s creditworthiness and ability to weather economic downturns.

Employee Retention

By linking BOLI to executive compensation or retirement plans, banks can incentivize key personnel to remain with the institution, fostering loyalty and stability in leadership.

Risks and Challenges

While BOLI is generally considered a safe investment, it is not without risks and drawbacks:

Interest Rate Risk

The returns on BOLI policies, particularly universal life products, can be sensitive to interest rate fluctuations. In a low-interest-rate environment, cash value growth may lag, reducing the policy’s overall profitability.

Liquidity Constraints

BOLI is a long-term investment, and accessing the cash value early (via loans or surrender) can incur penalties or reduce the policy’s value. This illiquidity may pose challenges for banks needing immediate funds.

Regulatory Scrutiny

BOLI is subject to oversight by federal banking regulators, such as the Office of the Comptroller of the Currency (OCC), which issued guidance in 2004 (OCC Bulletin 2004-56) to ensure its prudent use. Non-compliance with these guidelines can lead to penalties or reputational damage.

Reputational Risk

Some stakeholders, including employees or the public, may view BOLI unfavorably, perceiving it as profiting from employee deaths. Banks must manage this perception carefully to avoid backlash.

Mortality Risk

The financial benefits of BOLI depend on the timing of death benefits, which is inherently unpredictable. If insured employees live longer than expected, the bank may not realize returns as quickly as planned.

Regulatory Framework

BOLI operates within a well-defined regulatory landscape in the U.S. The OCC, Federal Reserve, and Federal Deposit Insurance Corporation (FDIC) have established guidelines to ensure banks use BOLI responsibly. Key requirements include:

• Risk Assessment: Banks must conduct a thorough analysis of BOLI’s risks and benefits before purchasing policies.
• Concentration Limits: Regulators cap the amount of BOLI a bank can hold relative to its capital (typically 25% of Tier 1 capital) to prevent overexposure.
• Consent: Employees must provide written consent to be insured, ensuring transparency and ethical compliance.
• Documentation: Banks must maintain detailed records of their BOLI holdings and report them in financial statements, such as the Call Report.

The 2004 OCC guidance remains a cornerstone of BOLI regulation, emphasizing safety, soundness, and alignment with the bank’s overall risk management strategy.

BOLI in Modern Banking

As of April 2025, BOLI continues to play a vital role in the banking industry. With interest rates fluctuating and economic uncertainty persisting, banks value BOLI’s stability and tax advantages more than ever. According to industry estimates, U.S. banks hold over $180 billion in BOLI assets, a figure that has grown steadily over the past decade.

BOLI has also adapted to modern needs. Some banks now use it to fund sustainable initiatives or diversity programs, aligning financial strategy with corporate social responsibility goals. Additionally, advancements in insurance products have introduced more flexible BOLI options, such as variable universal life policies, which offer higher potential returns tied to market performance.

Conclusion

Bank Owned Life Insurance is a powerful yet nuanced tool in the banking world. By insuring employees and leveraging the resulting cash value and death benefits, banks can manage costs, enhance financial stability, and generate tax-advantaged income. While it carries some risks—interest rate sensitivity, liquidity constraints, and regulatory oversight—the benefits often outweigh the drawbacks for institutions with a long-term perspective.

For those outside the banking sector, BOLI may seem like an obscure concept, but its impact is undeniable. It reflects the ingenuity of financial institutions in finding creative solutions to complex challenges. As the industry evolves, BOLI will likely remain a cornerstone of banking strategy, adapting to new economic realities while delivering consistent value.