Banking is a tough business. Low interest rates, low margins, increasing regulations, and a competitive marketplace for talent. Why do 66% of all banks hold a boring asset known as Bank Owned Life Insurance (BOLI) on their balance sheets?
It could be the attractive tax-equivalent yields, the high credit quality, or the under appreciated cost recovery feature that allows banks to keep or build a competitive compensation and benefits package for employees. The life of a BOLI program offers tax deferred growth on a daily basis and a tax free cost recovery benefit at the completion of the contract.
Many banks use this informal funding tool to provide supplemental life insurance or deferred compensation programs. These programs can be designed for early payouts based on performance or to help fund college education. These nonqualified plans are customized to each banks specific retention and reward needs.
An example of one of these programs is being touted by Stan Kelley, CEO, Freedom Bank of Southern Missouri. He designed a package for his executive team for retention and reward. The plan gave a pre-retirement survivor benefit and a post retirement cash benefit. One of his long-term valuable employees retired two years ago and while receiving the retirement benefits promised by the bank, died un-expectantly. The bank received the proceeds of the insurance contract and recovered their investment, plus the additional funds owed to the widow. This allowed the bank to continue to honor the post retirement commitment without impacting current investments or shareholder value.
“The returns on our BOLI program have been competitive and above market. The unfortunate early death of one of our former officers solidified our understanding of the mechanics of BOLI and we are very pleased that it worked as designed.” said Mr. Kelley.
Another bank implemented a BOLI program for the purpose of recovering rising health care costs. Steve Bowser, Chief Investment Officer, Dennison State Bank said, “With increasing health care costs and our need to provide competitive benefits now and in the future, we looked for a program that would provide an attractive rate of return and the highest financial ratings to offset and recover the costs associated with an aging workforce. Bank Owned Life Insurance has proven to be a great financial tool.”
With banks facing low interest rates, squeezed margins and competition for talent. It looks like boring is better.
OFFICIAL PUBLICATION OF THE KANSAS BANKERS ASSOCIATION