BOLI is a long term, spread asset that delivers a tax advantaged, net spread income that has averaged over 250 basis points for the last 20 years.
When a bank implements a BOLI plan it becomes the owner and beneficiary of life insurance contracts on a select group of employees. The bank pays the premiums and the policies become part of the assets of the bank.BOLI has been popular for many years with banks as a spread earning asset used to gain a tax advantaged yield. Banks enjoy advantages in the form of credit enhancements and minimum yield guarantees from BOLI policies. This combines with best practice implementation and administration to create a low risk, high yield asset.
BOLI is accounted for under FASB Technical Bulletin 85-4 as an ‘other asset’ and income from BOLI is accounted for as ‘other income’.
Upon maturity of the policies, the proceeds are paid to the bank in tax free income by the insurance company. BOLI earnings can be used to offset current and future employee benefit liabilities. The single most important factor in the implementation of a BOLI plan is the protection of the tax adjusted yield advantage. Well planned execution will ensure tax advantage growth and ultimate tax free claims at maturity of the policies.
BOLI is a long term, spread asset that delivers a tax advantaged, net spread income that has averaged over 250 basis points for the last 20 years; net of all expenses and taxes.
The chart below compares the historical rates for BOLI with the 5 and 10 year Treasury. The pre-tax advantaged and tax advantaged BOLI yields are shown for a bank in the 35% tax bracket. Note that these returns do not include the added value of the tax free death benefits paid to the bank.
