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BankOwned Life Insurance


Bank-Owned Life Insurance ... BOLI is life insurance owned by the bank that insures against the lives of bank ... bank may not hold life insurance in excess of ... – PowerPoint PPT presentation

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Title: BankOwned Life Insurance

Bank-Owned Life Insurance
  • Note to management These slides are intended for
    use when presenting BOLI issues to your board.
    Text in bold and in brackets indicate
    placeholders for bank-specific information

Role of Board
  • The board is responsible for establishing
    policies related to the banks investments and
  • The banking agencies expect bank boards to be
    responsible for ensuring that the purchase and
    holding of BOLI are consistent with safe and
    sound banking practices.
  • The elements of a successful BOLI program
  • Adoption of policies and procedures
  • A thorough pre-purchase due diligence process
  • Ongoing post-purchase monitoring
  • Managing risks associated with BOLI

Background on BOLI
  • BOLI is life insurance owned by the bank that
    insures against the lives of bank personnel, such
    as employees and directors.
  • BOLI is a long term asset, the proceeds of which
    can be used
  • To offset the costs of providing employee
  • To help the bank manage certain risks of loss
  • To provide additional compensation
  • Cash flows from BOLI policies are income-tax free
    if held to full term, and thus can provide
    attractive tax-equivalent yields.

Banks Use of BOLI
  • Add slides here to describe the banks intended
    or existing use of BOLI, such as key person
    insurance, defraying benefit expenses, and
    additional compensation.

Regulation of BOLI
  • The banks regulator has issued guidance titled
    the Interagency Statement on the Purchase and
    Risk Management of Life Insurance covering the
    acquisition of BOLI.
  • The Statement focuses on management and board
    oversight over all aspects of purchasing and
    holding BOLI.
  • Any of the following could subject the bank to
    regulatory criticism
  • The amount of BOLI held exceeds concentration
  • The purchase decision is not based on a thorough
    analysis of the risks and rewards of holding BOLI
  • The banks ongoing post-purchase management of
    BOLI is inadequate
  • BOLI is also subject to state insurance law,
    accounting rules, and tax laws.

Policies and Procedures
  • The board has been provided with the Bank-Owned
    Life Insurance Policy Statement for approval.
  • The statement covers
  • Management and board responsibilities
  • Risk management process
  • Establishment of BOLI limits
  • Pre-purchase analysis
  • Ongoing risk management process
  • Vendor and carrier selection
  • Identification and management of BOLI risks

Amount of BOLI to be Held
  • A bank may not hold life insurance in excess of
    its risks of loss or costs to be recovered.
  • The amount of BOLI held may not exceed 25 of the
    banks capital or, the bank has obtained
    regulatory approval to hold BOLI in the amount of
    __ of its capital.
  • The banks policy is to limit the aggregate cash
    surrender value of policies from one insurance
    carrier to dollar value or of capital and the
    aggregate cash surrender value of policies from
    all carriers to dollar value or of capital.
  • The bank intends to purchase or currently holds
    BOLI with an aggregate cash surrender value of
    ________, which is ___ percent of the banks

Pre-Purchase Analysis
  • The banks pre-purchase analysis consists of the
    following elements use for purchase decisions
  • Identifying the banks need for BOLI
  • Determining the amount of insurance needed
  • Assessing vendor qualifications
  • Analyzing the available products
  • Selecting a carrier
  • Assessing the reasonableness of additional
    compensation provided
  • Analyzing the risks and the banks ability to
    monitor and manage them
  • Evaluating alternatives to meeting the banks
  • Documenting the process

Pre-Purchase Analysis
  • Identifying the Need for BOLI
  • State the banks costs to be offset or the risks
    to be insured against. For example
  • Key persons
  • The following are identified as key persons,
    whose services are essential to the continued
    success of the bank
  • Name and position of person
  • Name and position of person
  • Include slides showing worksheets estimating the
    insurable value of these persons to the bank
  • Benefit plan costs
  • The bank provides nonqualified plans and
    qualified plans, including 401(k) obligations,
    medical benefits, profit-sharing, and life
    insurance benefits.
  • Include worksheets projecting the banks benefit

Pre-Purchase Analysis
  • Additional Compensation
  • Prepare a slide to discuss the type and amount
    of additional compensation provided by the bank
    that will be, or is, offset through BOLI.
    Include managements analysis confirming that
    such compensation is not excessive

Pre-Purchase Analysis
  • Determining the Amount of Insurance Needed
  • Prepare a slide describing managements
    calculation of the amount of BOLI to be purchased
    to meet its identified needs and objectives.

Pre-Purchase Analysis
  • Determining the Amount of Insurance Needed
  • Use if benefit obligations are to be tied to
    BOLI yields
  • The calculations shown in the previous slide are
    projections only. The interest yields on BOLI
    policies will be periodically re-set by the
    carrier describe the interest-crediting
    policies, or in the case of separate policies,
    state that the yields of the underlying assets
    will fluctuate with the market. Therefore, it
    is impossible to determine with certainty the
    amount that will be available to the bank to meet
    its obligations.
  • Discuss the banks policy recommended to be
    adopted regarding the link between BOLI and the
    banks benefit obligations, ensuring that the
    policies closely reflect what the bank
    realistically expects from its BOLI program.
    Fully apprise the board of how changes in
    projections may affect the banks position, and
    what steps the bank may have to take in response
    to such changes.

Pre-Purchase Analysis
  • Assess Vendor Qualifications
  • Management has selected ___________ as its
    broker/advisor/consultant on acquiring BOLI.
    Management has determined that vendor has the
    adequate reputation, experience, and financial
    soundness to honor its long-term commitment to
    the bank on BOLI.
  • In making this decision, management
  • examined the following vendor materials
  • conducted the following due diligence on vendor

Pre-Purchase Analysis
  • Analysis of Available Products
  • Prepare a slide discussing the products that
    management is considering, the relevant
    characteristics, and how the products could meet
    the banks objectives. Demonstrate how the
    selected products are most appropriate for the
  • Exchanges the ability of the bank to exchange
    carriers in the event of the deterioration of the
    existing carriers financial condition is limited
    by state insurable interest laws. Generally, a
    bank may only insure against the lives of
    existing, rather than former, staff. While the
    departure of an insured person from the bank will
    not affect the validity of the relevant policy,
    it does prevent the bank from exchanging
    carriers. Also describe policy restrictions and
    fees on exchanges
  • Note consider presenting this portion together
    with your vendor

Pre-Purchase Analysis
  • Selecting the Carrier(s)
  • In addition to the previous slide evaluating the
    available products, prepare a separate slide
    showing managements review of the available
    carriers. Include in the review
  • results of credit analyses of the carriers
  • their capacity to perform needed services over
    the long term
  • their commitment to the BOLI products
  • Note consider having your vendor assist in
    presenting this portion

Pre-Purchase Analysis
  • Assess the Reasonableness of Additional
  • Use this slide if the bank intends to acquire
    BOLI to supplement employee or director
  • The banks regulator has issued rules
    prohibiting banks from providing excessive
    compensation. Compensation is considered
    excessive when amounts paid are unreasonable or
    disproportionate to the services performed,
    considering all cash and non-cash benefits.
    Other factors include
  • The persons compensation history
  • Comparison with other individuals with comparable
    expertise at the bank
  • The banks financial condition
  • Comparable compensation practices at peer banks
  • The costs and benefits to the bank of providing
    post-employment benefits
  • The existence of any malfeasance by the
  • Other factors the banks regulator determines
    to be relevant
  • Compensation that could lead to material
    financial loss to the bank is prohibited as an
    unsafe and unsound practice.

Pre-Purchase Analysis
  • Split-Dollar Arrangements - Defined
  • Under a split-dollar arrangement, the bank and
    the individual share rights to the policys cash
    surrender value and death benefits. Split-dollar
    arrangements are used to provide benefits to
    personnel as additional compensation.
  • Describe how the bank uses split-dollar
  • The insurance arrangement is consistent with the
    banks compensation objectives and does not
    produce excessive compensation.

Pre-Purchase Analysis
  • Split-Dollar Arrangements Written Agreements
  • Describe the key terms of the written agreements
    entered into with bank personnel that establish
    the rights and obligations of affected parties.
    Review advice provided by tax, insurance, and
    legal advisors.

Pre-Purchase Analysis
  • Evaluate Alternatives to Meeting the Banks
  • Describe managements exploration of
    alternatives to BOLI to meet its objectives

Pre-Purchase Analysis
  • Document the Process
  • Describe managements maintenance of adequate
    documentation supporting the banks pre-purchase
    analysis and of its BOLI program generally

Pre-Purchase Analysis
  • Identifying and Managing BOLI Risks
  • The banks regulator has identified a series of
    risks associated with the acquisition of BOLI
    that the bank must fully comprehend, monitor, and
    manage. The banks management plan includes a
    thorough evaluation of all these risks, and
    development of policies and procedures to
    identify, measure, monitor, and control them.
    The risks identified by the agencies are
  • liquidity risk
  • transaction/operational risks
  • reputation risk
  • credit risk
  • interest rate risk
  • compliance/legal risk
  • price risk.

Pre-Purchase Analysis
  • Liquidity Risk the risk to earnings and capital
    arising from the banks inability to meet its
    obligations without incurring unacceptable losses
  • BOLI is a long-term, illiquid asset. The bank
    generally will not receive any proceeds from the
    insurance until payment of death benefits.
  • To obtain access to BOLI assets prior to
    maturity, the bank must either surrender the
    policies or borrow against them. Surrendering
    policies will subject the bank to charges
    quantify, and possibly tax penalties and
    liabilities for previously untaxed increases in
    the cash surrender value of the policies.
    Borrowing against a policy is disadvantageous in
    most cases due to limitations on the ability to
    deduct interest and other possible adverse tax
  • Discuss steps that management has taken to
    manage liquidity risk

Pre-Purchase Analysis
  • Transaction/Operational Risks the risk that
    arises from the failure to understand and manage
    the complexities of making the investment
  • The performance of BOLI products depends on a
    variety of factors, most notably, the policies
    interest-crediting rate, mortality cost, transfer
    and surrender charges and limitations, and other
  • For separate account policies, the bank must also
    make investment decisions, and evaluate the costs
    and benefits of purchasing stable value
    protection contracts.
  • Ambiguous policy terms expose policies to
    challenge by the IRS or other authorities as
    something other than tax-preferred insurance
  • Changes in accounting rules, agency regulations,
    and legislation can make future BOLI cash flows
    subject to income tax.
  • Discuss the significant terms of available or
    purchased policies and how the bank will manage

Pre-Purchase Analysis
  • Reputation Risk risk to earnings and capital
    arising from negative publicity regarding the
    banks business practices.
  • The banking agencies have identified potential
    adverse reactions from the public, from employees
    and employees estates when the bank is seen to
    benefit from the death of a current or former
    employee, or if there are disputes between the
    bank and the estate of the insured deceased over
    the rights to split-dollar policies.
  • Risks may be heightened to the extent that
    policies are placed on the lives of employees not
    generally seen as part of senior management.
  • Review the steps management has taken to manage
    reputation risks, such as by clearly documenting
    informed consent by the insured individuals
    obtained before purchasing insurance.

Pre-Purchase Analysis
  • Credit Risk the potential impact on earnings and
    capital arising from an obligors failure to meet
    the terms of a contract with the bank or
    otherwise perform as agreed.
  • Life insurance policies are long term assets.
    The credit quality of the carrier and the
    duration of the contract are key factors. A
    general account policy is an unsecured obligation
    of the carrier. The risks associated with
    separate account policies are based primarily on
    the assets held in the separate account rather
    than the carrier.
  • Describe the steps management has taken to
    identify and manage credit risks, such as
    performing credit analyses on carriers to ensure
    they can meet their obligations to pay death
    benefits and, if applicable, to pay the cash
    surrender value upon the surrender of a policy.
  • Describe the banks policies and procedures of
    ongoing monitoring of carriers condition, limits
    on BOLI holdings, and concentration exposures.

Pre-Purchase Analysis
  • Interest Rate Risk the potential impact on
    earnings and capital arising from an obligors
    failure to meet the terms of a contract with the
    bank or otherwise perform as agreed.
  • Review the interest yields of the underlying
    assets in the carriers investment portfolio, and
    how the yields affect interest crediting to the
  • Review the interest-crediting features of BOLI
    to be acquired, and managements view of how the
    yield and the method of crediting would meet the
    banks objectives.
  • If separate accounts are used, review
    managements plan to monitor and respond to
    interest rate fluctuations of the underlying

Pre-Purchase Analysis
  • Compliance/Legal Risks the risk to earnings and
    capital arising from violations of, or
    nonconformance with, laws, rulings, regulations,
    prescribed practices, or ethical standards.
  • Failure to comply with applicable laws,
    regulations, and prescribed practices could
    compromise the success of the banks BOLI program
    and result in penalties or loss of tax benefits.
    The risks include failure to comply with
  • Taxation rules, which form the basis for their
    favorable tax treatment
  • State insurable interest rules, which form the
    basis of treatment of BOLI as insurance policies
  • Accounting rules
  • Other laws and regulations
  • Review the banks management plan to monitor
    legal changes and respond to them

Pre-Purchase Analysis
  • Price Risk the risk to earnings and capital
    arising from changes in the value of portfolios
    of financial instruments (applicable to separate
  • The value of separate account products is the
    amount that could be realized upon surrender.
    Since the insurance carrier will provide neither
    a minimum cash surrender value nor guarantee an
    interest-crediting rate, the bank assumes price
    risks in its investments in separate accounts.
    Since the bank does not control the separate
    account assets as it would if it held the assets
    directly, it is more difficult for the bank to
    control price risk.
  • If the bank is purchasing stable value
    protection contracts, review managements review
    and analysis of those contracts
  • If the bank is not purchasing stable value
    protection, review managements plan for
    monitoring and reporting that will enable it to
    recognize and respond to price fluctuations in
    the fair value of the account assets.

Ongoing Risk Management
  • Bank management and the board are responsible for
    exercising continuous risk management by
    monitoring BOLI risks on an ongoing basis.
  • The performance of insurance assets should be
    reviewed by management and the board at least
    annually. More frequent reviews may be warranted
    in connection with significant changes to the
    BOLI program such as in connection with
    additional purchases, a decline in the financial
    condition of the insurance carriers, anticipated
    policy surrenders, and changes in tax laws or
    interpretations that could have an impact on the
    performance of BOLI.

Ongoing Risk Management
  • These are elements of an annual review of the
    banks BOLI holdings
  • a review of the agency-designated risks and how
    the banks management policies are responding to
  • a review of employees covered (additions,
  • a review of employees covered by an MA
    counterpart that also owns BOLI (e.g., are the
    employee positions insured by the other company
    consistent with the banks policies on who is
  • an assessment of death benefit amounts to ensure
    they are in line with employee salaries
  • a calculation of the ratio between insured
    persons who are employed by the bank and those
    who are formerly employed
  • an assessment of material changes to the banks
    BOLI risk management policies
  • an assessment of the effects of exchanging
    policies (understanding such effects should be
    part of the pre-purchase due diligence)
  • an analysis of mortality performance and the
    impact on income
  • an evaluation of material findings from internal
    and external audits and independent risk
    management reviews
  • a review of policy surrenders (e.g., the reasons
    for them, costs and benefits of surrenders, and
    any penalties and tax implications)
  • a comparison of BOLI holdings of peer banks to
    ensure that the banks holdings are not excessive
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