Wouldn’t it be great as an employer if you could offer the best benefits packages available to your employees and not spend a dime……….eventually.
Corporate Owned Life Insurance, COLI, and Bank Owned Life Insurance, BOLI, are life insurance products designed for that purpose. While their uses can be expanded and are often expanded well beyond that, in the simplest form, the employer would own and be the beneficiary of a life insurance policy, usually on key executives, that would pay back the institution for the often astronomical cost of benefit, retirement and incentive packages.
Because this is insurance to offset the cost of expenses, the premiums paid are allowable deductions for the institution. So, while often a little on the pricey side, it often becomes justifiable when you balance the deduction and the eventual tax free pay back of deducted expenses in the form of benefits. It it sounds like there may be some sweet spots in this program, well , you’re right.
Most COLI and BOLI is done with permanent cash value insurance, either universal life or whole life. Again sounds pricey, but again, throw these few ideas on your scales and see what you think. The premiums are deductible and the cash value in the policies grow tax free. In larger institutions this can add millions in cash assets to the balance sheet generated through tax deductible premiums.
And how about this. With millions sitting there, should the institution decide to, they can borrow cash value from the policy. We’ve all heard the upside for borrowing cash value from a life insurance policy. If the policy is paying 4% on the cash value fund and they charge you 6% on money you borrow from it, you effectively borrow the money at 2%. Even though you borrow from the policy, the cash really doesn’t come out of the policy, it comes from the insurance company. So while you’re paying 6% on the money you borrowed, you are continuing to earn 4% on the same money.
Take this to the bank level and it really gets sweet. A bank can borrow cash from the policy at a net 2% just like I can, but they are deducting the premium and now they also get to deduct the 6% interest they are paying on the loan as a business expense, so their net, not even takiing into consideration the deducted premiums is 4%.
Bottom line. For large, stable companies and institutions, these programs can make great sense.Â It must make sense to someone. In an article in National Underwriter last week they reported “bank owned life insurance aassets of $108.6 billion, up 11.1% from….the first half of 2006”.