Life insurance can be a confusing topic, but it’s one of the most important purchases you can make for the future of your family. One reason life insurance can be so confusing is because of the various types of policies are offered.
One of those kinds is bank owned life insurance. A type of key man life insurance, it’s actually not the typical family type of policy you may be thinking of.
These policies are extremely tricky to understand and have a lot of small complexities which create a lot of confusion and questions. In this article, we are only going to explore the surface of the bank owned life insurance world. There are tons of additional factors which go into these plans, all which revolve around the insurance and taxes impacting the policy.
How Does a Bank Owned Life Insurance Policy Work?
With a bank owned policy, the bank purchases the plan on a group of essential employees. The bank purchased the plan is the owner and beneficiary of the policy.
The bank, as an institution, will pay the premiums of the policy which have a cash redemption value attached to them. These policies are used as a tax efficient way to offset the costs of an employee benefit program.
Essentially, these policies are used as a way to fund employee benefits.
This can help them pay for employee benefit packages at a much cheaper rate than not using one at all. These plans have several advantages for the banks who own them. They will get a much better return on their investments than a traditional investment like a bond.
On top of the performance of the investment, the money is growing inside of the policy tax-free, which means the gains from the deposits are actually larger than they appear, a benefit you can’t get with other vehicles.
Additionally, the life insurance policy provides protection for the bank if one of the key employees were to pass away unexpectedly. Because they are also the beneficiary, they will be awarded the face value of the policy.
There are a lot of pros to these types of policies for the corporation, but there are a few downsides as well. One of the most notable negatives to these policies is the liquidity of them. You can sell them at any time, but you’ll face a penalty and additional taxes on the plan.
Three different types of bank owned life insurance could be offered. They are all similar in their nuts and bolts, but all have a few distinct advantages and disadvantages:
This one of the most common types of bank owned life insurance. With this kind of account, the bank makes an investment in a general account product then the deposit in which belongs to the insurance carrier. At this point, the insurance company can invest the deposit however they see fit.
This type of account is very similar, but the insurance carrier separates the holdings into a general account and well-known fund managers maintain the investments. With this kind of account, there is more risk for the investments, but there is the potential for more reward as well.
As you can imagine by the name, the hybrid account is a mixture of the other two types. It takes some of the best qualities of each type and makes a new form. It allows you the transparency of a separate account but gives you the stability of a general account.
Traditionally, these plans are bought for companies to protect themselves against any financial loss from the death of an important part of their organization, but now they are being used more and more often as financial keys to investment money and shelter against additional taxes.
With these plans, they can offer additional benefits to the key employees at the organization, while also reaping some of the benefits as well. This is one of the main differences between these plans and key-man policies, which are strictly a life insurance policy and upper management.
The main problem with these policies is the bank also takes on all of the risks of holding the policy. There is a chance all of the premiums deposited into the account could be lost.
It’s easy to see how people can be confused about BOLI and all of the different aspects of these plans. These plans don’t focus on giving the essential employees insurance coverage.
In fact, they typically don’t provide any insurance protection to the employee, but the provide protection to the company, which is just an additional benefit. The actual purpose of these policies is to provide a funding source for investments to offset the cost of providing benefit packages to employees within an organization.