Bank-owned life insurance is similar to corporate-owned life insurance, with the only major difference being that a bank, instead of a corporation, owns bank-owned life insurance.
Life insurance provides financial protection for your family’s future in the event of your passing.
Though life insurance is available independently, it is not the only way to get coverage. Many companies, and in this case banks, use life insurance coverage for their employees. Bank-owned life insurance is a bit more complicated than individual polices, which is why it is important to contact your bank or your independent life insurance agent to learn the specifics for your individual situation.
Originally bank-owned life insurance was purchased on the lives of major employees and higher executives to protect them against the cost they may face when losing the employee to an unexpected death. When a bank loses an essential employee there is the cost of recruiting and training replacements, or in the case of an owner’s death the stock of the company or bank may be affected. This kind of coverage is commonly known as key person insurance.
Bank-Owned Life Insurance has since progressed and now it insures a broad range of employees as part of the general hiring requirements with the employee’s consent. Bank employees sign documents for life, health and welfare coverage agreements.
The Difference with Bank-Owned Life Insurance
It is not the same as a group life insurance policy because with Bank-Owned Life Insurance is designed to protect the employees and their families and not the bank itself. In addition to the key person coverage option, there is also split-dollar life insurance policy, which lists the bank as the beneficiary for the amount of the premium paid, with the remainder going to the employee who is insured on the policy. In most cases the death benefit of Bank-Owned Life Insurance is used to buy some or all of the shares of the company stock owned by the deceased. It is also used as a means of recovering the cost of funding for various types of employee benefits.
The tax rules for Bank-Owned Life insurance polices are complicated and vary from state to state. There are some general criteria that policies must follow in order to retain their tax advantaged status including the following: they can only be purchased by the highest-compensated third of employees, any employee that is insured must receive written notification before purchase of the policy of the company’s intent to insure the employee and also the amount of the coverage. Lastly the employee also must receive written notification if the company is a partial or total beneficiary of the policy.
Bank-Owned life insurance is used by banks to protect themselves and their employees. Its tax rules are complicated and complex, making it important for people to contact their local independent life insurance agent to help figure out the state specific rules.
BOLI is a highly specialized program involving the strict definition of life insurance, tax laws, employment rules and regulations and general law. It is not to be taken lightly, especially when toted as a “retirement” program.
Although a BOLI is a legitimate use of life insurance in many circumstances, there is a great deal of room for misuse and misunderstanding under a BOLI policy.
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