Understanding Bank-Owned Life Insurance (BOLI) Contracts

Bank-owned life insurance (BOLI) is a type of life insurance policy that is held by the bank itself as part of its overall investment portfolio. The primary purpose of BOLI contracts is to provide a death benefit to the bank, which can be used to repay outstanding loans or offset losses incurred by the institution. When a borrower defaults on their loan, the lender can opt to take out a life insurance policy on the borrower’s life as part of the original loan agreement. This policy is typically purchased through the lender’s insurance provider and is funded by the borrower through periodic premiums, usually deducted from the loan payments. BOLI contracts offer several benefits to lenders, including:

• A way to hedge against potential losses due to borrower default
• A means to generate additional income through premiums paid by borrowers
• An opportunity for lenders to diversify their investment portfolios However, BOLI policies also come with some unique tax implications. For example: The death benefit received by the bank is generally considered taxable income and must be reported on the borrower’s tax return BOLI premiums are typically non-deductible as business expenses by the lender, but can be used to reduce taxable income The interest earned on BOLI investments may also be subject to certain tax rules and regulations In recent years, regulators have increased scrutiny of BOLI contracts, leading some lenders to reassess their use of these policies. While BOLI remains a popular tool for lenders looking to manage risk and generate additional revenue, it’s essential to carefully consider the potential benefits and drawbacks before entering into an agreement. As with any type of life insurance policy, it’s crucial to consult with a qualified financial advisor or attorney to understand the specific implications of BOLI contracts on your business.