Permanent Life Insurance: What Options Are Available to You?

When it comes to life insurance, there are two main categories: Term life insurance and permanent life insurance. Today, David Jacobs, J.D., Principal at Acumen Insurance Solutions will be discussing permanent life insurance; more specifically, what options are available to you?

Let’s dive in.

What is Life Insurance?

First things first, what is life insurance?

Life insurance is a contract between a policy owner and a life insurance company. In this contract, the life insurance company promises to pay a designated beneficiary a death benefit upon the passing of the insured.

As we mentioned, when it comes to life insurance, there are two main categories: term life insurance and permanent life insurance. Remember that, no matter which type you own, the death benefit is generally paid income tax-free to the beneficiaries. 

Now, let’s focus on the different types of permanent life insurance options available.

Permanent Life Insurance: The Basics

Permanent life insurance, sometimes also referred to as whole life insurance, is designed to last for your lifetime, not just for a period of years. Since it’s designed to last for your entire lifetime, permanent life insurance is more expensive than term.

Permanent life insurance has the benefit of lasting longer than term, with premium flexibility and a cash value. The cash value is tax-advantaged and serves as a living benefit that the policy owner can access for any reason before the insured has died.

Three components make up permanent life insurance:

  • Premiums
  • Cash value, and
  • Death benefit

When you make a premium payment, what happens? Well, part of that premium goes to pay for the cost of insurance, or rather the cost to insure your life for the death benefit amount, as well as for policy fees, state premium taxes, and commissions.

The remainder of their premium goes into your cash value account, which can grow for you to use for any purpose at a later time.

Some of the main differences between the types of permanent policies have to do with what mechanism grows that cash value account.

Let’s discuss.

Types of Permanent Life Insurance

There are a few different types of permanent life insurance contracts to note. Again, the main difference between them is how the cash value (the living benefit account) grows.

Remember that, no matter which type of permanent insurance you own, the cash value grows tax-deferred and can be accessed tax-free using policy loans and withdrawals.  

Whole Life Insurance

A whole life policy cash value grows based on a guaranteed interest rate plus a non guaranteed dividend that the insurance carrier declares every year. Dividends are positively-correlated to interest rates and move slowly over time.

Universal Life Insurance

With a universal life insurance policy, the cash value grows based on a crediting interest rate that the insurance company declares annually, and is also positively-correlated to interest rates. 

Index Life Insurance

With an index universal life policy, the cash value grows based on the performance of a specific stock or bond index; typically it’s the S&P 500, however, other index accounts are available.

Index life policies are not directly invested in the market but instead track the movement of the chosen index.

Typically, index policies have a floor and a cap mechanism. For example, if the index declines over a policy year, the cash value is credited at a 0% gross rate to protect against downside risk; but, if the index increases, the cash value is credited at that rate, up to the cap. It’s like investing with guardrails. Caps can vary among carriers and usually float on an annual basis.

Variable Universal Life Insurance

The last type of policy is called a variable universal life policy. Variable life policyholders use mutual-fund-like sub-accounts to grow the cash value. Policy owners are accepting market volatility in exchange for the opportunity to potentially earn higher returns.

These types of policies are considered securities by the Securities and Exchange Commission (SEC), whereas whole, universal, and index are considered general account policies.

Infographic of Permanent Life Insurance What Options Are Available to You

Learn About Term Life Insurance Next!

We hope this discussion delineated the differences between term life insurance and permanent life insurance, and that you learned more about the types of permanent life insurance that are available on the market today.

Interested in learning more about the second category of life insurance, term life insurance? Read on in our article “Insurance 101: Term Life Insurance vs. Permanent Life Insurance.”

Important Notes: Please refer to 26 U.S. Code §101(a) regarding tax-fee death benefit and 26 U.S. Code § 7702 (a) (g) regarding tax treatment of cash value. Policy performance is based on current rates as charges, and some values are not guaranteed. Medical and financial underwriting is required. Withdrawals and loans from life insurance policies classified as Modified Endowment Contracts (MEC) may be subject to income tax and a federal tax penalty, if taken prior to age 59½. Excessive policy withdrawals and loans may cause the policy to lapse, which will result in the loss of death benefit and adverse tax consequences. Life insurance is backed by the claims-paying ability of the carrier and is not FDIC insured. See policy illustration for details. Acumen Insurance Solutions, LLC does not provide tax, legal, or investment advice, and is not FINRA registered.

Life Insurance 101: Difference Between Buy-Sell and Key-Person

Welcome to Life Insurance 101. We’re here to make things simple for you. Today, we have ​​David A. Jacobs, J.D., Principal at Acumen Insurance Solutions on camera to discuss the difference between buy-sell and key-person insurance.

Let’s dive in.

What is Buy-Sell Life Insurance?

Buy-sell life insurance is different from key-person (or key-man in the old days) life insurance. Buy-sell life insurance is used to protect a departing owner and his/her heirs, as well as the business and its remaining owners.

An Example of Buy-Sell Life Insurance

Let’s say Bob and Rick are in business together; they are 50-50 owners. Bob happens to pass away unexpectedly. In this case, Rick would then be in business with Bob’s beneficiaries, which is likely not an ideal situation for any party.

Therefore, the payout from a life insurance policy on Bob’s life is used as a way for Rick (or the business) to immediately obtain the financial resources necessary to buy out Bob’s beneficiaries, and vice versa. This way, Bob’s beneficiaries walk away with cash, and Rick with the shares of the business.

Make sense?

What is Key-Person Life Insurance?

Key-person life insurance, on the other hand, provides money to the business that’s lost a key employee which can be used to help replace lost revenue and offset costs to identify and train a replacement.

When Do You Use Buy-Sell Life Insurance?

There’s often a legal agreement between partners in a business—a shareholders’ agreement. The buy-sell portion of this agreement dictates what happens when a triggering event occurs and ownership needs to change hands.

These triggering events, to name a few, might include:

  • Death
  • Disability
  • Divorce of a partner, or
  • Retirement

Regardless of the triggering event, the organization and/or the partners need to have the funding available in order to buy out the departing partner or the departing partner’s heirs, if necessary.

Life insurance is a great way to do that. 

Infographic of Life Insurance 101: Difference Between Buy-Sell and Key-Person

Using Permanent Life Insurance to Fund Buy-Sell

Permanent life insurance (whole, universal, index, and variable) with cash value can help you handle all of those triggering events, whether the departing owner leaves due to death or another reason.

If an owner happens to pass away, the life insurance death benefit is used. However, if another triggering event occurs, the life insurance cash value can be tapped in order to meet that obligation and prevent using company cash flow or having to borrow at high interest rates.

The Importance of Life Insurance

Even if you don’t have a business partner, it’s important to make sure you protect your family by having insurance on your life for the current value or projected value of your business. If you pass away unexpectedly, your family will lose the income you generated and the value of your business will likely decline or perhaps disappear. It would be a shame for your family to not be able to reap the rewards of your hard work if you’re no longer there.

Interested in learning more? Check out another one of our Life Insurance 101 topics: Term Life Insurance vs. Permanent Life Insurance.

Term Life Insurance vs. Permanent Life Insurance

An Insurance 101 Series

Welcome to Life Insurance 101. We’re here to make things simple for you. Today, we’ve got ​​David A. Jacobs, J.D., Principal at Acumen Insurance Solutions on camera to discuss the difference between term life insurance and permanent life insurance in a way you can understand.

Let’s dive in.

What is Life Insurance?

Life insurance is a contract between a policy owner and a life insurance company. In this contract, the life insurance company promises to pay a designated beneficiary a death benefit upon the passing of the insured.

Most of the time, that death benefit is paid income tax-free to the beneficiary.

Term Life Insurance vs. Permanent Life Insurance

Interestingly enough, life insurance comes in a couple of different flavors. There are two main categories of life insurance: the first is called “term” life insurance, and the second is known as “permanent” life insurance.

The main difference between permanent and term insurance is that permanent insurance is designed to last for the insured’s lifetime and permanent insurance has a tax-advantaged cash value component.

But more on this later! Let’s discuss each individually.

Term Life Insurance

Term life insurance is exactly what it sounds like. It is life insurance that’s for a period of years; typically 10, 15, 20, or 30 years.

When it comes to term life insurance, there are only two components:

  1. The premium that’s due either every year, quarter, or month, and
  2. The death benefit, which is paid when the insurer dies within that term

Generally, premiums are level and the death benefit is guaranteed for that period. At the end of the term, the insurance policy stops, and the benefit is gone.

Lastly, some term life insurance policies have a special benefit that allows you to “convert” the term insurance to a permanent insurance policy without medical underwriting.

This can be a tremendously beneficial feature if the insured experiences a health issue that would prevent them from being able to qualify for new insurance after the term policy ends. These convertible term policies tend to cost more and require more effort to find than traditional term policies, but can be worth it depending on your unique circumstances and desires.

Permanent Life Insurance

The second type of insurance category is permanent insurance. The terms “permanent” and “whole life” insurance are sometimes used interchangeably.

Just as the name implies, permanent life insurance is designed to last for the insured’s lifetime, not just for a period of years. Since it’s designed to last longer, permanent life insurance is more expensive than term.

Permanent life insurance, however, has the benefit of a) lasting longer and b) having a cash value component. The cash value can be accessed for a variety of reasons and grows without tax.*

A Permanent Life Insurance Policy’s Cash Value Component

Let’s discuss more about the cash value component that is unique to permanent life insurance.

The cash value component of a permanent life insurance policy is available to the policy owner while the insured is alive, and grows tax-deferred. This cash value component can be accessed tax-free using either policy loans or a withdrawal of the principal.

This cash value component allows the policy to last as long as the policyholder wants it to. Permanent insurance is similar to a car; the more gas you put in, the longer it will drive. The same thing goes for permanent life insurance: the more premium you put into the policy, the longer the policy will last and the more cash value it will build.

Now, let’s briefly discuss the different types of permanent life insurance.

Types of Permanent Life Insurance

There are a couple of different types of permanent life insurance contracts to note, including:

  • Universal life
  • Index life
  • Whole life
  • Variable universal life

The difference between them all is how the cash value (the living benefit account) grows. For example:

  • Does it grow based on a dividend? That’s a whole life policy.
  • Does it grow based on an interest rate calculation or declaration? That would be a universal life policy.
  • Does it follow an index, for example, the S&P 500, but with a “floor” and a “cap” mechanism? That would be an index policy.
  • Or, does it involve the market (i.e. mutual fund-like accounts)? That would be a variable universal life policy.

Regardless, all of these policies have the same feature; as long as you continue to pay premiums and cash value remains in the policy, it will last until the death of the insured.

In the meantime, however, the policy owner can reach in and use the cash value for a variety of purposes. For example, it can be used to help pay premiums in certain years, fund education needs, supplement retirement, and/or support healthcare costs, all without triggering tax.

These are all things that the policy owner can use the cash value for while the insured is still alive.

Read on to learn more about the specific permanent life insurance policies available to you.

Infographic for Term Life Insurance vs. Permanent Life Insurance

A Recap on Term Life Insurance vs. Permanent Life Insurance

To review, the differences between term and permanent are:

  • Term life insurance lasts for a period of years and has two components: a premium and a death benefit.
  • Permanent life insurance lasts as long as you want it to (typically a lifetime) and has three components: a premium, a death benefit, and a cash value.

No matter what type of life insurance you own, however, it is an asset. Moreover, it is an asset class that needs to be reviewed, monitored, and serviced regularly. Why? To make sure that the policy is keeping up with your goals as well as to make sure that the industry and the policy are still performing as anticipated.

Read on to learn about the question, “Can I Change My Life Insurance?


Important Notes: Please refer to 26 U.S. Code §101(a) regarding tax-fee death benefit and 26 U.S. Code § 7702 (a) (g) regarding tax treatment of cash value. Policy performance is based on current rates as charges, and some values are not guaranteed. Medical and financial underwriting is required. Withdrawals and loans from life insurance policies classified as Modified Endowment Contracts (MEC) may be subject to income tax and a federal tax penalty, if taken prior to age 59½. Excessive policy withdrawals and loans may cause the policy to lapse, which will result in the loss of death benefit and adverse tax consequences. Life insurance is backed by the claims-paying ability of the carrier and is not FDIC insured. See policy illustration for details. Acumen Insurance Solutions, LLC does not provide tax, legal, or investment advice, and is not FINRA registered.

Knowing Your Life Insurance Options

Life insurance can be a crucial tool for:

  • Tax planning
  • Spousal protection planning
  • Wealth transfer planning, and
  • Business planning

However, as your personal and financial situation changes over time, so could your need for coverage. It is important that you know all your options regarding your life insurance, as well as when to audit your life insurance, so you can make informed decisions as to how to handle this valuable asset. You may have just one policy, or several life insurance contracts of varying types and designs. 

Let’s discuss your life insurance options.

Life Insurance Options

Below are the four primary options available regarding your life insurance.

Option #1: Continue Your Coverage

If you still need life insurance to meet your planning goals or if your health has deteriorated, you may wish to retain your coverage. Some policies allow for premium flexibility and reduction in policy size. 

Option #2: Stop Paying Premiums and Let Your Coverage Lapse

Seniors over the age of 65 lapse over $100 billion of life insurance coverage every year. Your premiums will end but so will your life insurance coverage when it eventually lapses. 

Option #3: Surrender Your Policy

You can surrender your policy to the insurer and cancel your coverage in exchange for the cash surrender value (permanent policies only).

Option #4: Sell Your Policy via a Life Settlement

If your permanent (whole, universal, index, or variable life) policy qualifies, you can sell it to an investor group who will pay you an amount in excess—sometimes four to five times—of the cash surrender value, in exchange for paying future premiums and eventually collecting the death benefit. Some convertible term policies can also qualify so it could be worthwhile checking before you let it lapse.

Make sure you fully understand the potential tax consequences of lapsing, surrendering, or selling your life insurance policy before moving ahead. 

The Importance of Auditing Your Life Insurance Policy

In addition to knowing your options, it’s just as important to regularly audit your life insurance coverage.

Why? Taking the time to review and understand your existing policies can help you:

  • Reduce carrier and contract risk
  • Check that you are carrying the right amount and type of coverage
  • Ensure the policies are owned by the correct person or entity
  • Consider new policy features, such as critical illness coverage, and
  • Improve overall policy earnings over time

Remember, over the years, life insurance contracts have changed, become more efficient, and regularly offer different features and benefits. Today’s policies are different even compared to those purchased just a few years ago.

This considered it makes sense for every policy owner to periodically take a look at their existing life insurance contracts and make adjustments accordingly.

Infographic of Knowing Your Life Insurance Options

Let’s Develop a Plan – Together

Knowing your options is key. At Acumen Insurance Solutions, our trusted advisors have decades of experience to help you develop a customized plan. Please contact us for a complimentary policy review so we can help you reach your goals.

Interested in learning more? Read on for more about auditing existing life insurance plans for credit unions or the difference between term life insurance and permanent life insurance.

How to Maximize Your Legacy Using Life Insurance

An efficiently designed gifting program funded with life insurance can help you to transfer your wealth, limit your exposure to transfer taxes, and maximize your financial legacy.

Read on to learn how combining a gifting strategy with an irrevocable life insurance trust (ILIT) can help you to make the most of your legacy.

Transferring Wealth and Enhancing Legacies: Annual and Lifetime Gifts

One of the best ways to enhance your legacy and minimize your exposure to transfer taxes is by combining:

  • A gifting strategy, and
  • An irrevocable life insurance trust (ILIT)

An ILIT is an effective estate tax reduction technique. Gifting, combined with an ILIT, allows you to meet other planning goals such as avoiding probate and increasing creditor protection. Additionally, an ILIT gives you greater control and flexibility over how your assets will be distributed.

Moreover, a lifetime gifting strategy, in conjunction with life insurance, may also increase the total amount passed on to your heirs.

Let’s discuss how U.S. transfer taxes can affect these life insurance strategies. 

Understanding U.S. Transfer Taxes

The U.S. federal government imposes a tax on the transfer of wealth above certain amounts. There are three distinct types of “transfer taxes” that may apply: 

Estate Tax

On the transfer of property at death.

Gift Tax

On the transfer of property during life.

Generation-Skipping Transfer (GST) Tax

On the transfer of property (during life or at death) to individuals who are more than one generation removed from the donor, commonly referred to as “skip persons” (e.g., a grandchild).

In addition to federal taxes, several states impose a state-level estate tax or inheritance tax, depending on where you live or own property.*

Maximizing Your Legacy Using Life Insurance

So, this considered, what can you do? What tools are available to you to maximize your legacy? Life insurance can be a perfect fit.

Implementing a gifting plan to fully utilize your available exemptions can help to significantly minimize or eliminate exposure to estate taxes.

One very efficient strategy is to make gifts to an ILIT using annual exclusion gifts and/or some of your lifetime exemption and have the ILIT trustee use the gifted funds to purchase life insurance. The steps are as follows:

  1. Your attorney drafts an ILIT.
  2. You fund the ILIT with annual exclusion gifts of $16,000 (in 2022) for each beneficiary of the trust, which can include children and grandchildren. You may use your lifetime exemption to gift larger amounts to the trust. 
  3. The ILIT trustee purchases an insurance policy on your life (or the joint lives of you and your spouse). The ILIT is the policy owner and beneficiary, with premiums paid from the gifted funds.
  4. At your death, the ILIT receives the death benefit free from income, estate, and GST taxes. By funding the ILIT with life insurance, you not only remove the gifted assets from your estate, but the policy’s death benefit creates an income tax-free pool of money, potentially increasing the overall benefit you pass on.

How Life Insurance Can Help

Life insurance can offer a variety of benefits. Some include the following:

  • Income tax-free death benefit: Death benefit is received income tax-free and can be used to help pay estate taxes (if any) and secure a legacy for your beneficiaries.1
  • Access to tax-free income: Cash value that accumulates inside a permanent life insurance policy can be accessed tax-free and distributed to beneficiaries.2
  • Competitive rate of return: Life insurance death benefit can provide a higher net rate of return compared to other options through life expectancy.3

Gifts may be made directly to beneficiaries or to a trust. When gifted to an ILIT, the assets will be excluded from estate tax for multiple generations (in many jurisdictions), and the trust structure provides additional benefits4,  including:

  1. Enhanced inheritance protection
  2. Flexibility and access
  3. Easy funding
  4. Increased creditor protection
Infographic of How to Maximize Your Legacy Using Life Insurance

What We Do

At Acumen Insurance Solutions, we know that a properly designed gifting program funded with life insurance can help you transfer wealth and enhance your legacy. Interested in learning more? Read on to learn the difference between term life insurance and permanent life insurance.

*Check your state’s regulations to verify what state-level estate tax or inheritance taxes are imposed.

Footnotes

1 Life insurance death benefit proceeds are generally excludable from income tax, with a few exceptions including transfer for value.

2 Loans and withdrawals will reduce the death benefit and cash surrender value and may cause the policy to lapse, which may cause recognition of taxable income. Policies classified as MECs may be subject to tax when a loan or withdrawal is made plus a 10% federal tax penalty if taken prior to age 59 1⁄2.

3 IRR on death benefit is equivalent to an interest rate at which an amount equal to the illustrated premiums could have been invested outside the policy to arrive at the net death benefit of the policy.

4 Acumen Insurance Solutions is not a law firm and does not provide tax or legal advice. Please consult your tax and legal professionals.

Rearview shot of a happy family walking towards the sea

Life Insurance Underwriting Process

Life insurance underwriting is the process of evaluating the level of risk an applicant for coverage may pose to the insurance company. There are several things that an insurance underwriter will typically review, including: lifestyle, health, and motor vehicle history. The underwriting process is subjective and can take between two and six months to complete.

Step 1: Informal underwriting and pre-qualification

Medical records are ordered based on the information provided on your signed HIPAA authorization. You will also complete a physical exam conducted by a licensed medical professional at your home or office. Some carriers may waive the exam for younger, healthier insureds.

Results from your exam combined with your medical records will allow the carriers to determine your
insurability and offer an initial health rating. This could help narrow down your options to carriers who
feel you are the healthiest.

Step 2: Formal application and additional requirements

You will then complete and sign the selected carrier’s life insurance application. Upon receipt, the carrier may also require additional information.

Young African American couple sitting at table with papers and themis statue and signing agreement with lawyer

Types of Life Insurance

Life insurance comes in several different flavors, so learning the options and then selecting the right type of policy for your goals and budget is crucial.

In general, life insurance is a contract between a policy owner and an insurer, whereby the insurer promises to pay a designated beneficiary a sum of money, called a “death benefit,” upon the passing of the insured person, in exchange for a premium, paid in a lump sum or over time. Under current tax law, death benefits are exempt from Federal income and capital gains tax; with additional planning, they can be exempt from Federal estate tax, too.


Term life

Term life insurance is designed to last for a specific amount of time or “term,” which can range from 1-to-40 years. Term life is pure coverage without a cash value component. Premiums are inflexible but they are guaranteed not to increase for the length of the term. At the end of the term, a new policy and updated medical underwriting is typically required. Some term policies offer a feature that allows conversion to a permanent policy of the same or smaller amount within a certain period and without evidence of insurability. This can be valuable if the policy owner wants to extend coverage beyond the term, but the insured cannot medically qualify.

Permanent Life

As opposed to term, permanent life insurance is designed to last until the insured’s death, whenever it may occur. It combines term insurance death benefit protection with a cash value account that grows tax-deferred. Each year, the life insurer deducts what it needs from the premium to cover mortality and administrative costs; the rest goes into the cash value account. The owner can access the cash value during the insured’s lifetime for different purposes, including reducing premiums, pledging it as collateral for a loan, receiving in cash, or leaving it to accumulate. There are five main types of permanent life insurance policies, discussed in detail, below. Many of the differences come down to the option chosen as the mechanism that drives the growth of the cash value account.

Whole Life

Like all permanent life insurance policies, whole life provides lifelong coverage and includes a cash value component. Although it’s more complicated than term, whole life is the most straightforward form of permanent life insurance. This is because the premium is designed to remain the same for as long as the insured lives, the death benefit is guaranteed, and the cash value account grows at a guaranteed rate. Most whole life policies can also earn annual dividends on cash value, which represents a portion of the insurer’s financial surplus, but they are not guaranteed. Whole life premiums are not as flexible as other types of permanent insurance, and policy loan interest rates can be high. Whole life is most appropriate for those with a conservative risk profile.

Employee working in a cafe

What is Bank-Owned Life Insurance (BOLI) and How Can You Benefit?

Bank Owned Life Insurance (BOLI) is an institutional financial product used by most U.S. banks the first policy was issued in 1983.

BOLI is used to provide benefits to key employees, retain top bank directors and executives, and protect against the loss of a critical employee, in addition to enhancing non-interest income.

The bank is the policy owner, premium payor, and beneficiary the insureds are consenting key executives.

Policies are placed with top-quality insurance carriers and funded on a single premium basis, with cash values growing income tax deferred and death benefits paid income tax-free. 1

Policies with similar characteristics can be used for organizations, families, and individuals to provide protection and enhance current balance sheets.

Who Owns Boli?

Did you know that many commercial banks have more invested in life insurance policies than they do in bank premises, fixed assets and all other real estate assets combined?

As of the third quarter of 2019, nearly 3,800 banks owned $190 billion in BOLI policies. For example, Bank of America owns $22 billion, JP Morgan Chase owns $11 billion, and Wells Fargo owns $18 billion in BOLI assets2.

BOLI is highly regulated by various federal and state banking authorities Regulations allow banks to hold up to 25% of their most vital regulatory capital known as Tier 1 in BOLI policies .3

What is the Purpose of BOLI?

Even though BOLI can be a very attractive place for banks to earn higher current yields on their safest capital, these policies are not purchased for the sole purpose of enhancing non-interest income.

Rather, BOLI is used as a tax-favored asset to increase bank earnings and offset rapidly rising costs of employee benefits, such as sky-rocketing medical, disability, and workers’ comp insurance premiums.

BOLI is also used to protect (indemnify) the bank from the unexpected loss of skilled and valuable executives, often referred to as “key person” life insurance.

Banks also utilize BOLI as a vehicle to finance the cost of providing a deferred compensation plan for key officers.

Download the guide to Bank Owned Life Insurance here:

How is BOLI Funded?

BOLI is institutionally-priced, permanent life insurance, funded with a single, lump-sum premium.

The premium equals the cash surrender immediately. BOLI products have no-loads, nosurrender charges, and all the income.

How Does BOLI Enhance a Bank’s Balance Sheet?

One of the biggest ancillary benefits is that BOLI policies produce far superior returns than traditional bank investments, such as municipal bonds, 5- and 10-year U.S. Treasurys, and mortgage-backed securities (refer to Chart A).

BOLI generates non-taxable profit and loss earnings equal to the growth in cash surrender value, and any death benefits are paid out are completely tax-free.

In fact, the tax advantages enjoyed by using BOLI are usually absent in other nonqualified retirement packages and benefit plans, which is what makes BOLI such a valuable component of a general deferred compensation program.

To emphasize earnings, BOLI policies are structured to maximize the cash value growth and minimize the expense of the death benefit portion of policy.

BOLI is issued by highly-rated insurance companies, which means that the chance for default, bankruptcy, or other negative situations is remote.

In fact, banks and their regulators are comfortable using life insurance companies to protect their safest capital because they do not use excessive leverage.

For example, if a bank has $1 on deposit, it can lend out up to $10 to borrowers. This leverage can lead to instability and, in excess, bank failure or a “run” on the bank where it cannot meet depositor demand.

However, if a life insurance company has the same $1 on deposit, it may loan out no more than $0.92, and usually only a fraction of that amount, which makes them stable institutions in down economies and a good fit for a portion of banks’ safest capital.

Who is BOLI Policy Owner, Insured, and Beneficiary?

The bank is the owner and beneficiary of the policies. When the insured employee passes away this tax-free death benefit can be used to fill the vacuum left by the death of the key executive, as well as fund other business needs.

Banks typically keep the life insurance policies on retired or separated executives because the rate of return can be even higher when the policies are held until death.

A portion of the death benefit may be shared with insured officers via a supplemental life insurance plan which can serve as a valuable “Golden Handcuff.”

Depending on the insurance companies and amount of premium, if 10 or more executives participate, then in most cases no medical tests are required.

Can Individuals Benefit From BOLI?

Life insurance companies only issue institutionally priced BOLI policies to commercial banks.

However, some carriers allow selected agents to design retail policies with loads and fee structures that are like BOLI. These policies are used to protect families against the loss of breadwinners and to protect businesses, including nonprofits, against the loss of owners and key employees.

Just like BOLI, these policies also generate higher current yields on cash value compared to those offered by other safe, liquid assets, such as CDs, U.S. Treasurys, and bonds (refer to Chart B).