What Is Bank-Owned Life Insurance (BOLI)?
Bank-owned life insurance (BOLI) is a form of life insurance purchased by banks for their key employees. However, the bank is the beneficiary and also usually the owner of the policy. This insurance is used as a tax shelter for financial institutions. They leverage its tax-free savings provisions as funding mechanisms for employee benefits.
All employee benefits for these selected employees are covered under the plan and paid out from this fund. All premiums paid into the fund, in addition to all capital appreciation, are tax-free for the bank. As a result, banks can use the BOLI system to fund employee benefits on a tax-free basis. In effect, bank-owned life insurance is a kind of tax shelter providing funds (tax-free) to the bank to offset costs.
National banks may purchase and hold certain types of life insurance called bank-owned life insurance (BOLI) under 12 USC 24 (Seventh). Banks can purchase BOLI policies in connection with employee compensation and benefit plans, key person insurance, insurance to recover the cost of providing pre- and postretirement employee benefits, insurance on borrowers, and insurance taken as security for loans. The OCC may approve other uses on a case-by-case basis. (Source: occ.treas.gov)