Yes, banks do invest in life insurance, and they do it at scale. U.S. banks collectively hold well over $100 billion in life insurance policies on the lives of their executives and directors, an asset class known as bank-owned life insurance, or BOLI. The bank buys the policy, pays the premiums, owns the cash value, and collects the death benefit when the insured employee eventually dies. It is one of the most common non-traditional assets sitting on bank balance sheets today.
Why Banks Buy Life Insurance
The purpose is funding, not speculation. Banks owe their employees long-term benefits: retirement plans, deferred compensation, post-retirement health coverage. Those obligations keep growing, and the bank needs a dedicated pool of assets to meet them. BOLI is an unusually efficient way to build that pool.
Here is the economic logic. The cash surrender value of a qualifying life insurance policy grows tax-deferred under Section 7702.1Office of the Law Revision Counsel. 26 USC 7702 – Life Insurance Contract Defined The death benefit, when it arrives, is generally excluded from the bank’s gross income under Section 101(a)(1). Each quarter the bank books the growth in cash value as non-interest income without owing current tax on it. Compared to buying a taxable bond portfolio to pre-fund the same benefits, BOLI compounds faster.
There is one offset. Premiums the bank pays are not tax-deductible, because the bank itself is the beneficiary.2Office of the Law Revision Counsel. 26 USC 264 – Certain Amounts Paid in Connection With Insurance Contracts Over a policy’s life, the tax-deferred inside buildup and the income-tax-free death benefit more than make up for the lost deduction. That math is why BOLI exists as a product category at all.
Who the Bank Can Insure
A bank cannot take out a policy on a random teller. To get the favorable tax treatment on the death benefit, IRC Section 101(j) restricts the pool of insurable employees. At the time the policy is issued, the insured person must be a director, a “highly compensated employee” under Section 414(q), or a “highly compensated individual” under Section 105(h)(5) using a top-35-percent-by-compensation threshold.3Office of the Law Revision Counsel. 26 USC 101 – Certain Death Benefits In practice, BOLI covers senior officers, executives, and directors.
Notice and Consent
Before the policy is written, the bank must give the employee written notice that it intends to insure their life and must state the maximum face amount of the coverage. The employee has to give written consent, acknowledge that the coverage may continue after they leave the bank, and be told that the bank will receive the death benefit.3Office of the Law Revision Counsel. 26 USC 101 – Certain Death Benefits Skip any part of that process and the bank loses the income tax exclusion on the death benefit, salvaging only an exclusion equal to the premiums it paid. On a large policy, that difference runs into real money.
Where the Premium Money Actually Goes
Banks pick among three account structures when they buy BOLI, and the choice drives credit risk, market risk, and regulatory capital treatment.
General Account
Premiums flow into the insurance carrier’s general investment pool alongside everyone else’s. The carrier credits a declared interest rate to the policy. Returns are stable and predictable, but the bank is effectively an unsecured general creditor of the carrier. If the carrier fails, the bank stands in line with the other creditors. General account BOLI carries a 100 percent risk weight for capital purposes.4FDIC. Bank-Owned Life Insurance (BOLI) Core Analysis Procedures
Separate Account
The bank’s assets sit in a segregated account legally insulated from the carrier’s general creditors. The bank often has input on the underlying investment mix and takes on the related market risk. Some separate account policies add a stable value protection wrap that covers the gap between the account’s fair value and the bank’s cost basis if the policy is surrendered.5Community Banking Connections. Bank-Owned Life Insurance: A Primer for Community Banks Larger institutions tend to favor this structure for the insolvency protection and transparency.
Hybrid Account
A hybrid blends a segregated account with a minimum return guaranteed by the insurer. The bank keeps the insolvency protection of a separate account and gains a floor under its returns, while market gains above the floor still flow through. It suits banks that want more upside than a general account but less volatility than a pure separate account.
How Much a Bank Can Hold
Federal regulators treat BOLI as a concentration risk. The interagency statement issued jointly by the OCC, Federal Reserve, FDIC, and the former OTS says it is generally not prudent for a bank to hold BOLI with an aggregate cash surrender value exceeding 25 percent of the institution’s capital.6Office of the Comptroller of the Currency (OCC). Interagency Statement on the Purchase and Risk Management of Life Insurance That 25 percent cap is the headline number examiners look at.
Banks also have to set internal limits on exposure to any single insurance carrier, taking the legal lending limit into account. For national banks, the legal lending limit is generally 15 percent of capital, which effectively caps general account BOLI with any one carrier at the same level.
Before buying a policy, the bank must perform credit analysis on the carrier covering credit ratings, financial condition, marketplace experience, and commitment to the BOLI product line. The credit risk management function should sign off on carriers, the depth of the analysis should scale with the size of the exposure, and the review has to continue on an ongoing basis rather than stopping at purchase.6Office of the Comptroller of the Currency (OCC). Interagency Statement on the Purchase and Risk Management of Life Insurance Regulators also expect a documented pre-purchase analysis that identifies the business need, quantifies appropriate coverage, assesses the economic benefit, and lays out an exit strategy for scenarios like carrier credit deterioration or an unexpected liquidity need.4FDIC. Bank-Owned Life Insurance (BOLI) Core Analysis Procedures
Why the Cash Is Hard to Get Back Out
BOLI is designed as a buy-and-hold asset held until the insured dies. A bank that treats it as a liquidity buffer will not like what it finds when the time comes to tap it.
Most BOLI policies are deliberately structured as modified endowment contracts, or MECs. The bank pays in more during the first seven years than the Section 7702A “7-pay test” allows for standard life insurance treatment, because front-loading premiums maximizes the cash value growth that is the entire point of the asset.7Office of the Law Revision Counsel. 26 USC 7702A – Modified Endowment Contract Defined MEC classification is permanent once it attaches. Withdrawals and loans from an MEC are taxed last-in-first-out, so gains come out first as ordinary income, and accessing cash value before the insured reaches age 59½ triggers an additional 10 percent penalty tax.
Surrender is no easier. Surrendering a policy triggers ordinary income tax on any gain over the premiums paid, the MEC penalty if applicable, and surrender charges from the carrier that bite hardest in the policy’s early years.5Community Banking Connections. Bank-Owned Life Insurance: A Primer for Community Banks This illiquidity is the single biggest risk a bank needs to walk in understanding.
One boundary worth stating plainly: BOLI is not covered by FDIC deposit insurance. For general account policies, the bank’s investment is backed by the claims-paying ability of the carrier. For separate account policies, it rides on the performance of the segregated investments. State insurance guaranty associations provide some backstop if a carrier fails, but their coverage limits sit far below the face amounts banks typically carry. That is why ongoing carrier credit monitoring is treated as a core regulatory expectation rather than a nice-to-have.