The BOLI Challenge
Evaluate how to free up capital, obtain liquidity, and potentially earn higher rates of return.
Through acquisitions, a reduction in bank-owned life insurance (BOLI) portfolio yields, and a changing population of employees, banks can be challenged with managing legacy BOLI portfolios. Some banks have all or a portion of a its BOLI holdings performing well below acceptable net returns.
Banks are often caught in what we call the “BOLI Tax Trap” – this is where all or a portion of the BOLI portfolio is delivering low net returns, but the age of the portfolio creates two significant problems:
Potentially large embedded taxable gain
The age of the portfolio may create a charge to earnings problem due to the embedded tax gain if the bank were to surrender part or all of the portfolio.
Insureds are no longer employed
Potential tax-free exchange options to a new BOLI product may have limitations.
Are your legacy BOLI net returns below market yields?
Does your BOLI asset have taxable gains upon surrender?
Is there a large tax cost and/or negative earnings impact to obtain immediate liquidity?
Do you have MEC tax penalties associated with a surrender?
A modified endowment contract (MEC) does not meet all of the definitions of life insurance which can create a negative tax impact. If the cumulative premium payments exceed certain amounts specified under the Internal Revenue Code, the life insurance policy will become a Modified Endowment Contract (MEC). Taxation under a MEC is similar to taxation under an annuity but it does not meet all of the definitions of life insurance which can create a negative tax impact.