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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:

  1. 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.


  2. 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.


Do you have BOLI assets on terminated employees?


Have you been told your BOLI assets cannot be moved?
“Most of the insureds in my BOLI portfolio are terminated employees. Unfortunately, I am stuck.”  
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