What is BOLI?

BOLI is an acronym for institutionally price, investment grand Bank-Owned Life Insurance. The BOLI asset is offered to
banks on a select basis by insurance carriers through a limited number of sophisticated consulting organizations.

What is the legal authority for Bank Owned Life Insurance?

The authority for national banks to purchase and hold life insurance is found in 12 USC 249 (Seventh), which provides
that national banks may exercise “all such incidental powers as shall be necessary to carry on the business of banking.”

Should all banks own BOLI?

No. BOLI only makes sense for banks that meet the following four criteria:

• The bank is profitable and desires growth;
• The bank does not expect to be in an alternative minimum tax paying situation for more than 5 years;
• The bank has no long term liquidity concerns; and
• The bank pays for benefits for its employees.

Why do financial institutions use Bank Owned Life Insurance?

Purchases of life insurance that the OCC has found to be incidental to banking include key-person insurance, insurance
on borrowers, insurance purchased in connection with employee compensation and benefit plans and insurance taken as
security for loans (OCC Bulletin 2000-23). Financial institutions use BOLI primarily to informally finance employee
benefit plans and to increase net income since BOLI may earn a higher after-tax yield than many traditional financial
institution eligible investments and BOLI may be designed to match the long term nature of benefit plan expenses.

How does BOLI work?

The financial institution purchases life insurance on a select group of management employees. The financial institution is
the premium payor, the owner and the beneficiary of the life insurance policies. The insured employees have no
ownership nor do they receive benefits from the insurance policies. In many instances, the cash accumulation at the end
of the first year is greater than the premium paid. The insurance policy values are assets of the financial institution.

Will BOLI have an impact on a financial institution’s financial performance?

It is possible that BOLI may favorably impact a financial institution’s financial performance by creating higher net after-
tax returns than traditional bank investments without increasing the current tax liability. Should this occur, earnings per
share will increase. BOLI is immediately accretive.

How does the balance sheet change with the purchase of BOLI?

The financial institution may sell treasuries or use funds generated from cash flow to purchase the BOLI contracts. The
cash values in the BOLI policies are assets of the financial institution. BOLI is initially designed to be balance sheet
neutral. Should the BOLI contracts generate an after-tax rate of return higher than the traditional institution investment,
the Income Statement will show additional income which translates into increased Net Worth.

Are the values in BOLI policies accessible by the financial institution?

Yes. The BOLI policies are part of the general assets of the financial institution and are not put in trust or otherwise
segregated for the benefit of the employees.

Does the financial institution keep the coverage when the employee(s) terminate or retire?

Yes. The employees are tracked via their Social Security number. When the employees or former
employees die, information is accessed through the Social Security system and the death claim is
filed with the insurance carrier.

Is BOLI liquid?

Yes. BOLI policies may be surrendered at any time and the cash surrender value will be paid to the financial institution. The insurance carrier pays the financial institution the cash surrender value of the policies. The financial institution must pay income taxes on any gain, thus reducing the overall after-tax returns that are attributable to BOLI transactions.