Pre-Purchase Compliance:

Banking regulations, specifically OCC Bulletin 2000-23, require banks to perform a comprehensive ten step analysis in order to insure that the purchase of BOLI is consistent with safe and sound banking practices. Regulators have found that the purchase of BOLI is incidental to the business of banking and therefore a permissible investment if it is used to reimburse the bank for the loss of a key executive or purchased in connection with employee compensation and benefit plans:

"National banks may, as other corporations frequently do, use corporate-owned life insurance as a financing or cost recovery vehicle for pre- and post-retirement employee benefits…There are two common methods of financing or effecting cost recovery of employee benefits. The first is the cost recovery method. Under this method, the corporation sustains the cost of providing the employee benefits and the cost of purchasing the life insurance. The corporation holds the life insurance and collects the death benefit to reimburse the corporation for the cost of the benefits and the insurance…The second method of financing employee benefits is known as cost offset. With this method, the corporation projects the annual employee benefit expense associated with the benefit plan. Then, the company purchases life insurance on the lives of certain employees. The amount of insurance purchased is great enough so that the income earned on the cash surrender value offsets the benefit expense.”
Appendix – OCC Bulletin 2000-23

The Pre-Purchase Analysis, at a minimum, must consider the following:

• Determine the need for life insurance
  
  
• Quantify the amount of insurance needed
  
  
• Select an appropriate vendor
  
  
• Select an appropriate carrier or carriers
  
  
• Review the characteristics of the available insurance products
  
  
• Analyze the benefits of BOLI
  
  
• Determine the reasonableness of additional compensation provided
  
  
• Analyze the associated risks and the bank’s ability to monitor risks
  
  
• Evaluate alternatives
  
  
• Document the decision
  

Regardless of the financing rationale being considered, the bank must complete a comprehensive analysis before purchasing BOLI. The objective of the pre-purchase analysis is to help ensure that the bank understands the risks, rewards, and unique characteristics of BOLI. The Pangburn Company, working in close cooperation with the bank’s insurance broker, will play an active role in the analytical process. Once a purchase decision has been made and implemented we will also assist in the preparation of a comprehensive compliance manual.