BOLI/COLI/ICOLI/CUOLI

BOLI serves as a tax-efficient strategy for banks to offset employee benefit costs by purchasing life insurance policies on key executives’ lives, with the bank as owner and beneficiary. Cash surrender values grow tax-deferred, generating monthly bookable income, while tax-free death benefits are received upon the executive’s passing. Historically paired with new executive benefit plans, BOLI now commonly offsets existing benefit expenses, providing an accretive return that exceeds the opportunity cost of alternative investments.

Three primary BOLI products cater to banks’ needs: General Account, the most common and oldest form, where deposits merge into the carrier’s general holdings like real estate and bonds, offering a current crediting rate with a guaranteed minimum but limited transparency. Separate Account segregates assets into bank-eligible investments managed by renowned fund managers, delivering detailed reporting and a yield-to-worst crediting rate, with an optional stable value rider for downside protection, though no guaranteed minimum exists. Hybrid Account combines the best of both, providing a current and guaranteed crediting rate alongside separate account transparency, and both separate and hybrid options shield assets from carrier creditors for added security.

BOLI’s advantages include tax-favored returns surpassing after-tax yields of traditional investments like muni funds or treasuries by 150-300 basis points, tax-deferred cash value growth (tax-free if held to death), and immediate earnings accretion to boost ROE and ROA. It diversifies portfolios, incurs no surrender charges, and aligns with regulatory guidelines as a long-term asset recorded as “other income” under FASB rules. However, disadvantages involve illiquidity risks—surrendering triggers taxable gains and a 10% IRS penalty—plus concerns over carrier credit quality and crediting rate competitiveness, addressable via IRC Section 1035 exchanges after year ten to avoid penalties.

COLI offers corporations a tax-deferred investment alternative to mutual funds, where the company buys and owns policies on key employees’ lives as primary beneficiary, paying non-deductible premiums for growing cash values and tax-free death benefits. This structure recovers costs from SERPs or deferred compensation programs, including lost earnings on premiums, by booking cash values to offset accrued liabilities. Distributions via withdrawals or loans remain tax-free if repaid through death proceeds, enhancing after-tax results over taxable scenarios.

Flexible funding options include single or annual premiums, with cash accessible basis-free via withdrawals or loans, repaid tax-free at death. Some corporations match participant investment choices using variable life products for aligned returns, avoiding income taxes on gains during accumulation. This full retention of interest and compound growth outperforms mutual fund taxation, providing a superior asset to fund executive rewards without limits on contributions or vesting.

In essence, COLI delivers non-deductible premiums yielding tax-deferred accumulation and tax-free proceeds, ideal for offsetting benefit liabilities. It empowers selective benefits for high earners, with no significant reporting burdens, though FICA timing rules apply. By transforming insurance into a strategic asset, corporations achieve enhanced retention and financial efficiency.