BOLI and benefits: Two peas in a pod
While not a benefit on its own, business-owned life insurance can help cover the cost of offering benefits.
Since the early 1980s, business-owned life insurance or BOLI has been the go-to strategy for banks and credit unions to offset the cost of executive and employee benefits. At the end of June 2021, more than 900 credit unions reported owning $7.9 billion—more than 9% of CU net worth—in cash surrender value, which is the amount left over after fees when you cancel a life insurance policy or annuity. What makes BOLI work so well?
BOLI is an institutional life insurance policy insuring CU officers. Unlike the typical life insurance policy we buy as individuals, BOLI is engineered to provide the least amount of death benefit gain and the maximum amount of growth in cash surrender value. The growth in CSV is recorded monthly as “other non-interest income.” Most CUs offer the insured officer the ability designate their own beneficiary for some of the death benefit gain.
The crediting rate, the interest rate earned on the contract value (principal plus accrued income) expressed as an effective annual yield, adjusts at least annually. The crediting rate history shows BOLI moves in the general direction of broader interest rates, albeit more slowly and with a lag. Unlike directly-held fixed-income investments, however, general account BOLI has no mark-to-market risk—something to consider as interest rates begin to rise.
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