Bank-Owned Life Insurance · BOLI
BOLI vs. COLI:
what's the difference?
BOLI and COLI are the same tool used by two kinds of owners. Here is how each one works, the tax rules they share, and where they differ.
Quick answer
- BOLI and COLI work the same way. The only real difference is who owns the policy: BOLI is owned by a bank, and COLI is owned by a company that is not a bank.
- In both, the company buys permanent life insurance on employees who have given written consent, and the company is the owner and the beneficiary.
- When the notice and consent rules in tax code Section 101(j) are followed, the death benefit is generally income tax-free.
How both work
A company buys permanent life insurance, usually whole life or universal life, on a group of its officers or employees. The company pays the premium, owns the policy and is named as the beneficiary. The employees agree to the coverage in writing before the policies are issued.
While the policies are in force, the cash value grows tax-deferred. The company carries that cash value on its balance sheet as an asset. When an insured employee passes away, the company receives the death benefit. Over many years, that growth and those benefits help the company pay for costs it already has, like employee benefits.
Where they differ
Who owns it
BOLI is owned by a bank or savings institution. COLI is owned by any other kind of business, from a manufacturer to a hospital system.
Who oversees it
Banks answer to their regulators. The 2004 Interagency Statement sets expectations for board oversight, a pre-purchase analysis, carrier credit risk and concentration limits. A non-bank company sets its own internal policies, within the tax rules.
How much a company can hold
For banks, regulators treat a total cash surrender value above 25 percent of capital as generally not prudent without board approval. COLI has no bank capital test, though the purchase still has to make sense for the business.
The tax rules they share
Both BOLI and COLI fall under Section 101(j) of the tax code, which covers life insurance a company owns on its employees. For policies issued after August 17, 2006, the company must tell the employee in writing that it plans to insure their life, the most it could be insured for, and that the company will be the beneficiary. The employee must give written consent before the policy is issued.
When those steps are followed and the insured fits one of the groups the rules allow, the death benefit is generally income tax-free to the company. If the steps are skipped, much of the death benefit can become taxable. Companies that hold these policies also file Form 8925 with the IRS each year to report them.
What companies and banks use them for
Offsetting benefit costs
The most common use. Tax-deferred growth helps offset the rising cost of health care, retirement plans and other employee benefits.
Funding nonqualified deferred compensation
Many companies use the policies to informally fund supplemental retirement plans for executives, so the money is there when the promised benefits come due.
Key-person coverage
The death benefit can help the company through the loss of someone hard to replace, such as a senior lender or a founder.
Reviewing what you already hold
Whether you call it BOLI or COLI, policies bought years ago can fall behind today's market. An independent benchmark shows where they stand. For banks, the concentration guideline is part of that review, and if a change makes sense, a 1035 exchange is often how it is done.
Frequently asked questions
What is the difference between BOLI and COLI?
Ownership. BOLI is bank-owned life insurance, owned by a bank. COLI is corporate-owned or company-owned life insurance, owned by a business that is not a bank. The policies work the same way.
Do employees have to consent to BOLI or COLI?
Yes. Under Section 101(j), the employee must be told in writing about the coverage and must give written consent before the policy is issued. Skipping this step can make the death benefit taxable.
Is the death benefit from BOLI or COLI taxable?
It is generally income tax-free when the 101(j) notice and consent rules are met and the insured fits one of the groups the rules allow. Your CPA or tax professional can confirm how the rules apply to your company.
Are banks regulated differently on BOLI than companies are on COLI?
Yes. Banks follow the 2004 Interagency Statement, which covers board oversight, a pre-purchase analysis, carrier credit risk and concentration limits. A non-bank company sets its own policies within the tax rules.
Educational content only. This is not tax, legal, accounting or regulatory advice. Every bank's situation is different. Review any BOLI decision with your CFO, your auditors, your legal counsel, and your CPA or tax professional, and keep your regulator's expectations in view. Policy values depend on the terms of each contract and the financial strength of the issuing insurance company.
Find out where your BOLI stands
A short call, an independent comparison, and a clear answer. No change of agent of record is needed. Request a BOLI review, read the BOLI overview, or call +1 (586) 899-1003.
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Sources
Interagency Statement on the Purchase and Risk Management of Life Insurance (OCC Bulletin 2004-56) · 26 U.S. Code 101 · 26 U.S. Code 1035
Educational content only.