Banks dislike surprises. They prefer instruments that behave predictably, deliver steady income, and fit neatly within a defined risk framework. That is where bank-owned policies come in, a niche that offers tax-advantaged earnings and balance sheet benefits. Behind the sales pitch sits a quieter truth. 

 

This is life insurance packaged as a financial asset, which brings real risks, nuanced interactions with capital and liquidity, and a need for careful board-level stewardship. The short version is simple: treat it like any core asset you would protect in a storm. For the full picture, keep reading and bring coffee.

 

 

What BOLI is and Why Banks Use It

BOLI is designed for banks to purchase permanent coverage on a group of eligible employees, with the bank as beneficiary. The earnings typically arise from the insurer’s investment results within the policy, credited back to the bank after fees and mortality costs. Banks often use that steady income to offset the expense of employee benefits, which creates a tidy narrative for shareholders.

 

The attraction is obvious. Income tends to be stable, accounting is well understood, and capital treatment is predictable under normal conditions. Yet none of that neutralizes risk; it simply organizes it. To handle BOLI well, you need to understand what sits underneath the crediting rate, who stands behind the guarantees, and how the position behaves when interest rates jump, spreads widen, or liquidity tightens.

 

 

The Core Risks Hidden in Plain Sight

Carrier Credit Strength

Every shiny number on a proposal depends on the insurer staying strong. The insurer’s general account or separate account backs policy values, so the bank effectively inherits the carrier’s creditworthiness. Ratings, surplus levels, risk-based capital ratios, and asset quality all matter. 

 

The point is not to chase the highest credited yield, it is to pair a competitive return with a carrier that can plausibly keep its promises during a recession, a credit shock, or a protracted rate cycle. Think of the underwriting as two layers deep: the insurer underwrites lives, and the bank underwrites the insurer.

 

Interest Rate and Crediting Dynamics

Crediting rates do not float in a vacuum. They follow the insurer’s portfolio, which holds bonds that roll over on a schedule. In rising rate environments, crediting rates can lag, since legacy bonds must mature before the portfolio resets at higher yields. In falling rate environments, crediting rates may look generous for a while, then converge downward as reinvestment occurs. 

 

The risk for the bank is a mismatch between the economics of the BOLI portfolio and the bank’s own asset-liability profile. A sensible approach is to model how credited earnings respond across multiple paths for short and long rates, and then decide whether the BOLI block dampens or amplifies the bank’s earnings volatility.

 

Liquidity and Surrender Considerations

Policy values are not a checking account. Early surrenders can trigger charges that reduce proceeds meaningfully, and tax consequences can appear if gains are realized outside qualifying conditions. Even partial withdrawals or loans, where allowed, deserve careful modeling so the bank does not degrade long term performance for short term cash needs. 

 

The question to ask is simple. If the bank needed to unwind part of the position next spring, how much would actually land in cash after charges and taxes. If the answer makes you squint, rethink the allocation size or your contingency plans.

 

Concentration and Correlation

Concentration risk shows up in two places. First, the bank may lean too heavily on a single carrier, a single product type, or a single purchase vintage. Second, the bank may inadvertently concentrate economic risk by aligning BOLI with other spread-dependent assets. In isolation, a five or ten percent allocation may feel modest. 

 

In practice, the same rate or credit shock that pressures the bank’s bond portfolio can also pressure expected BOLI crediting rates. True diversification pays attention to the correlation math, not just the number of positions.

 

Regulatory and Accounting Considerations

Regulators expect a clear pre-purchase analysis, board-approved policies, and ongoing risk monitoring. Accounting is usually straightforward, yet disclosures and documentation still matter. 

 

The safest path is to treat BOLI like any other long-duration asset subject to management oversight. That means reviewing carrier financials at least annually, testing policy performance against expectations, and maintaining complete files that explain why the investment remains suitable.

 

Core risk	What it means	Why it matters	Simple checks & controls
Carrier credit strength	Your results depend on the insurer staying financially strong.	If the carrier weakens, guarantees and expected earnings become less reliable.	Review ratings/surplus/RBC, scan asset quality, diversify across carriers, avoid chasing the highest quoted rate.
Interest rate & crediting dynamics	Crediting rates adjust slowly because the insurer’s bond portfolio rolls over over time.	In rising-rate periods, BOLI may lag; in falling-rate periods, it can look strong then drift down later.	Run rate-path scenarios, compare to your ALM profile, set realistic expectations for lag, monitor spreads and reinvestment behavior.
Liquidity & surrender considerations	Policy value isn’t “cash”—exits can trigger surrender charges and taxes.	If you need funds quickly, the amount you net may be meaningfully less than expected.	Model “cash-out next spring” scenarios, document surrender schedules, limit allocation size to true long-term funds, plan contingency liquidity elsewhere.
Concentration & correlation	Too much exposure to one carrier/product/vintage—or to risks that move together.	A single shock (rates/credit spreads) can hit both BOLI expectations and other bank assets at once.	Set concentration limits, stagger purchase vintages, diversify product types, review correlation to other spread-sensitive holdings.
Regulatory & accounting considerations	BOLI requires documented rationale, board policy, and ongoing monitoring.	Weak documentation or monitoring can create examiner friction even if performance is fine.	Maintain a pre-purchase analysis file, schedule annual carrier reviews, track policy performance vs expectations, keep governance roles and cadence explicit.

 

Building a Sensible BOLI Risk Framework

Governance That Does Real Work

Write a policy that does more than decorate a binder. Define allowable carriers, minimum rating thresholds, concentration limits by carrier and product type, required analyses before purchase, and the cadence for ongoing reviews. Assign roles across treasury, finance, and risk, and make the board’s oversight explicit. Good governance clarifies not only how to buy, but how to escalate when conditions change.

 

Due Diligence That Actually Digs

Carrier due diligence should reach beyond a ratings slide. Read statutory statements, study investment allocations, and pay attention to unrealized positions and asset-liability management notes. Ask how the insurer hedges interest rate risk and how it sources credit spread. 

 

Product due diligence should unpack fees, mortality charges, crediting methodology, and the mechanics of any market value adjustments. Ask impolite questions until you understand how the sausage gets made.

 

ALM and Scenario Analysis

Model the position like you would a bond portfolio. Build rate shocks, steepeners, flatteners, and credit spread scenarios. Ask how quickly the crediting rate adjusts and what happens to policy values under stress. 

 

Test liquidity needs and potential surrenders, then record the implications in plain language. This is not academic choreography. It is how you discover whether the BOLI block behaves as an income stabilizer or a quiet source of earnings noise when the curve moves.

 

 

What Good Looks Like

The healthiest BOLI programs look boring, which is a compliment in banking. Multiple carriers with strong balance sheets, reasonable allocation sizes, and purchase vintages spread across time. Policies with transparent crediting mechanisms, realistic expectations for returns, and a clear narrative for how the earnings support employee benefit costs. 

 

A documentation trail that would make future you proud. A monitoring routine that catches trouble early, not in hindsight. If the setup feels routine and slightly unglamorous, you are probably doing it right.

 

 

Practical Touchpoints for Ongoing Oversight

Strong programs set expectations before the first premium is wired. That means agreeing on performance bands for crediting rates, deciding what would trigger an additional review, and keeping a calendar of carrier check-ins. Finance teams fold BOLI income into broader interest rate risk reports, so leadership can view it alongside margin trends and securities yields. Risk teams log concentration metrics and confirm compliance with policy thresholds. 

 

Audit teams verify documentation and confirm that nothing wandered off the guardrails. When the market shifts, the team knows what to do. If rates climb quickly, expect a lag in BOLI’s crediting uplift and confirm that the earnings profile still fits the plan. If spreads widen, read the carrier’s investment commentary with extra care, looking for credit migration that could pressure future rates. 

 

If the bank’s liquidity profile tightens, revisit surrender math before making any moves. Clear communication is your best defense against hasty decisions. Do not forget the people side. Eligibility lists should be maintained carefully, with privacy and consent handled by the book. 

 

Beneficiary designations and documentation must be correct, secure, and updated as employment changes. Small administrative lapses can grow into messy problems, and BOLI rewards tidy back offices more than it rewards heroics.

 

 

Keeping Perspective on Returns

It helps to remember what BOLI is not. It is not a magic bond fund in disguise, and it is not a quick fix for earnings. It is a long term position that aims to deliver steady income with favorable tax attributes. 

 

Over multi-year horizons, the crediting rate should look like a smoothed version of the insurer’s portfolio returns, shaded by fees and mortality costs. If your internal story requires aggressive projections to pencil out, the story needs an edit. Patience and restraint are unfashionable yet effective in this corner of the balance sheet.

 

 

Exit Planning Before You Need It

Good programs imagine the end from the start. Under what conditions would you surrender, reduce, or exchange a block. What are the cost and tax consequences, and how would you communicate the decision internally and externally. 

 

Is there a partial unwind path that preserves value while addressing new constraints. Planning does not make exit likely; it simply keeps you prepared. No one enjoys thinking about the fire escape, yet everyone is grateful it exists when the alarm sounds.

 

 

Conclusion

BOLI works best when everyone treats it like a serious investment rather than a shiny add-on. Pick strong carriers, size positions thoughtfully, test the economics against your own balance sheet, and document the why behind every decision. If you keep your governance sturdy and your expectations grounded, the program will feel pleasantly uneventful, which is a delightful outcome in a world that loves drama. 

 

And if someone asks why the bank owns policies at all, you can smile and say the quiet part out loud. This is one of those rare places where good risk management makes the numbers better and the sleep easier.