Pub. 2 2011 Issue 1

spring 2011 7 I t’s likely that the use of BOLI will continue to grow with the anticipated rise in healthcare costs under the new healthcare laws. There are two basic types of BOLI products, whole life and universal life. Whole life BOLI products are a more traditional form of life insurance. These are “bundled products” which are ac- tuarially designed based upon a single premium payment to provide both cash value growth and death benefit in one “bucket”. This “bundled” product is guaranteed to provide permanent life insurance as well as cash value growth protection in tandem, all inside one “bundle’’. With a whole life product, the Bank is certain to receive a death benefit upon the passing of the insured. By contrast, Universal life BOLI prod- ucts are “unbundled.” Simply put, there are two “buckets” of assets combined into one policy. First, there is the “cash value bucket” which represents the cash value of the policy based upon premium payments and investment earnings. The second is the “death ben- efit bucket,” which represents the death benefit payable to the Bank upon the death of the insured. As long as there is sufficient cash within the “cash value bucket” to cover the cost of the death benefit which exists within the “death benefit bucket”, the Bank will receive a death benefit when the insured passes away. In the event that there is not sufficient cash within the “cash value bucket” to pay that cost, the death benefit can be reduced or even cease to exist in some rare instances. Furthermore, Universal life BOLI prod- ucts can be further broken down into three subcategories; general account, separate account, and hybrid. In general account products, the cash within the “cash value bucket” is held and man- aged in the insurance company’s general portfolio and the crediting rate is depen- dent on the carrier’s declared crediting rate. With separate account products, the cash within the ‘’cash value bucket” is placed in a fund that is separate from the carrier’s general account and those assets are separately managed. By comparison, the hybrid product has features of both separate account and general account products. Further, the hybrid product is also promoted as having potentially lower risk weight- ing features; a claim that banks should independently validate by conducting their own analysis. In working with Banks over the years and speaking at various bank regulatory and professional association meetings, our group has often been asked how to A great majority of the banks in the US have either bought or are considering the purchase of bank owned life insurance (“BOLI”) to address employee benefit costs and/or offset the costs of executive or director benefit plans. Nine Steps to the Purchase and Risk Management of BOLI By Melissa K. Oliverio, JD and Michael A. Oliverio, II, MBA Q Nine Steps — continued on page 8