Decoding BOLI and COLI

One of the most common questions we get is, “Why haven’t I heard about BOLI and COLI before?” After explaining the key benefits of The Perpetual Wealth Strategy™, which includes guaranteed growth, tax-deferred cash value, and tax-free access to funds, it’s easy to understand why these strategies aren’t more widely known. Bank-Owned Life Insurance (BOLI) and Corporate-Owned Life Insurance (COLI) have been used by banks and corporations for years to build wealth, improve tax efficiency, and offset the costs of employee benefits.

So why are these strategies not more commonly used by individuals? Let’s explore how BOLI and COLI work and why these tax-advantaged insurance products have been staples for large institutions—and how they could be just as effective for you.

The basic benefits include:

1. Guarantees: Guaranteed growth – guaranteed loan provision
2. Safety: Your money is with a financial institution established in the mid 1800’s
3. Liquidity: You can access up to 95-100% of your cash value at any time
4. Tax Benefits: Premiums are paid with after-tax dollars – cash value grows tax-deferred and can be borrowed against income-tax free for future use – death benefit pays to the beneficiary income-tax free
5. Private Contract: Your policy is not publicly known

These basic benefits are truly beneficial; however, what is not commonly known is this strategy has been widely used by banks and corporations for many years. Let’s discuss these two uses and why banks and corporations choose to take advantage of them.

1. Bank-Owned Life Insurance (BOLI): A Strategic Wealth-Building Tool for Banks and You

One powerful tool many large institutions use to build wealth, offset costs, and achieve tax efficiency is bank-owned life insurance (BOLI). This strategy allows banks to leverage life insurance to secure guaranteed growth, tax-deferred cash value growth, and tax-free death benefits, all while maintaining liquidity and funding employee benefit programs. But what if you, as an individual, could benefit from this strategy too? Let’s break down how BOLI works and how similar approaches could be used in your personal financial planning.

How Does BOLI Work?

BOLI is a life insurance policy purchased by banks on key employees—usually executives or key figures within the bank.This form of insurance is a tax shelter for the administrating bank, as it is a tax-free funding scheme for employee benefits. The bank is both the owner and the beneficiary of the policy. Here’s how it works:

• Banks purchase life insurance on a select group of key employees with either a single premium or a series of annual premiums.
• The cash value of the policy grows tax-deferred, producing a return greater than other bank investments, such as Muni Funds or Mortgage-Backed Securities.
• When the insured employee passes away, the tax-free death benefit is paid directly to the bank, helping offset the costs of employee benefits and improving the bank’s overall financial position.

Why Banks Use BOLI

BOLI is a tax-efficient asset that allows banks to maximize returns while minimizing tax exposure. Here are some of its key advantages:

• Tax-free growth: The cash value grows without being taxed during the accumulation phase, and death benefits are paid tax-free.
• Liquidity: Banks can access the cash value at any time, providing a stable, low-risk source of funds for various financial needs.
• Diversification: By investing in BOLI, banks can diversify their portfolios, enhancing financial stability.
• No surrender charges: Unlike many other financial instruments, BOLI doesn’t incur surrender charges, making it a flexible option for long-term planning.
• Tier 1 capital reserve: The cash value of BOLI counts as a Tier 1 Capital Reserve, enhancing the bank’s regulatory compliance and financial standing.

BOLI vs. Traditional Bank Investments

The returns generated from BOLI often exceed the after-tax returns of more traditional investments, such as Muni Funds, Mortgage-Backed Securities, or 5 & 10-Year Treasuries. The tax advantages and guaranteed growth make BOLI an attractive option for banks, and the strategy’s significant tax benefits are part of why banks continue to use it to strengthen their financial positions.

How You Can Benefit from BOLI-like Strategies

Just like banks, individuals can use life insurance as a powerful tool for building wealth and achieving financial freedom. By leveraging The Perpetual Wealth Strategy™, you can access many of the same benefits as BOLI:

• Guaranteed cash value growth: Build wealth with tax-deferred growth and tax-free access to your funds.
• Tax-free death benefit: Ensure your legacy is passed down without tax implications.
• Liquidity and flexibility: Access your funds whenever you need them, with no restrictions or penalties.

2. Corporate-Owned Life Insurance (COLI): A Powerful Strategy for Corporations and You

At Paradigm Life, we often highlight the power of life insurance policies as a cornerstone of The Perpetual Wealth Strategy™—a strategy designed to help you achieve financial freedom. One of the most effective tools in this strategy is Corporate Owned Life Insurance (COLI) is life insurance, a powerful asset used by corporations to maximize wealth, fund employee benefits, and optimize tax efficiency. 

How Does Corporate-Owned Life Insurance (COLI) Work?

COLI is a life insurance policy purchased by corporations to insure the lives of key employees or executives, with the company being the owner and beneficiary of the policy. The primary advantage of COLI lies in its tax-deferred cash value growth and tax-free death benefits, making it a strategic choice for businesses seeking to build financial reserves while funding employee benefits.

• Non-deductible premiums are paid by the corporation, but the cash value grows tax-deferred, which enhances the company’s overall return.
• Policy loans can be taken from the accumulated cash value, offering liquidity and flexibility. These loans can be repaid tax-free via the policy’s death benefit.
• Upon the death of the insured key employee, the tax-free death benefit is paid to the corporation, helping offset the costs of employee benefit programs or fund future corporate needs.

The Advantages of COLI for Corporations

COLI is an effective tool for corporations due to its tax advantages and ability to provide long-term financial stability. Here are some of the key benefits:

• Tax-deferred growth: Cash values accumulate tax-deferred, allowing the company to build significant wealth without paying taxes on the growth.
• Tax-free death benefits: When the insured passes away, the death benefits are paid out tax-free to the corporation, providing a financial buffer for future employee benefits or other company needs.
• Liquidity: Policy loans provide access to the cash value, which can be used to support corporate programs or manage cash flow.
• Diversification: COLI diversifies a company’s investment portfolio, offering a stable, low-risk asset compared to traditional investments like municipal bonds or mortgage-backed securities.

How You Can Benefit from COLI-like Strategies

If these strategies are effective for corporations, why not apply the same principles to your own financial strategy? By utilizing life insurance funding within The Perpetual Wealth Strategy™, you can achieve similar benefits on a personal level, including:

• Guaranteed growth: Enjoy tax-deferred growth on the cash value of your life insurance policy, similar to the returns experienced by corporations using COLI.
• Liquidity and flexibility: Access your funds through policy loans, which are tax-free as long as they are repaid from the death benefit.
• Wealth protection: A life insurance policy guarantees a tax-free death benefit for your beneficiaries, ensuring your family’s financial security.

FAQS About Decoding BOLI and COLI

What is Bank-Owned Life Insurance (BOLI) and Corporate-Owned Life Insurance (COLI)?

Bank-Owned Life Insurance (BOLI) and Corporate-Owned Life Insurance (COLI) are life insurance policies purchased by banks and corporations, respectively, to insure the lives of key employees or executives. In these arrangements, the institution owns the policy, pays the premiums, and is the beneficiary. The policies accumulate cash value, which grows tax-deferred, and provide a tax-free death benefit to the institution when the insured employee passes away. These strategies serve as financial assets for the organizations, helping them achieve tax efficiency, fund employee benefits, and improve liquidity.

What are the primary benefits of implementing BOLI and COLI for banks and corporations?

The primary benefits of BOLI and COLI for banks and corporations include:

1. Tax advantages:
   • Both policies offer tax-deferred growth on the cash value, meaning the funds grow without being taxed during the accumulation period. Additionally, the death benefit is paid out tax-free to the organization, providing a significant tax advantage compared to other investment vehicles.
2. Cash value growth:
   • Over time, BOLI and COLI policies accumulate cash value that can be accessed through policy loans or withdrawals, offering liquidity for the institution. These funds can be used to support employee benefit programs, manage cash flow, or fund future corporate projects.
3. Employee benefit funding:
   • Both BOLI and COLI are commonly used to fund employee benefits such as retirement plans, bonuses, and executive compensation. The death benefit from these policies helps offset the costs of these programs, reducing the burden on the company.
4. Financial stability:
   • As long-term, stable assets, BOLI and COLI can help enhance a company’s financial stability, diversifying its investment portfolio and providing guaranteed returns. The cash value of these policies is often considered a Tier 1 Capital Reserve for banks, strengthening their regulatory compliance and capital position.

What considerations should businesses keep in mind when considering BOLI and COLI as financial assets?

Businesses should evaluate several key factors when deciding to implement BOLI and COLI as financial assets:

1. Financial objectives:
   • Organizations need to clearly define their financial goals, such as enhancing liquidity, providing retirement benefits, or increasing capital reserves. Understanding the role BOLI or COLI will play in achieving these objectives is critical for its successful integration into the overall strategy.
2. Regulatory requirements:
   • Banks and corporations must ensure that their BOLI or COLI policies comply with industry regulations. For example, the Office of the Comptroller of the Currency (OCC) provides guidance on how banks can use BOLI, and similar regulations govern the use of COLI in corporations. Ensuring compliance helps mitigate potential legal risks and ensures the policies remain in line with financial regulations.
3. Organizational needs:
   • Businesses should consider the specific needs of their employees and how BOLI or COLI fits into their employee benefit programs. 
4. Risk tolerance:
   • Like any financial asset, BOLI and COLI come with risks. Businesses should assess their risk tolerance, ensuring the policies align with their broader financial strategy and investment approach. 

Unlock the Power of BOLI and COLI for Your Financial Future

BOLI and COLI have long been powerful tools for banks and corporations to optimize wealth-building, tax efficiency, and employee benefits. These life insurance strategies offer significant advantages like tax-deferred cash value growth and tax-free death benefits, and they can be just as effective for your personal financial strategy.

By leveraging The Perpetual Wealth Strategy™, you can apply the same principles used by large institutions to achieve financial independence, protect your legacy, and grow your wealth tax-efficiently.

Take the First Step Toward Financial Freedom

Whether you’re a business owner looking to implement BOLI and COLI for your company or an individual seeking to apply the same principles to your personal financial strategy, life insurance can be a powerful tool for achieving financial independence and building long-term wealth.

Schedule a consultation with a Paradigm Life Wealth Strategist today to learn how life insurance policies and The Perpetual Wealth Strategy™ can help you create a personalized financial plan that works for you.