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In the past four years that Ben McCoy and I have been working and educating Michigan bankers on the use of BOLI (an acronym for Bank-Owned-LifeInsurance), we have not seen more interest in this subject than this past year. The awareness that BOLI can be effective for financing employee benefit expenses or that it can enhance a bank's bottom line and increase shareholder value has never been higher.
For years large banking institutions have recognized the benefits of BOLI, buying large amounts for the main purpose of enhancing their income statement through increased after tax yields.
A BOLI program custom designed for the bank produces an initial tax equivalent yield of approximately 150 to 200 basis points greater than a bank investment with similar characteristics depending on the tax rates. Most BOLI purchases produce cash on cash yields ranging from 5.5 percent to 6.75 percent (based on current market rates). This corresponds to a tax-equivalent yield of 8.00 percent to as high as 11.00 percent depending upon the banks effective tax rate, the insurance company(ies) selected, premiums deposited, and the ages of the insured individuals. The tax code excludes the cash value increase and the eventual death proceeds from taxation.
The BOLI policy is an...