BOLI Pays Banks Before and After Executive Deaths

by Sam Eifling  on Monday, May. 3, 2010 12:00 am  

Dudley surmises that changes in the structure of BOLI spurred its recent growth, from general account to separate account investing. The general account gives the insurance company full control of the premium. Any investments the insurer makes with that premium, then, are out of the bank's hands - and therefore amount to a risk the bank can't adjust.

"In the middle part of the 2000s," Dudley said, "big banks had started looking at separate account, and it trickled down to community banks." Separate account allows banks to adjust the allocations of those holdings. A bank might, then, choose to divide the premium among government securities, mortgage-backed securities and the insurance company's general fund. "The bank, by regulation, can look through to the investment in those funds and adjust their risk weighting," Dudley said. "That can be of real value to them."

'Dead Peasant' Insurance

The yields are attractive enough to some companies to take out life insurance on employees, often without the workers' knowledge. A 1996 memo churned up in a suit against Winn-Dixie for making itself the beneficiary for 36,000 employees' life insurance policies gave this practice a ghoulish nickname: "Dead Peasant" insurance, a phrase coined by one of the grocer's attorneys. Wal-Mart Stores Inc. of Bentonville, among other companies, came under fire for similar actions.

The Pension Protection Act of 2006 outlined best practices for BOLI and its corporate-owned cousin, COLI, designating income from death proceeds as tax-free income so long as the insured is notified and signs off on the policy, and is among the most highly compensated employees of an institution.

Failing these conditions, any payouts from the policies won't be tax free, a provision that Myers said was meant to discourage a company from taking out policies without consent. "Every court that I've been in front of has usually held that Wal-Mart doesn't have an insurable interest in the lives of rank-and-file employees, absent something like written consent," the attorney said. "Just taking out a policy on a rank-and-file employee without their written consent would be illegal in most states."

But for many bank executives, at least, that arrangement works out much more favorably.



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