Banks are expected to maintain a comprehensive risk management process for purchasing and holding bank owned life insurance (BOLI), including ongoing monitoring and board oversight consistent with safe and sound banking practices. While many institutions conduct an annual BOLI review to satisfy supervisory expectations, leading practices treat the annual review as one component of an ongoing governance and monitoring program, not a once‑a‑year snapshot.
Because bank owned life insurance is typically a long‑duration balance sheet asset, banks benefit from reviews that evaluate both current performance and forward‑looking risks, including interest‑rate sensitivity, carrier credit fundamentals, concentration levels, liquidity constraints, and compliance considerations.
The Bank Owned Life Insurance Asset
Bank owned life insurance is often purchased to help recover and offset employee benefits and compensation costs and can support strategies such as benefit financing, key person coverage, and certain split‑dollar arrangements when structured appropriately. As the interagency guidance makes clear, the board must understand the role the asset plays in the institution’s overall strategy and the complex risk characteristics that come with holding life insurance contracts over long periods.
From a supervisory standpoint, “well‑managed” bank owned life insurance programs demonstrate:
- Effective senior management and board oversight.
- Comprehensive policies and procedures, including appropriate limits.
- A thorough pre‑purchase analysis.
- An ongoing system of risk assessment, monitoring, internal control, audit, and compliance.
Examiners evaluate not only what the bank owns, but how the bank governs the program, especially as bank owned life insurance holdings become material to earnings or capital.
What a Modern Bank Owned Life Insurance Annual Review Should Answer
A regulator‑aligned annual review should help the bank answer two practical questions:
- What is the present and projected return on the premium invested?
- What risks could impair the return on — or return of — capital tied to the BOLI program?
Today, examiner procedures emphasize that banks should have policies addressing objectives, permissible products, pre‑ and post‑purchase requirements, tax/accounting/regulatory considerations, per‑carrier and aggregate cash surrender value (CSV) limits, vendor/service provider oversight, and annual reviews by audit/compliance functions.
The Critical Element: Crediting Rate Dynamics and Portfolio Support
For most banks, interest earnings credited to BOLI policies remain a primary driver of cash value growth and reported non‑interest income. Ongoing risk management should therefore focus on both:
- The policy crediting mechanics and current credited rate environment.
- The carrier’s underlying investment portfolio and its ability to sustain crediting over time.
Why “In‑Force Projections” are No Longer Optional in Best Practice
Interagency guidance encourages institutions to analyze projected policy values using multiple illustrations and assumptions, including ranges of interest crediting and mortality assumptions. A modern annual review should incorporate updated in‑force projections to assess:
- Whether projected cash value growth remains consistent with program goals.
- Whether a sustained change in credited earnings could create performance risk.
- Whether policy design features (e.g., surrender charges) create liquidity constraints.
Bank Owned Life Insurance Annual Review: A Regulator‑Aligned Checklist
Below is a structured checklist reflecting current supervisory emphasis on governance, controls, and documentation.
1. Governance and Policy Compliance
Confirm the bank’s bank owned life insurance policy addresses (and the program reflects):
- Objectives and permissible products
- Pre‑ and post‑purchase analysis requirements
- Aggregate and per‑carrier CSV limits
- Board/committee approval practices
- Independent review/audit expectation
2. Concentration and Limits (CSV)
Review total CSV as a percent of capital (and trends), per‑carrier CSV concentrations and any exceptions to policy limits and how they were approved and documented.
Interagency guidance notes it is generally not prudent for an institution to hold BOLI with aggregate CSV exceeding 25% of capital and expects board/committee approval when acquisitions result in aggregate CSV above that level (or above the bank’s internal limits).
3. Carrier Credit and Ongoing Due Diligence
Document carrier review practices, including, carrier financial strength monitoring, any changes in carriers outlook that could affect credited earnings and replacement/exit considerations and switching costs.
4. Accounting, Reporting, and Accuracy Controls
Confirm GAAP treatment and appropriate financial reporting, accuracy of CSV reporting for regulatory filings, proper classification of earnings in noninterest income reporting.
FDIC examiner procedures also reference GAAP expectations applicable to insurance contracts and emphasize validation of reported CSVs.
5. Risk-Based Capital Treatment
Modern reviews should confirm the bank’s capital treatment is consistent with the product design:
- General account bank owned life insurance typically receives a 100% risk weight.
- Separate account bank owned life insurance is risk weighted based on permissible underlying assets, subject to constraints such as a 20% floor in the applicable “look‑through” approaches described in supervisory materials.
6. Legal/Compliance: Insurable Interest and Consent
Confirm documented controls around insurable interest requirements under applicable state law and insured party consent requirements and related documentation practices.
7. Audit/Independent Review and Board Reporting
Ensure audit/compliance review is performed at appropriate frequency and scope, findings are reported to the board or a designated committee and remediation is tracked and documented.
FDIC procedures also emphasize board reporting on significant risks such as new purchases, concentrations, exceptions, audit/regulatory reports, and complaints or threatened litigation.
What’s Changed Since 2004 and Why It Matters Now
The 2004 Interagency Statement remains foundational, but the supervisory environment and expectations for documentation, governance, and risk framing have evolved.
- Examiner Playbooks Are More Operational and Evidence‑Based
- “Ongoing Monitoring” Has Become the Standard (Not Just Annual)
- Capital Rule References Are More Specific (General vs. Separate Account)
- Supervisory Language Around “Reputational Risk” Has Shifted
- Documentation Expectations Are Higher
A Strategic Approach: How NFP Helps Banks Strengthen Bank Owned Life Insurance Governance
In today’s environment, banks benefit from a BOLI review process that supports both:
- Supervisory readiness (clear, consistent documentation and controls).
- Strategic oversight (forward‑looking projections and scenario awareness).
NFP’s executive benefits and banking advisory teams help institutions structure and maintain bank owned life insurance programs with disciplined governance
