“…The banking industry – one of the most powerful and influential industries in the United States – has a deep affection for cash value life insurance and treats it like a golden asset.”– Barry James Dyke, “Cash Value Life Insurance: Contempt Prior to Investigation”
As we watch the economy play out over 2020, it’s important not to get too sidelined by what the stock market is doing. It’s also important that we watch the banks—what they’re doing and not doing. And how to save money as they do.
If you’ve paid any mind to them over the last few decades, you’ll realize that banks have a history of being about as certain as the unsinkable Titanic was in 1912. Yet since 2008, banks have funneled a great deal more of their new money into a traditional product designed to provide more protection, security and profits. The exact kind of product that can weather unpredictable times such as these.
The Double Standard of Banks
You can walk into any bank and secure a number of financial products—checking or savings accounts, CDs, credit cards, mutual funds, and loans. Yet the banks won’t sell you the one financial product where they store much of their own money. One that they use to:
- Protect and accumulate cash
- Avoid taxes on gains and windfalls
- Shield against loss and the unexpected
- Inflation-proof their funds
- Fund programs for employee benefits
The product in question is high cash value life insurance with a mutual company. In the banking industry, it’s known as BOLI—Bank-Owned Life Insurance.
This life insurance helps the banks meet their capital requirements, fund their employee benefits, and much more. Commonly, this is insurance that banks buy on their executives and key employees.
The majority of banks in the United States have BOLI, which is held as an asset of the bank (different from policies established for the benefit of the insured employee). The practice was first established in the 1980s, and has steadily increased. Why? Because banks quickly discovered that BOLI far outperforms the assets that banks sell to their own customers.
BOLI is a type of Corporate-Owned Life Insurance (COLI).
The banks actually owns the life insurance contract, pays the premiums, and is usually the beneficiary upon the death of the employee. Payments are made into a trust account, the proceeds of which pay the employee’s benefits.
These policies are a bit different than the type of policy you might purchase as an individual, although there are major similarities between it and a traditional whole life insurance policy. Similar to whole life, BOLI policies have a cash value and a death benefit. However unlike most whole life policies, these bank-owned policies are single premium MECs (modified endowment contracts), which means that they can incur penalties when loans are taken against the policies, or if the cash value is surrendered.
As such, BOLI is often a long-term investment that is rarely leveraged or surrendered. Most similar to this is a single premium whole life policy, which is also a MEC.
And while whole life insurance can be used to fund anything through policy loans, BOLI is highly regulated. As such, it’s used almost exclusively to offset the costs of benefit packages. In spite of the common misconception that banks are profiting off of the deaths of their employees, BOLI is a tool which benefits employees. BOLI policies can fund health insurance premiums, 401(k) employer matches, paid vacations, and retirement packages.
The Benefits of BOLI
So why are banks funneling a sizeable portion of their funds into BOLI? Because BOLI can produce returns that they couldn’t otherwise achieve. And as with traditional whole life insurance, there are a number of other benefits besides.
The top advantages of BOLI:
- Superior returns compared to typical banks products
- Low risk and high liquidity, which is essential in a bank’s ability to lend
- Cash value grows tax-deferred, and is never taxed if held until death
- Diversifies the bank’s portfolio
- Cash values won’t decrease if interest rates rise
- Some policies offer minimum performance guarantees
- Tax-free death benefit can help a bank manage the loss of a key employee
- Allows them to offer better benefits, and attract and retain quality employees
- Cash values are backed by the highest rated insurance companies in the nation
The Disadvantages to BOLI:
- They are MECs, which means they can incur penalty fees and taxes for early surrender or policy loans
- Less favorable tax treatment as MECs (though efficient cash value growth)
- Policies can be sold any time, yet the gains are taxable and incur an additional 10% penalty on gains
- Considered long-term assets on a bank’s balance sheets
- If the credit quality of an insurer decreases over time, risk can be increased
- There’s no guarantee that tax-free gains of a BOLI held to maturity will not be challenged.
BOLI is a topic that is largely ignored in the world of finance, yet deserves more recognition. When we understand how our biggest financial institutions get returns, and where they place their trust, we can make more informed decisions.
Lessons from BOLI on How to Save Money
Your family isn’t a business, nor a bank, though we always encourage individuals to begin seeing their finance as their personal economy.
So how do you apply this information to your own Prosperity? For starters, banks and other institutions who have financial certainty often employ this advice:
- Think long-term, and avoid speculation
- Anticipate and strategize for the unexpected—don’t simply hope it won’t happen to you
- Save your money in vehicles that outpace inflation
- Seek to build equity in assets like life insurance and real estate
- Don’t equate more risk with more reward. It’s simply risk.
- Reduce taxes where possible—it’s less about how much you make, and more about how much you keep
- Cash flow is king
- Liquidity is essential (if you can’t use your dollars, what are they doing for you?)
- And rule #1…don’t lose money
The trick to finding Prosperity is to do what the wealthy (including institutions like banks) actually do, rather than what they tell investors to do. While there’s a lot of criticism for whole life insurance, the foundation of our financial system is built upon cash value insurance. It’s worth considering why.
In 2008, and now again in 2020, it’s become apparent that short-term thinking with short-term profits has failed. Now, with decades of BOLI in the books, the jury is out. Cash value insurance can withstand financial crises. It can strengthen a bank’s balance sheet and bring certainty, protection, long-term gains, and favorable taxation.
To make your own personal economy more prosperous in the long run, and more certain in uncertain times, look to a flexible product such as high cash value whole life insurance. This is the “banker’s secret” that can launch you into Prosperity.
If you’re interested in speaking with someone who can help and teach you how to save money like the banks, seek out a Prosperity Economics Advisor.