By R. David Fritz, Jr., CLU® and Pat Marget J.D., CPA, CFP®, CLU®
2023 was an unprecedented year in banking with a sharp increase in interest rates being the lead story. Banks faced new dynamics in navigating the spreads between pricing loans and deposits, as well as dealing with liquidity challenges. With all of the changes in interest rates, it is a good time to review the impact on existing and new Bank Owned Life Insurance (BOLI) yields.
Many of those who own BOLI, have seen how well BOLI performed during the prolonged, low interest rate environment from 2008 through 2022. For many banks, BOLI was one of their better performing assets. When interest rates spiked in 2023, existing inforce BOLI yields initially lagged due to how rapidly rates rose, but now we are seeing inforce BOLI yields increasing.
In addition, new BOLI yields have increased substantially with the spike and first year yields are at 15–20 year highs. Today is an excellent time to look at BOLI as banks have seen this asset stress-tested and succeed in very extreme interest rate environments.
BOLI provides a community bank with access to unique asset classes offered by the highest-rated life insurance carrier’s General Account investment portfolio. These portfolios do not directly correlate with other bank assets, giving the bank excellent diversification and access to asset classes it otherwise would not own, such as private equity, common stocks, and real estate.
Lastly, you cannot argue with the inherent earnings advantage of a tax-free asset like BOLI. With the U.S. national debt over $30 trillion, there is tremendous pressure to raise corporate and personal tax rates when the current rates sunset in 2025.
We realize some banks have struggled with liquidity and BOLI has not been in the plan. For some banks, this issue is softening. As you work through your 2024 budget, it is a good time to review your BOLI.
Fritz, Jr. is Managing Partner and Marget is Managing Director at Executive Benefits Network (EBN), a WBA Bronze Associate Member.