Why banks buy life insurance
Banks’ primary objective of buying life insurance is to acquire the benefits not available in their products and other institutions. Compared to the bank’s products that are taxable and low rates, life insurance offers a guaranteed growth, tax advantages, and a stable balance sheet with an asset that can be used as collateral.
As Frankel explained, BOLI policies are so accommodative in such a way that they have a great return compared to traditional bank investments. This is because there is a positive growth in the policies cash value and the death benefits paid out, entirely tax-free.
Bankers have spelled out the main reason to purchase BOLI is that it “provides competitive returns with superior credit quality,” According to BankDirector.com. BoliColi.com says that BOLI returns typically exceed traditional bank investments after tax by 150 to 300 or 1.5 – 3% annually. The conventional bank’s investments include the following:
• Municipal bonds,
• Mortgage-backed securities
• 5-and 10-year Treasuries.
According to BankDirector.com, in 2016 confirmed that BOLI yields range from 3.00%to 3.75% that generates a net tax equivalent of 4.85% to 6.05% for a bank that is in the 38% tax bracket. There is also a measure of strength and stability that is offered by life insurance. From a regulator’s point of view, the bank’s core capital, tier 1, should be well protected as it represents the highest quality capital.
Banks find life insurance an essential part of tier 1 because they invest in long-term stability and do not employ leverage. With this aspect, bank-owned policy cash value high quality, low-risk asset. Barry James Dyke explains that where a bank has $1 million on deposit, the company has a chance to loan up to $920,000, which makes them superior even during challenging economic times.
The financial double standard
Banks are always interested in selling their retail financial products such as checking and savings accounts, credit cards, mutual funds, and mortgages. If you insist on putting your money where they put theirs, they will not accept doing business with you. Banks use their finances for the following purpose:
• Growing of the cash reserves more times than the bank savings
• Benefit from tax-deferred growth with tax-free gains
• Faster means of building a tax-advantaged cash position than the acceptable typical retirement vehicles
• Increased stability and liquidity through building cash positions
• Preparing for future need for an increased cost
• Protection from losing key employees
Denver Nowicz of Wealth for Life explains that banks do not follow the conventional ways of investing their money, which is risky and unpredictable. Instead, they put a huge chunk of their reserves known as Tier One Capital into high cash value life insurance.