Tax Benefits and Pitfalls of Bank-Owned Life Insurance

Oct 31, 2020
Tax and Accounting


Welcome to Life Designers - the leading experts in life design consulting and coaching. In this comprehensive guide, we will explore the tax benefits and potential pitfalls associated with bank-owned life insurance (BOLI). Whether you are a business owner or an individual considering BOLI, understanding the tax implications is crucial. Let's dive into the important details.

What is Bank-Owned Life Insurance?

Bank-Owned Life Insurance, commonly known as BOLI, is a type of life insurance policy purchased by banks or other financial institutions to cover key employees. It serves as a financial asset on their balance sheets, helping them recover costs associated with employee benefits and providing death benefit protection.

Tax Benefits of Bank-Owned Life Insurance

1. Tax-Deferred Growth

One of the significant advantages of BOLI is the potential for tax-deferred growth. The cash value within the policy grows tax-free as long as it remains within the policy. This allows banks to accumulate significant cash reserves over time, helping to offset costs and liabilities.

2. Tax-Free Death Benefit

Upon the death of the insured key employee, the bank receives a tax-free death benefit payout. This provides financial protection to the bank and allows for the smooth transition of key positions without impacting the balance sheet.

Considerations and Potential Pitfalls

1. Tax Treatment on Policy Termination

It's important to note that if a BOLI policy is terminated prior to the death of the insured employee, the accumulated cash value may be subject to immediate taxation. Understanding the tax implications in such cases is crucial to avoid unexpected tax liabilities.

2. Compliance with IRS Guidelines

The IRS has specific regulations surrounding the purchase and taxation of BOLI. It's essential to ensure compliance with these guidelines to avoid any penalties or adverse tax consequences. Consulting with tax professionals experienced in BOLI is recommended to navigate these complexities effectively.


Bank-Owned Life Insurance can provide significant tax benefits and financial protection to banks and financial institutions. However, navigating the complexities surrounding its tax implications requires in-depth knowledge and expertise. At Life Designers, we specialize in providing top-notch life design consulting and coaching services, including comprehensive guidance on bank-owned life insurance and its tax implications. Trust our experienced team to help you optimize your financial strategies and make informed decisions. Contact us today and take the first step towards a brighter financial future!

Joseph Carroll
Amazing guide! Learned so much about the tax benefits and pitfalls of bank-owned life insurance.
Nov 11, 2023