Bank-Owned Life Insurance - BOLI

A form of life insurance purchased by banks where the bank is the beneficiary, and/or owner. This form of insurance is a tax shelter for the administering bank, as it is a tax-free funding scheme for employee benefits.

Banks use BOLI contracts to fund ever-increasing employee benefits at a much cheaper rate. The process works like this: the bank sets up the contract, and then makes payments into a specialized fund set aside as the insurance trust. All employee benefits that need to be paid to particular employees covered under the plan are paid out from this fund.

All premiums paid into the fund, as well as all capital appreciation, are tax free for the bank. Therefore, banks can use the BOLI system to fund employee benefits on a tax-free basis.