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For the past 25 years, banks of all sizes have purchased bank-owned life insurance (BOLI) to offset the rising cost of their employee benefit programs. With after-tax returns - often higher than other available investment alternatives - BOLI has maintained its reputation as a sound financial strategy with low risk.
Although hybrid products have been available, two predominant types of insurance products lead the market - general and separate account BOLI. Historically, separate account products have been the structure of choice of large banks, while community banks have traditionally purchased general account products.
Recently, however, separate account products have emerged for the community bank market with many of the same attractive features that larger bank products enjoy, making them an attractive alternative for comparison and consideration.
GENERAL ACCOUNT BOLI
From a credit perspective, general account BOLI is often thought of as a loan to the insurance company. The bank's credit risk is to the insurance company, not to any specified invested assets.
To mitigate credit risk, banks that purchase general account products typically diversify their purchase among several highly rated insurance companies. The insurance companies invest the bank's premium dollars into their general investment account, and credit...