General Account BOLI

General Account BOLI offers broad asset diversification, subject to the claims of general creditors, which include minimum annual interest guarantees from the carrier. Cash value is not subject to market fluctuation or asset default.

A fixed interest rate is credited annually to each policy, based on the expected return of the assets purchased by the insurance company, less a margin for expenses; the rate may be indexed. Cash values are backed by assets in the general account of the insurance carrier.

Separate Account BOLI

Separate Account BOLI features assets protected from the general creditors of the carrier in the unlikely event of insolvency. Unlike a general account contract, cash value of a separate account contract may be invested in different asset strategies. In essence, this means changes in market value could have a direct impact on the policyowner's balance sheet and income statement - unless a stable value contract is included.

The interest rate credited to a separate account BOLI plan provides a variable yield, based on the return of the underlying policy assets, less a margin for expenses, and are segregated from other carrier assets in a separate account. These assets back policy cash surrender values, owned by the bank.

Hybrid BOLI

While Separate Account BOLI offers more flexibility than General Account, Hybrid BOLI offers reduced minimum purchase requirements, a guaranteed minimum crediting rate, various risk-based capital alternatives, choice of investment subaccounts, asset protection from the carrier's creditors, bundled or explicit pricing and, importantly, portfolio or new money crediting rates.

Importantly, BOLI is an allowable transaction under OCC 2004-56, and is usually funded by an asset sale or liquidation. Potential insureds for BOLI are restricted to "highly compensated" officers and/or directors, according to federal law and state insurable interest rules.  Guidelines suggest maximum holdings should not exceed 25 percent of capital. BOLI is subject to the potential impact of proposed tax legislation.

Policy Changes & 1035 Exchanges

A 1035 exchange permits an exchange from one policy to another on a tax-free basis, when certain criteria are met:

     1) Policies are exchanged from one carrier to another

     2) Only active insureds (highly compensated employees/directors) are exchangeable

     3) New consent forms must comply with applicable law

While a 1035 exchange is usually done to improve plan performance, risk weighting or credit exposure, there are many considerations in play including impact on benefits plans, projected long-term performance of the new product, and outcomes of new underwriting, to name a few.

Participation in any contract or program demands internal due diligence and a full suitability analysis based on each client's situation. Clark consultants assist current clients in sorting out concerns about potential exchanges.