Accounting for Bank Owned Life Insurance

One of the most common questions we receive from our clients and prospective clients is regarding the accounting treatment of BOLI.  This article will review the basics of accounting for BOLI.  If you are interested in how BOLI is treated on the Bank’s call report, read our article on Reporting of BOLI on Call Reports and TFRs.

FASB Technical Bulletin 85-4 entitled “Accounting for Purchases of Life Insurance” addresses accounting for BOLI.  Only the amount that could be realized under the insurance contract as of the balance sheet date (i.e., the cash surrender value reported to the institution by the insurance carrier less any applicable surrender charges not reflected by the insurance carrier in the reported cash surrender value) is reported as an asset. Additionally, because there is no right of offset, an investment in BOLI should be reported as an asset separately from the deferred compensation liability.

FASB EITF 06-5 titled “Accounting for Purchases of Life Insurance—Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4” further clarified the issue.   The consensus report was that:  (1) contracted amounts in addition to traditional cash surrender value should be included in BOLI asset values; (2) amounts receivable only on simultaneous surrender of a group of policies (or certificates) generally are not includible in BOLI asset values; and (3) contractual restrictions on surrender do not require the discounting of future surrender values if a request for surrender does not affect cash value during the restricted period.

Example BOLI Accounting Entries

Accounting for the Initial BOLI Purchase

Initially, a bank should record as an asset on its balance sheet the “amount that could be realized under the insurance contract” as of the balance sheet date.   For the initial premium amount, the bank will set up an account on the company’s balance sheet for “Bank Owned Life Insurance/Cash Surrender Value of Life Insurance”.  Premiums paid are a non-tax-deductible expense.  The Cash Surrender Value (CSV) is recorded as an “other asset”.  The bank will debit COLI/CSV of life insurance and credit the source of the funds on the balance sheet.

An example $1,000,000 purchase would look like this:

If the policy(s) are Single-Pay, this would be the only entry.  If the policies are Multi-Pay, this entry would recur every year premiums are payable.Accounting for the Cash Surrender Value Increase from a BOLI Purchase

Once the purchase is completed, the bank should record in its income statement the change in cash surrender or contract value during the period as “an adjustment of premiums paid in determining the expense or income” for the relevant period.  The amount of the asset on the balance sheet also should be adjusted to reflect these changes.

Each month, EBN provides its clients with an online and/or securely emailed report showing the increase in cash surrender for the BOLI as a whole, by insurance carrier and for each executive who has a policy in-force.  The increase in CSV over time is booked as “other non-interest income” and is not taxable.  Each month, the bank would make journal entries as a debit to BOLI/CSV of Life Insurance to record the increase in CSV and crediting Increase in Cash Value of Life Insurance.

An example $5,000 increase in cash value for the month would look like this:

Accounting for the Death of a Participant

When the insured officer dies, the bank receives the death benefit of the insurance policy, and the cash surrender value is credited.  The company recognizes a gain for the amount of the death benefit less the cash surrender value.  The entire death benefit is received by the bank income tax free.

An example journal entry would look like this, assuming a $3,000,000 death benefit payable by the insurance company for the participant: