Bank Owned Life Insurance
The Division of Banking has received inquiries from Wisconsin state banks regarding their ability to purchase corporate or bank owned life insurance policies insuring their employees' lives. Generally, bank owned life insurance is purchased to help fund future financial obligations under a bank’s employee retirement and benefit plans.
The purpose of this Interpretive Letter is to outline the Division's position regarding a state bank's decision to purchase bank owned life insurance and to set forth guidelines addressing the due diligence considerations that should be undertaken by a bank and its board of directors when deciding to purchase this insurance.
Wisconsin state banks have been permitted to purchase and hold life insurance for a legitimate need of the bank and similarly are permitted to purchase bank owned life insurance on the lives of a group of bank employees. Such a purchase, to enable a bank to fund its future obligations to employees and retirees, addresses a legitimate need of the bank for insurance.
Because of the complexity of many of the bank owned life insurance policies and group programs, and the fact that life insurance is a form of long term financial commitment with various components of risk, banks and their boards of directors should take appropriate steps to assure they are making informed decisions about purchasing this insurance, consistent with safety and soundness principles. Risks to be analyzed which are associated with bank owned life insurance include transaction, credit, interest rate, liquidity, compliance, and price risks. These risks are discussed in detail in the Interagency Statement on the Purchase and Risk Management of Life Insurance (Interagency Statement) dated December 7, 2004.
The Division believes these due diligence and safety and soundness considerations have been adequately and appropriately addressed by the Interagency Statement. It is the position of the Division that state banks considering any bank owned life insurance purchase should also address and satisfy each of the due diligence considerations set forth in the Interagency Statement. The Division notes that the Interagency Statement requires banks not only to make and document an appropriate pre-purchase bank owned life insurance review and analysis, but also to conduct appropriate post-purchase reviews of the life insurance. The reviews should include monitoring for compliance with the investment limits of Wis. Stat. s. 221.0320.
The cash surrender values of general account life insurance policies represent the unsecured obligations of the insurance companies, therefore the carrying values of the cash surrender values in each company is limited to the investment limits of Wis. Stat. s. 221.0320.
With respect to the purchase of a separate account bank owned life insurance policy, the underlying investments within the separate account must be bank eligible investments under Wis. Stat. ch. 221. Furthermore, the underlying investments of the separate account will govern the applicable investment limitation for the separate account under Wis. Stat. ch. 221. For example, a separate account bank owned life insurance policy containing equity investments would not be considered a bank eligible investment under the banking statutes. Additionally, a bank’s initial investment and subsequent carrying value in a separate account bank owned life insurance policy containing corporate debt obligations would be limited to the amount under the statutes for a bank’s direct investment in a corporate debt obligation.
Banking Letter 47, December 20, 2001, Michael J. Mach, Administrator
Amended May 15, 2006, Michael J. Mach, Administrator