Banks implement long-term employee benefit plans to attract, retain, and create incentives for their most important asset – people. Benefit plans, such as deferred compensation plans and executive life insurance, can be important components of the compensation of managerial talent. It is common to fund these promises with bank-owned life insurance (BOLI).

With the passage of time, these plans, related technical requirements, and IRS rules can be puzzling. The product rules and economics of the BOLI policies can also become confusing. Ultimately, both the benefit plans and the BOLI need to be well understood and the two need to optimally work together. However, this is not always the case.

The current management team line-up may be quite different than it was five years ago. Benefits that the current team values could be quite different than the benefits the previous team valued just five years prior. In addition, the goals that a bank needs their upper management team to meet may be much different than the goals five years ago, but the related long-term incentives may be rewarding the achievement of the old obsolete goals. Insurance products, insurance company credit risk, and mortality assumptions have all changed in the past five years as well. Finally, the current amount of insurance could be too much, too little, or just inappropriate to fund the expected long-term employee benefit plan liability.