What Do Banks Buy? (BOLI)
Did you know that most financial institutions spend a lot of time and money trying to convince people that whole life is a bad place to hold money? Remember, they spend billions advertising each year, and have an amazing level of control over content that is distributed. The financial media gets their information from Wall Street, so they believe what these institutions preach.
They also train legions of advisors to repeat this idea that whole life is a bad place for money. I (Wes) was one such advisor early in my career and simply repeated what I was told: that these whole life products were dinosaurs and terrible investments. I wasn’t trying to lie to anyone, but I didn’t understand the policies and I could see that they had terrible cash value in the early years, so who was I to question this big financial advisory firm who was training me?
You have to understand that these firms don’t distribute whole life insurance. They might get into the term or universal life business. These businesses are much easier to enter, all you have to do is hire some underwriters and keep some money in reserves, and unlike whole life, their business isn’t owned by the policy holders. And term insurance is extremely lucrative because 99% of the policies lapse and never pay out a benefit. In other words, they’re pure profit. Since the institutions primary goal is for you to invest in their mutual funds, or CD’s, they are surely not going to send you to the sleepy mutual whole life company who has been doing the same boring business for over a hundred years. Like all financial institutions, they want all your money in their products!
So considering all the hype about what a horrible deal whole life insurance is, they obviously wouldn’t own it themselves, would they? WRONG! They own more of it than anyone! Banks purchase so much whole life insurance that many of the life insurance companies have entire branches set up to cater to them and they have their own separate name – Bank Owned Life Insurance (BOLI). Many of these banks have standing orders to buy as much of it as they can.
Every one of these large banks has far more money and resources than you have. So why do they own whole life insurance? It’s because a good bank (one that makes prudent and wise money management decisions) has a very similar philosophy to what we are teaching you here.
The bank’s main business is risky. Now, if they’re good at what they do, they analyze the risk and take on only really good quality risk, and they then diversify across many projects so that even when one goes bad, they have many more that are profitable. But they still need a certain amount of safe and secure capital in reserve.
Banks call this Tier One Capital. The most important thing is that this money is safe and secure. After this, they look for the highest yield possible. Tax advantages. Death benefits. Professional Management. These are all things that whole life provides them. The banks know that good Mutual Life Insurance companies are better at managing safe money than they are and so they use this expertise. Shouldn’t you?
A great book that goes into far more detail on this subject is “Pirates of Manhattan” by Barry James Dyke. The chapter on this subject details many of the nation’s largest banks and the exact amount of their whole life holdings (the large banks we work with are all on this list). There’s also more detailed information as well as nice stories such as the one from the bank CEO who admitted that his bank’s BOLI holdings were their best performing asset!
This is Part 8 in a series on Whole Life Insurance. You might want to read the introduction to this series which will link to each post in the explanation of whole life and Ben’s story showing how whole life is used in a variety of ways in his life.
Photo credit: swisscan(away)