Bank Owned Life Insurance in NQ plan - Why?

[AndyH]

Can anyone explain the advantages to a Bank or Bank Executive of Bank Owned Life Insurance in a NQ plan for the executive? Other than deferral of taxation on growth of a life insurance policy (which I am admittedly skeptical about), are there any other legitimate selling points? Are there any advantages due to the banking industry's tax or capitalization rules?

Any contrary arguments?

[XTitan]

The reasons for banks owning life insurance are similar to the reasons for corporations or trusts owning life insurance for informally funding NQ plans. The banking regulators issued OCC 2004-56 to address many of the issues regarding the permissibility of banks owning life insurance.

Why the skepticism on tax-deferred cash value growth?

[AndyH]

Why the skepticism on tax-deferred cash value growth?

Thanks for the comments.

Insurance premiums, policy commissions and expenses eating at the return are my reasons.

I'm looking at a proposal that assumes 8% growth. Is that even legal now to illustrate? Is it reasonable?

[XTitan]

Ah. Skepticism fueled by economic concerns not tax law. That's legit. When it comes to an assumed rate of return on an insurance proposal, the only thing you can be sure of is that it's wrong, but you won't know by how much for another 40 years. I suppose that's true for any asset. If you want to see the mechanics of the insurance proposal at a different rate, the broker should be able to provide.

[AndyH]

But if, hypothetically the contract does earn 8%, is there any reason to do this other than:

1. Earn (8%-expenses and insurance premiums) tax deferred from now until payment date inside the contract versus earn

less

2. Earn (8% less taxes) in an after tax account (assuming the same investment mix).

The same deductible amount is paid at retirement age, right? And, at the same tax rate.

Is there anything else to this?

[rcline46]

The purpose of the insurance is if the executive should die prematurely, the bank gets tax free income to pay the deductible benefits. whattadeal!

[XTitan]

But if, hypothetically the contract does earn 8%, is there any reason to do this other than:

1. Earn (8%-expenses and insurance premiums) tax deferred from now until payment date inside the contract versus earn

less

2. Earn (8% less taxes) in an after tax account (assuming the same investment mix).

The same deductible amount is paid at retirement age, right? And, at the same tax rate.

Is there anything else to this?

From an economic stand point, you should consider the accounting attributes as well as they tend to be different between life insurance and taxable assets.

[david rigby]

When it comes to an assumed rate of return on an insurance proposal, the only thing you can be sure of is that it's wrong, but you won't know by how much for another 40 years.

Calling Ned Ryerson.

[AndyH]

From an economic stand point, you should consider the accounting attributes as well as they tend to be different between life insurance and taxable assets.

Would you or someone else kindly explain what such accounting attributes might be?

I have seen some COLI FAS #87 exhibits for example, and have not seen any differences that appeared sustantive beyond what looked like smoke and mirrors.

[XTitan]

From an economic stand point, you should consider the accounting attributes as well as they tend to be different between life insurance and taxable assets.

Would you or someone else kindly explain what such accounting attributes might be?

I have seen some COLI FAS #87 exhibits for example, and have not seen any differences that appeared sustantive beyond what looked like smoke and mirrors.

I wouldn't call it smoke and mirrors; I'd call it GAAP, which is sometimes saying the same thing.

Depending on the asset and the accounting treatment adopted, you might/might not accrue deferred tax liabilities, you might/might not mark-to-market, you might/might not have fair market valuations, etc.

[AndyH]

Thanks. I have seen references to deferred tax liabilities which to the non-GAAP mind looked like mirrors. Any GAAP minded people out there willing to explain what that means and why? Is it an internal accrual issue or does it have tax implications?

[Mark Whitelaw]

John Hancock has an excellent newly published resource piece on accounting for different types of nonqualified plans and the life insurance that may be informally funding the obligations.

http://jh1.jhlifeinsurance.com/vgn/images/...al%209-9-09.pdf

This may help. Take care - Mark

[AndyH]

Thank you. That looks great.