The Wall Street Journal published an article in May which revealed a little known secret about the largest banks in the world.
Ok, you’re right. There are a lot of secrets your bank keeps from you, but here is one to add to your “I had no idea” list.
The secret?
Banks are some of the largest purchasers of permanent life insurance in the world. Bank owned life insurance, or BOLI, is a strategy banks use to fund executive pensions, employee benefits and healthcare costs.
BOLI is used to improve the income statement of the bank and is used for the bank to enjoy tax benefits (yes permanent life insurance is tax-free money), and finally to improve the banks financial stability.
Banks buy permanent life insurance by the truck loads. According to the article, Bank of America currently holds over $17 Billion in BOLI. The ironic part of the strategy is this; the bank is the owner of the life insurance policies, meaning they pay for it, yet they need a real flesh and blood person to be the insurable interest on whose life the policy is based.
Guess who these people are? The employees! The employees have these policies attached to them, yet do not have access to any of the proceeds.
This is not new. Banks have been buying BOLI for many years now. They all do it. Name a bank and they will most likely have BILLIONS in bank owned life insurance. In 2007 author Barry J. Dyke discussed this in his book, “The Pirates of Manhattan.”
In his book, Dyke states, “Banks own so much (life insurance) that the cash values on their balance sheets actually make them look like life insurance companies unto themselves.” He goes on to explain that “banks buy such a great deal of life insurance because it provides immeasurable economic benefits, financial stability, and safety – which are superior to the banks themselves.”
When was the last time you visited your bank and they talked to you about making sure you have a significant amount of permanent life insurance in your financial plan?
It probably has never happened. Banks do not put their own cash into the investments they sell. Go ask the president of the bank how much of the banks own money is put into IRA’s, stock or mutual funds. Can you guess what he or she will say? None. Why?
The investments that most banks sell to the public are too risky!
The banks do not want to subject their cash to the risk of the market so they stay out. They like life insurance because their cash values are safe; the life insurance company guarantees the principle. What the banks sell their customers and what they do with their own cash are two completely different things.
You know me, I like to go deep. So here is the real secret and sadness behind this story. Banks understand the value of human capital. They see the human value in their employees, especially the top 35% by pay. So much so that they open up huge insurance policies on their employees and stuff them full of cash.
They know if that employee ever dies, there will be a financial impact and they want to re-coup all the money they ever paid out to the employees via pensions or other benefits.
If a bank just put their money in a mutual fund and a retired employee dies, the bank gets nothing. By owning a life insurance policy on this employee, the bank gets all their money back that they paid out to the retired employee tax-free.
The bank understands the value of the human life but unfortunately most Americans do not.
Most people do not value their own human life, thus they never buy adequate amount of life insurance.
The human life is the number one asset. Banks know this of their employees, yet the employees do not feel the same way about themselves.
Why? According to Dyke, the reason is cost.
Americans do not value their number one asset, themselves, enough to buy as much life insurance as it makes sense.
Learn a lesson from the biggest banks in the world. The human value is the number one asset and life insurance can be a powerful tool for sustainable wealth.
