Purchase of Bank Owned Life Insurance

PURPOSE: The Division of Finance routinely receives inquiries about the purchase of life insurance. Some bankers indicate they have considered purchasing life insurance policies and treating the cash surrender value as a significant portion of the bank’s capital account. A bank may, within the bank’s incidental powers, purchase life insurance reasonably related to a legitimate bank interest. A bank may not purchase life insurance for investment purposes. This rule sets guidelines for the purchase of bank owned life insurance. (1) The powers and authorities of banks and trust companies (bank) are set out in section 362.105, RSMo. This statute is specific in the type of investments authorized by banks and it does not include the purchase of life insurance for the bank’s own account as an investment. Accordingly, any purchase of insurance is allowed only if it is within the incidental powers of a bank or it is reasonably related to a legitimate bank interest such as the interest in protecting itself against loss. (2) A bank may purchase life insurance to indemnify itself against the loss of key management personnel. The amount of insurance purchased must be reasonable in relation to the size and needs of the bank. Also, the board of directors must document the basis upon which it determines who qualifies to be covered by the insurance. The board must document the basis for determining the amount of insurance needed to indemnify the bank against the death of each individual. The bank must document and be able to demonstrate an insurable interest and a legitimate insurance need when insuring a key person. The authority to hold such a policy lapses if, because of a change in employment status or responsibilities, the individual is no longer considered a key person. (3) A bank may purchase life insurance in conjunction with providing employee compensation and benefits or when the insurance is paid in part to the bank and to the employee, which is commonly referred to as split dollar insurance. A bank may also purchase life insurance in connection with an employee compensation and benefit plan. The bank’s funding obligation must be reasonable and the projected cash flow from a life insurance policy must not substantially exceed the projected liabilities to fund the compensation or benefit program. Such life insurance policies may be held only so long as the bank’s liability under the associated compensation or benefit plan continues. (4) A bank may purchase, at the bank’s expense, insurance on the life of a borrower to protect its interest in the event of the death of the borrower. The maximum amount of insurance should not exceed the principal balance of the borrower’s obligation. Similarly, a bank may take security interest in an existing policy. In no event may the bank’s decision to make a loan be based on the availability of the insurance proceeds for repayment of the loan. (5) Accounting for bank owned life insurance policies must be consistent with the requirements of generally accepted accounting principles. However, in no event may a bank carry the value of that policy as an asset on its books in an amount which exceeds the current cash surrender value of the policy. (6) The cash surrender value of the policy represents funds due from a corporation and therefore may not exceed the limit on loans to one (1) borrower set by section 362.170, RSMo. The legal loan limit also will apply to the aggregate book value of all policies, including subsequent earnings, which are purchased from the same company. The bank should examine the financial condition of the insurance company before purchasing the policy and maintain access to and periodically review recent financial statements of the insurance company. Finally, if the aggregate cash surrender value of all these policies owned by the bank is large in relation to the bank’s total capital account, these amounts will be considered a concentration of credit. AUTHORITY: sections 361.105, RSMo 2000 and 362.105, RSMo Supp. 2001.* This rule originally filed as 4 CSR 140-2.055. Original rule filed Aug. 22, 1991, effective Feb. 6, 1992. Amended: Filed Jan. 16, 2003, effective Aug. 30, 2003. Moved to 20 CSR 1140-2.050, effective Aug. 28, 2006. *Original authority: 361.105, RSMo 1967, amended 1993, 1994, 1995 and 362.105, RSMo 1939, amended 1949, 1963, 1965, 1967, 1977, 1983, 1986, 1990, 1991, 1992, 1995, 2000, 2001.