OLYMPIA, Wash. The state Division of CUs has approved requests from state chartered credit unions to buy key-person insurance, also known as bank-owned life insurance, a popular retirement benefit held by banks known as BOLI, absent specific regulatory approval.
In a new interpretative statement, Linda Jekel, director of credit unions for the Department of Financial Institutions, said state charters may start buying so-called BOLI policies beginning May 1 without permission from the regulator, as long as they meet certain conditions laid out by NCUA for federal charters. Under those conditions credit unions must create a segregated trust to handle the individual life insurance obligation; the investment must be solely for funding an employee benefit plan obligation; and the credit union may hold the obligation only as long as the period during which it has an actual or potential obligation under the plan.
These conditions were set by NCUA for federally chartered credit unions, so Washington charters may conduct similar transactions under the state’s parity statute, according to Jekel.
Banks’ investments in BOLI became controversial in the 1990’s because many banks used the premiums they paid as tax shelters, with some banks investing significant amounts of capital.
The credit union regulator set certain restrictions, such as a finding that an investment in BOLI would amount to an unsafe or unsound practice. In that case, wrote Jekel, the state regulator could bar the credit union from buying the policy or could order a divestiture.
