Bank-Owned Life Insurance

Bank-owned life insurance is similar to corporate-owned life insurance, with the only major difference being that a bank, instead of a corporation, owns bank-owned life insurance.
Life insurance provides financial protection for your family’s future in the event of your passing.

Though life insurance is available independently, it is not the only way to get coverage. Many companies, and in this case banks, use life insurance coverage for their employees. Bank-owned life insurance is a bit more complicated than individual polices, which is why it is important to contact your bank or your independent life insurance agent to learn the specifics for your individual situation.

Originally bank-owned life insurance was purchased on the lives of major employees and higher executives to protect them against the cost they may face when losing the employee to an unexpected death. When a bank loses an essential employee there is the cost of recruiting and training replacements, or in the case of an owner’s death the stock of the company or bank may be affected. This kind of coverage is commonly known as key person insurance.

Bank-Owned Life Insurance has since progressed and now it insures a broad range of employees as part of the general hiring requirements with the employee’s consent. Bank employees sign documents for life, health and welfare coverage agreements.

The Difference with Bank-Owned Life Insurance

Bank-Owned Life InsuranceWith Bank-Owned Life Insurance, the bank is either the total or partial beneficiary of the policy and the employee group is insured under the policy.

It is not the same as a group life insurance policy because with Bank-Owned Life Insurance is designed to protect the employees and their families and not the bank itself. In addition to the key person coverage option, there is also split-dollar life insurance policy, which lists the bank as the beneficiary for the amount of the premium paid, with the remainder going to the employee who is insured on the policy. In most cases the death benefit of Bank-Owned Life Insurance is used to buy some or all of the shares of the company stock owned by the deceased. It is also used as a means of recovering the cost of funding for various types of employee benefits.

The tax rules for Bank-Owned Life insurance polices are complicated and vary from state to state. There are some general criteria that policies must follow in order to retain their tax advantaged status including the following: they can only be purchased by the highest-compensated third of employees, any employee that is insured must receive written notification before purchase of the policy of the company’s intent to insure the employee and also the amount of the coverage. Lastly the employee also must receive written notification if the company is a partial or total beneficiary of the policy.

Bank-Owned life insurance is used by banks to protect themselves and their employees. Its tax rules are complicated and complex, making it important for people to contact their local independent life insurance agent to help figure out the state specific rules.

BOLI is a highly specialized program involving the strict definition of life insurance, tax laws, employment rules and regulations and general law. It is not to be taken lightly, especially when toted as a “retirement” program.

Although a BOLI is a legitimate use of life insurance in many circumstances, there is a great deal of room for misuse and misunderstanding under a BOLI policy.

A Student Loan System Stacked Against the Borrower

That’s how Patrick Wittwer, 31, described his experience trying to repay his roughly $50,000 in student loans. Between misdirected payments by one of the companies servicing his loan and the abusive collection tactics he encountered when he fell behind, Mr. Wittwer said the repayment process simply seemed stacked against him.
A 2008 graduate of Temple University with a degree in media arts, Mr. Wittwer is not alone in his experience. Consumer advocates say student-loan servicers often make an already heavy debt load even more burdensome for borrowers.
A report issued late last month by the Consumer Financial Protection Bureau supports this view. Even though the economy and labor market have improved, student loan borrowers are experiencing high distress levels compared with borrowers with other types of consumer debt, the government report found. More than one in four student loan borrowers are delinquent or in default on their obligations.
In the aftermath of the financial crisis, we learned repeatedly about dubious practices among mortgage servicing companies that made it harder for homeowners trying to repay or renegotiate their loans. Now, similar horror stories are emerging about the companies servicing student loans.
Some 41 million Americans owe $1.2 trillion in student loan debt. The median debt burden among borrowers was $20,000 in 2014, up from $13,000 in 2007.
Companies servicing these loans manage borrowers’ accounts, process their payments and enroll them in alternative repayment plans, including those based on a fixed share of the borrowers’ income. Among the biggest companies are Navient, Great Lakes and Discover Bank.
The Education Department has contracts with 11 loan servicers. But with no federal standards governing these activities, student-loan servicers have great leeway in their practices. Making matters worse, borrowers are not allowed to choose their servicers, so if they encounter problems, they cannot take their business elsewhere.
“Good loan servicing is expensive,” Maura Dundon, senior policy counsel at the Center for Responsible Lending, said in a recent interview. “It requires reaching out and talking to people, and servicers don’t do it because they don’t get compensated for that. This is the fault of servicers, but it’s also the fault of the Department of Education for not writing this into their contracts.”
Denise Horn, a spokeswoman for the Education Department, said the agency continues to strengthen the federal direct loan program “to ensure all students and families receive the highest quality support from their federal loan servicers.” She added: “Everyone needs to do more to protect student loan borrowers — including servicers — and we’ll continue to take steps to strengthen the program and enhance oversight.”
A recent questionnaire by Young Invincibles, a research and advocacy organization focused on advancing economic opportunity for young adults, points to some of the weaknesses in student loan servicing.
One common borrower complaint among the roughly 1,200 people who responded to the survey was that servicers simply fail to follow instructions. Borrowers hoping to reduce both the cost and the length of their repayment period, for example, often ask servicers to steer payments toward higher-cost loans first. In a number of cases, recipients said, the companies ignored these requests.
“For servicers to ignore or do the opposite thing that a borrower would request is indicative of something very negative going on in the industry,” said Jennifer Wang, policy director at Young Invincibles.
Improper levying of late fees was another practice cited by those shouldering student loans. So were losing paperwork and making repeated requests for documentation.
Perhaps the biggest problem cited by borrowers and their advocates was the failure of student loan servicers to advise their customers of the full array of repayment plans available to them. In many cases, this means borrowers do not know they are eligible for loan relief and do not receive it.
Such relief includes repayment plans for federal loans based on a borrower’s income and family size, or debt forgiveness programs for borrowers who work in public service. Military service members also have a right to a lower interest rate while they are on active duty.
But many eligible borrowers don’t hear about these options, advocates say. An August report from the Government Accountability Office estimated that 51 percent of student loan borrowers nationwide are eligible for income-based repayment plans, but only 15 percent are enrolled.
Rather than offer one of these programs, servicers often suggest loan forbearance, in which the borrower stops making payments temporarily. But because interest keeps piling up on the loan during the forbearance period, this is an expensive alternative. And some private student loan servicers charge a $150 fee to put an account into forbearance.
Servicers say the complexity of federal student loan arrangements creates problems both for their workers who must try to explain these deals and for borrowers who need to understand them.
But servicers receive $600 million a year for their work, and explaining loan terms is surely one of the jobs they are being paid to perform. “For a servicer to see a student loan borrower struggle and not help them get into the right repayment plan is a huge customer service failure,” Ms. Wang said.
It is also a taxpayer risk, given that such practices raise a borrower’s potential to default.
Mr. Wittwer, who lives in Philadelphia, said he had encountered difficulties with some of his loan payments even though he arranged for them to be deducted automatically from his bank account last year.
“After six or seven months, I get a late notice for my federal loans and I go in to my bank and double-check that the loan was being paid,” he said. “My loans had been transferred to another office, but the original office had kept collecting it.”
It took about a month to fix the problem, Mr. Wittwer said. “You have to be hypervigilant about it because student loans are constantly being sold and moved.”
Ms. Dundon of the Center for Responsible Lending said that the Education Department had fixed some of the problems in its servicing contracts but that financial incentives were still misaligned in certain areas. For example, service companies receive more money if the loans they oversee are being paid off, and less if borrowers stop paying. While this system encourages servicers to keep borrowers current — a good thing — it discourages them from working with borrowers who fall behind.
Mr. Wittwer said he is currently paying $756 a month on his student loans, the minimum amount. He acknowledged that he did not understand the consequences of the sky-high interest rates on his loans when he took them on. But his credit score is rising and he has a job.
The Consumer Financial Protection Bureau is talking about rules to standardize student loan servicing practices. In the meantime, its enforcement unit has student loan servicing companies under the microscope. It brought a case against Discover Bank last summer, saying it inflated the amounts it said borrowers owed on their loans.
Discover Bank paid $18.5 million without admitting or denying wrongdoing.
Repaying a student loan is challenging enough without servicers adding to the burden with incompetence or dubious practices. Borrowers and taxpayers deserve better.

 Correction: October 9, 2015
 An earlier version of this column misstated part of the name of the government agency that issued a report last month about student loan servicing. It is the Consumer Financial Protection Bureau, not Boa

Student Debt Is Worse Than You Think

After a series of blockbuster hearings held 25 years ago on abuses in the higher education industry, Congress created a system to protect undergraduates from risky student loans.
But two weeks ago, the Education Department released a trove of new data suggesting that the system is failing and that, at some colleges, the saddling of students with loans they cannot afford to pay down is far more dire than anyone knew.
The loan crisis hits hardest at colleges enrolling large numbers of students from low-income backgrounds. These undergraduates have to borrow for college, then often have difficulty finding well-paying jobs after graduation — if they graduate at all.
There is a gender gap in earnings for the alumni at every top university, although the size of the difference varies greatly.
Degrees of Education: Gaps in Earnings Stand Out in Release of College DataSEPT. 13, 2015
Graduation day at West Kentucky Community and Technical College in Paducah, Ky., in May. In recent years more people have been borrowing money to attend community colleges, as well as for-profit colleges.
Degrees of Debt: New Data Gives Clearer Picture of Student DebtSEPT. 10, 2015
Educational Opportunity: California’s Upward-Mobility MachineSEPT. 16, 2015
Graduates at George Washington University's commencement this year.
Degrees of Debt: Why Students With Smallest Debts Have the Larger ProblemAUG. 31, 2015
As a result, they struggle to repay their loans. The colleges with the lowest student-loan repayment rates include many for-profit colleges, but also some public and private nonprofit colleges, including a substantial number of historically black institutions. Even some wealthier, more selective colleges turn out to have a bigger student loan problem than previously realized.
Along with recent research finding that student loan defaults are heavily concentrated among the most economically marginalized students, the new data suggests that debt is a major financial obstacle for people who already face barriers to opportunity.
When Senator Sam Nunn of Georgia led the investigation in the early 1990s, Congress found widespread fraud by for-profit colleges. Some trade schools had gone so far as to grab people from welfare lines to sign them up for loans without their consent. The loans were never repaid, and the colleges kept the money.
In response, Congress created a rule called the cohort default rate. Every year, the Education Department calculates the percentage of borrowers who have recently left a given college and have defaulted on their federal-government-backed loans. If the default rate is too high, the college is kicked out of the federal financial aid system. The rule was an immediate success — more than 1,500 for-profit colleges were pushed out. A number of public and nonprofit colleges were also forced to bring their default rates down.
But the system has limitations. Only colleges with a default rate above 30 percent for three consecutive years, or above 40 percent in any single year, are expelled from the financial aid system. And students who default more than two to three years after leaving college don’t count as defaulters. Nor do students who manage to avoid default, but struggle to repay their loans.
In September, the department made a different calculation. Instead of default rates, the department calculated nonrepayment rates, which include both defaulters and borrowers who have never paid a single dollar of principal on their loans.
The nonrepayment category includes people who are only paying interest, have delayed making payments by enrolling in graduate school or are getting loan extensions. The nonrepayment rates were calculated over a longer time period: at one, three, five and seven years after students leave college.
Some of the numbers are startling. American National University — a for-profit chain offering degrees in business, health care and information technology, both online and at 30 campuses in six Midwestern states — has an official default rate of 8.5 percent, well below the national average of 11.8 percent. But its five-year nonrepayment rate is 71 percent. Even after seven years, most of the university’s students, the large majority of whom borrow, have failed to pay back a penny of their loans.
How is this possible? Because, as American National’s Department of Repayment Success web page helpfully explains, students are legally allowed to defer or otherwise delay making their loan payments based on economic hardship, continuing education and other factors.
Of course, interest accumulates in the meantime. This is “repayment success” only in the sense that it successfully helps students postpone paying their loans long enough to push the moment of debt crisis beyond the federal default-rate window and keep American National eligible for more federal aid. Proving economic hardship is likely to be easy, since the typical former student earns only $22,400 a year 10 years after entering college.
Some more mainstream colleges also have significant nonrepayment rates. Georgia State and the Universities of Cincinnati, Houston, Louisville, South Florida and Alabama all have single-digit default rates but have five-year nonrepayment rates of over 20 percent. At the University of Memphis, 35 percent of students have not paid down principal after five years. More than half of the students who borrowed to attend the for-profit University of Phoenix, which enrolls hundreds of thousands of students, have been unable to pay back a dollar of their loan principal after five years.
All told, over 700 colleges and branch campuses, many of them small proprietary schools, but also some public and private nonprofit institutions, have over half of their borrowers fail to pay down any debt after seven years. Nearly all of those colleges remain eligible for federal financial aid.
Among both public and private nonprofit institutions, the debt problem is most acute when students with very little money attend colleges with very little money. All 25 of the public universities with the highest five-year nonrepayment rates are historically black institutions. Of the 25 private colleges with the worst nonrepayment rates, 22 are historically black. One example, Lane College in Jackson, Tenn., has a 12.9 percent default rate but a 78.2 percent nonrepayment rate.
Historically black colleges are neither unusually expensive nor profligate institutions. Most have served their communities for decades or longer, enduring racism and inadequate funding while enrolling young people who are often low-income, first-generation college students. As a result, despite the fact that tuition at historically black colleges is often much lower than at well-heeled private colleges, a vast majority of their students borrow.
That so many graduates of black colleges struggle to repay their loans may exacerbate racial wealth disparities. These nonrepayment rates, moreover, do not include the private loans that many students take out once their federal aid is exhausted, or the debt that parents are increasingly carrying to pay for their children’s college educations.
The new data may prompt Congress to revisit its system for ensuring that students who take on debt have a fighting chance to pay it back.