Fixed Income Alternatives with a Twist: Using Life Insurance to Maximize Debt Returns via Tax Efficiencies and Institutional Pricing

As we enter the ninth year since the Federal Reserve Bank slashed interest rates in response to the Great Recession, many Wealthy Families are looking for ways to deploy cash into the fixed income markets. This comes at a time when most market pundits are predicting that the Federal Reserve Bank will finally begin to raise interest rates at the scheduled December 2015 meeting. This long awaited rise in rates poses many challenges for wealthy families, in particular those with fixed income portfolios. Some of those are as follows:

• The market value of fixed income assets is volatile due to changing interest rates,
• Currently, it is difficult for fixed income assets to provide yield as new money fixed income interest rates remain at historical lows (Moody’s Corporate Aaa Bond Yield is approximately 4%),
• Fixed income investments are tax inefficient (excluding Municipal Bonds) as interest is includable in taxable income and income tax rates have increased (the combined federal and state income tax can be as a high as 49.8%),
• Additional risk may need to be taken to gain yield, either through duration or quality, with the latter raising greater exposure to default.

In light of these factors, BOLI or Bank Owned Life Insurance could be a viable alternative. BOLI is life insurance purchased and owned by a bank, on the life of
an executive of the bank, where the bank has a financial interest in the policy. BOLI has traditionally been used as a tax-efficient method for funding the costs of employee benefit programs. This white paper discusses the tax strategies that a Bank Owned Life Insurance Policy can provide.