Risk of Merchant Capture - Media Communication Group

Nine Steps — continued from page 9either withdrawn from the market or have suspended BOLIsales. The question is whether the carrier will continueto support its BOLI product if it is no longer active in themarket. Most BOLI products today have restrictions andpenalties that make it difficult to exchange out of a BOLIproduct. Getting it right from the start is very important.The opportunities to change carriers in the future can beseverely limited.8. Does the BOLI have breakpoints? Most BOLI productshave commission breakpoints. Typically, these breakpointsoccur at premium purchases of $5 and $10 million. Thelower commissions paid at these breakpoints can result in adirect improvement in the net crediting rate on the BOLI. Ifthe bank is close to obtaining a breakpoint, it should look tostructure its purchase to obtain that breakpoint. Diversificationis important but be mindful of breakpoints too.9. What are the bank’s options if the carrier has problems?One common misconception bankers may have about BOLIis that if the carrier has a problem the bank can alwaysexchange out of the product tax-free under Section 1035 ofthe Internal Revenue Code. This may not always be the case.First, the bank must have an insurable interest in the personinsured by the policy. If the insured person is no longeremployed at the bank, then the bank no longer has an insurableinterest and an exchange may not be made. Secondly,if the policy is medically underwritten and the insured hasexperienced health problems, an exchange may no longer bepossible. Finally, there could be exchange charges and restrictions,which would make it expensive or time consuming tomake the exchange.A second option is simply to surrender the policy. A surrender,however, would trigger income tax on the investmentgain in the policy plus a 10% tax (MEC) penalty on that gain.The bottom line is the bank should be aware of its limitedability to exchange out of a carrier’s BOLI product. Getting itright from the start is, therefore, extremely important.In conclusion, BOLI can be an excellent way for a bank to addressrising benefit costs. It can also be used very effectivelyto cover the cost of a plan designed to attract, retain, andreward the bank’s key talent. That being the case, the bank’sBOLI should be as strong as possible and hopefully this NineStep Die Diligence Process should help reach that goal. Melissa K. Oliverio and Michael A. Oliverio, II are Financial Representatives withThe Northwestern Mutual Life Insurance Company and are members of the MMBConsulting LLC, Service Team.REACHYOUR TARGETAUDIENCEAFFORDABLYFind out how targeted advertisingcan produce real, measurableresults for your organization.ADVERTISE ANDGET RESULTSKris Montione, Advertising Sales801.746.4003 | kris@spectruminkpublishing.com10www.wvbankers.org