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+-------+---+-----------------------+-----------+-----------------+---+
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|       | N |                       |           |                 |   |
|       | * |                       |           |                 |   |
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+-------+---+-----------------------+-----------+-----------------+---+
| ## Co |   |                       |           |                 |   |
| mptro |   |                       |           |                 |   |
| ller  |   |                       |           |                 |   |
| of th |   |                       |           |                 |   |
| e Cur |   |                       |           |                 |   |
| rency |   |                       |           |                 |   |
|       |   |                       |           |                 |   |
| > Adm |   |                       |           |                 |   |
| inist |   |                       |           |                 |   |
| rator |   |                       |           |                 |   |
| > of  |   |                       |           |                 |   |
| > Nat |   |                       |           |                 |   |
| ional |   |                       |           |                 |   |
| >     |   |                       |           |                 |   |
| Banks |   |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
| #     |   | ## Bank Purcha        | ## Des    | ##              |   |
| # Sub |   | ses of Life Insurance | cription: |  Guidelines for |   |
| ject: |   |                       |           |  National Banks |   |
+-------+---+-----------------------+-----------+-----------------+---+

**TO:** Chief Executive Officers of All National Banks, Department and
Division Heads, and All Examining Personnel

**PURPOSE**

This bulletin provides general guidelines for national banks to help
ensure that bank purchases of life insurance are consistent with safe
and sound banking practices. It replaces Bulletin 96-51, dated September
20, 1996, which is hereby rescinded.

**BACKGROUND**

Corporate‑owned life insurance (COLI) includes all life insurance that a
corporation, such as a bank, purchases and owns or has a beneficial
interest in. Life insurance is a financial instrument which serves many
necessary and useful business purposes. However, as with most financial
instruments, COLI can be complicated and is not without risk.
Furthermore, COLI transactions are unique and represent activities which
differ greatly from the main business activity of most corporations.
Some national banks have purchased COLI without fully understanding the
transactions and the associated risks.

This bulletin is designed to help national banks make informed decisions
consistent with safe and sound banking practices. Bankers should
complete a thorough analysis before purchasing COLI. This bulletin sets
forth supervisory policy, including minimum standards for pre‑purchase
analyses, applicable to the purchase of COLI by national banks. The
bulletin also includes discussions of the most common uses of COLI and
the associated risks.

##### LEGAL AUTHORITY

The authority for national banks to purchase and hold life insurance is
found in 12 USC 24(Seventh), which provides that national banks may
exercise "all such incidental powers as shall be necessary to carry on
the business of banking." Purchases of life insurance that the OCC has
found to be incidental to banking include key-person insurance,
insurance on borrowers, insurance purchased in connection with employee
compensation and benefit plans, and insurance

+-------+---+-----------------------+-----------+-----------------+---+
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|       | N |                       |           |                 |   |
|       | * |                       |           |                 |   |
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+-------+---+-----------------------+-----------+-----------------+---+
| ## Co |   |                       |           |                 |   |
| mptro |   |                       |           |                 |   |
| ller  |   |                       |           |                 |   |
| of th |   |                       |           |                 |   |
| e Cur |   |                       |           |                 |   |
| rency |   |                       |           |                 |   |
|       |   |                       |           |                 |   |
| > Adm |   |                       |           |                 |   |
| inist |   |                       |           |                 |   |
| rator |   |                       |           |                 |   |
| > of  |   |                       |           |                 |   |
| > Nat |   |                       |           |                 |   |
| ional |   |                       |           |                 |   |
| >     |   |                       |           |                 |   |
| Banks |   |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
| #     |   | ## Bank Purcha        | ## Des    | ##              |   |
| # Sub |   | ses of Life Insurance | cription: |  Guidelines for |   |
| ject: |   |                       |           |  National Banks |   |
+-------+---+-----------------------+-----------+-----------------+---+

taken as security for loans.[^1] The OCC may approve other uses for
bank-owned life insurance on a case-by-case basis. However, a purchase
of life insurance must address a legitimate need of the bank for
insurance. Life insurance may not be purchased to generate funds for the
bank's normal operating expenses, for speculation, or for the primary
purpose of providing estate planning benefits for bank insiders unless
it is part of a reasonable compensation package. In addition, the
purchase of life insurance is subject to supervisory considerations, and
life insurance holdings must be consistent with safe and sound banking
practices.

##### SUPERVISORY POLICY

The purchase of permanent life insurance (permanent insurance) policies
subjects the policyholder to several risks. The cash surrender value
(CSV) of most life insurance products is subject to credit risk.[^2]
Usually, the CSV is a long‑term, unsecured, nonamortizing obligation of
the insurance company. The CSV is also subject to several other risks,
such as transaction risk, interest rate risk, liquidity risk, compliance
risk, and price risk.

National banks holding life insurance in a manner inconsistent with safe
and sound banking practices may be subject to supervisory action. This
bulletin outlines supervisory considerations to be used in making this
assessment. Supervisory action may include, but is not limited to,
partial surrender or divestiture of affected policies.

**Pre‑purchase Analysis:**

The safe and sound use of bank**‑**owned life insurance depends on
effective senior management and board oversight. Regardless of the
bank\'s financial capacity and risk profile, the board must understand
the role bank**‑**owned life insurance plays in the overall business
strategies of the bank.

The board\'s role in analyzing and overseeing bank**‑**owned life
insurance should be commensurate with the size, complexity, and risk
inherent in the transaction. Although the board may delegate

+-------+---+-----------------------+-----------+-----------------+---+
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+-------+---+-----------------------+-----------+-----------------+---+
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|       | * |                       |           |                 |   |
|       | * |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
| ## Co |   |                       |           |                 |   |
| mptro |   |                       |           |                 |   |
| ller  |   |                       |           |                 |   |
| of th |   |                       |           |                 |   |
| e Cur |   |                       |           |                 |   |
| rency |   |                       |           |                 |   |
|       |   |                       |           |                 |   |
| > Adm |   |                       |           |                 |   |
| inist |   |                       |           |                 |   |
| rator |   |                       |           |                 |   |
| > of  |   |                       |           |                 |   |
| > Nat |   |                       |           |                 |   |
| ional |   |                       |           |                 |   |
| >     |   |                       |           |                 |   |
| Banks |   |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
| #     |   | ## Bank Purcha        | ## Des    | ##              |   |
| # Sub |   | ses of Life Insurance | cription: |  Guidelines for |   |
| ject: |   |                       |           |  National Banks |   |
+-------+---+-----------------------+-----------+-----------------+---+

decision‑making authority related to bank purchases of life insurance to
management, the board remains responsible for ensuring that purchases of
life insurance are consistent with safe and sound banking practices.

The objective of the pre‑purchase analysis is to help ensure that the
bank understands the risks, rewards, and unique characteristics of COLI.
As such, each purchase or assumption of a beneficial interest in COLI
should be preceded by a thorough pre‑purchase analysis. At a minimum,
the pre‑purchase analysis should consider the following standards.

I*. Determination of the* *Need for Insurance*

The bank should determine the need for insurance by identifying the
specific risk of loss or obligation to be insured against. The existence
of a risk of loss or an obligation does not necessarily mean that a
national bank can purchase or hold an interest in life insurance. For
example, a national bank may not purchase life insurance on a borrower
as a mechanism for effecting a recovery on obligations that have been
charged‑off, or are expected to be charged‑off for reasons other than
the borrower\'s death.[^3] Also, a national bank should surrender or
otherwise dispose of permanent life insurance acquired through debts
previously contracted (DPC) within a short time frame, generally 90
days, of obtaining control of the policy.[^4]

Additionally, the purchase of insurance to indemnify a national bank
against a specific risk does not relieve a national bank from other
responsibilities related to managing that risk. For example, a national
bank may purchase life insurance to indemnify itself from the loss of a
"key­-person." However, "key‑person" life insurance should not be used in
place of, nor does it diminish the need for, adequate management or
"key‑person" succession planning.[^5]

+-------+---+-----------------------+-----------+-----------------+---+
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|       | 2 |                       |           |                 |   |
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+-------+---+-----------------------+-----------+-----------------+---+
|       | * |                       |           |                 |   |
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|       | I |                       |           |                 |   |
|       | N |                       |           |                 |   |
|       | * |                       |           |                 |   |
|       | * |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
| ## Co |   |                       |           |                 |   |
| mptro |   |                       |           |                 |   |
| ller  |   |                       |           |                 |   |
| of th |   |                       |           |                 |   |
| e Cur |   |                       |           |                 |   |
| rency |   |                       |           |                 |   |
|       |   |                       |           |                 |   |
| > Adm |   |                       |           |                 |   |
| inist |   |                       |           |                 |   |
| rator |   |                       |           |                 |   |
| > of  |   |                       |           |                 |   |
| > Nat |   |                       |           |                 |   |
| ional |   |                       |           |                 |   |
| >     |   |                       |           |                 |   |
| Banks |   |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
| #     |   | ## Bank Purcha        | ## Des    | ##              |   |
| # Sub |   | ses of Life Insurance | cription: |  Guidelines for |   |
| ject: |   |                       |           |  National Banks |   |
+-------+---+-----------------------+-----------+-----------------+---+

II\. *Quantification of the Amount of Insurance Needed*

The bank should estimate the size of the obligation or the risk of loss
and ensure that the amount of insurance purchased is not excessive in
relation to the estimate. For such estimates, national

banks may include the cost of insurance and the time value of money in
determining the amount of insurance needed. The estimate of the amount
of insurance needed should be based on reasonable financial and
actuarial assumptions. In situations where a national bank purchases
life insurance on a group of employees or a homogenous group of
borrowers, it can estimate the size of the obligation or the risk of
loss for the group on an aggregate basis and compare that to the
aggregate amount of insurance purchased.

Purchasing or holding excessive permanent insurance may be an unsafe and
unsound practice if it subjects the bank to unwarranted risks.
Bank‑owned life insurance subjects the bank to several risks which may
be significant. The risks are explained in the "Risks Associated With
COLI" section of this bulletin.

III*. Vendor Selection*

The vast majority of COLI purchases are made through vendors, either
brokers/consultants or agents. Most corporations have used
brokers/consultants. However, some corporations have purchased COLI
through agents who work for specific insurance companies. It is also
possible to purchase COLI directly from insurance carriers without using
a vendor.

The role of the vendor, if any, depends on the type of vendor selected.
For example, the vendor may be an agent of a specific insurance company
who serves as the bank\'s primary contact with the insurance company,
explains the company\'s various products, and helps the bank in making
product selection. Or, the vendor may be an independent broker who has
established working relationships with many insurance companies. In
addition to being the bank\'s primary contact with the insurance
company, the broker will work with the bank in selecting a carrier and
in designing, negotiating, and administering/servicing the COLI.

The bank does not have to use a vendor. In deciding whether or not to
use a vendor or what type of vendor to use, the bank should consider its
knowledge of COLI, the amount of resources it can

+-------+---+-----------------------+-----------+-----------------+---+
| # O   | # |                       |           |                 | # |
|       | # |                       |           |                 |   |
| ##    | # |                       |           |                 |   |
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|       |   |                       |           |                 |   |
|       | O |                       |           |                 |   |
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|       | C |                       |           |                 | # |
|       |   |                       |           |                 |   |
|       | 2 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
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|       | 0 |                       |           |                 |   |
|       | - |                       |           |                 |   |
|       | - |                       |           |                 |   |
|       | 2 |                       |           |                 |   |
|       | 3 |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
|       | * |                       |           |                 |   |
|       | * |                       |           |                 |   |
|       | O |                       |           |                 |   |
|       | C |                       |           |                 |   |
|       | C |                       |           |                 |   |
|       | B |                       |           |                 |   |
|       | U |                       |           |                 |   |
|       | L |                       |           |                 |   |
|       | L |                       |           |                 |   |
|       | E |                       |           |                 |   |
|       | T |                       |           |                 |   |
|       | I |                       |           |                 |   |
|       | N |                       |           |                 |   |
|       | * |                       |           |                 |   |
|       | * |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
| ## Co |   |                       |           |                 |   |
| mptro |   |                       |           |                 |   |
| ller  |   |                       |           |                 |   |
| of th |   |                       |           |                 |   |
| e Cur |   |                       |           |                 |   |
| rency |   |                       |           |                 |   |
|       |   |                       |           |                 |   |
| > Adm |   |                       |           |                 |   |
| inist |   |                       |           |                 |   |
| rator |   |                       |           |                 |   |
| > of  |   |                       |           |                 |   |
| > Nat |   |                       |           |                 |   |
| ional |   |                       |           |                 |   |
| >     |   |                       |           |                 |   |
| Banks |   |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
| #     |   | ## Bank Purcha        | ## Des    | ##              |   |
| # Sub |   | ses of Life Insurance | cription: |  Guidelines for |   |
| ject: |   |                       |           |  National Banks |   |
+-------+---+-----------------------+-----------+-----------------+---+

and is willing to spend servicing/administering the COLI, and the
benefits a vendor may provide. Depending on the role of the vendor, the
vendor\'s services can be extensive and critical to successful
implementation and operation of a COLI plan. If the bank uses a vendor,
it should make appropriate inquiries to satisfy itself regarding the
vendor\'s ability to honor its commitments, which may be long term. In
assessing the vendor's ability to honor its commitments, the bank should
typically review the vendor\'s services, general reputation, experience,
and financial capacity. The nature and thoroughness of the review should
be determined by the size and complexity of the potential COLI purchase.

IV*. Carrier Selection*

COLI plans are typically of long duration and may represent significant
risks for the bank. Therefore, carrier selection is one of the most
critical steps in a COLI purchase. The bank should review the product
design, pricing, and administrative services of the carrier(s) and
compare them with the bank\'s needs. In addition, the bank should also
review the carrier\'s ratings, general reputation, experience in the
market place, and past performance. A broker/consultant, if used, may
assist the bank in this regard.

Furthermore, before purchasing life insurance, the bank should perform a
credit analysis on the selected carrier(s) in a manner consistent with
safe and sound banking practices for commercial lending. A more complete
discussion of the credit analysis is included in the \"Credit Risk\"
section of this bulletin.

V*. Review the Characteristics of the Available Insurance Products*

There are a few basic types of life insurance products in the
marketplace. However, these products can be combined and modified in
many different ways. The resulting final product can be quite complex.
The bank should review the characteristics of the various insurance
products available. It should select the product or products with
characteristics that match the institution\'s objectives and needs. To
do this, the bank should thoroughly analyze and understand the products
being considered.

When purchasing insurance on "key‑persons" and individual borrowers, the
bank should consider whether the bank\'s need for the insurance will be
eliminated before the insured

+-------+---+-----------------------+-----------+-----------------+---+
| # O   | # |                       |           |                 | # |
|       | # |                       |           |                 |   |
| ##    | # |                       |           |                 |   |
|       | # |                       |           |                 | # |
|       |   |                       |           |                 |   |
|       | O |                       |           |                 |   |
|       | C |                       |           |                 | # |
|       | C |                       |           |                 | # |
|       |   |                       |           |                 |   |
|       | 2 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
|       | - |                       |           |                 |   |
|       | - |                       |           |                 |   |
|       | 2 |                       |           |                 |   |
|       | 3 |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
|       | * |                       |           |                 |   |
|       | * |                       |           |                 |   |
|       | O |                       |           |                 |   |
|       | C |                       |           |                 |   |
|       | C |                       |           |                 |   |
|       | B |                       |           |                 |   |
|       | U |                       |           |                 |   |
|       | L |                       |           |                 |   |
|       | L |                       |           |                 |   |
|       | E |                       |           |                 |   |
|       | T |                       |           |                 |   |
|       | I |                       |           |                 |   |
|       | N |                       |           |                 |   |
|       | * |                       |           |                 |   |
|       | * |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
| ## Co |   |                       |           |                 |   |
| mptro |   |                       |           |                 |   |
| ller  |   |                       |           |                 |   |
| of th |   |                       |           |                 |   |
| e Cur |   |                       |           |                 |   |
| rency |   |                       |           |                 |   |
|       |   |                       |           |                 |   |
| > Adm |   |                       |           |                 |   |
| inist |   |                       |           |                 |   |
| rator |   |                       |           |                 |   |
| > of  |   |                       |           |                 |   |
| > Nat |   |                       |           |                 |   |
| ional |   |                       |           |                 |   |
| >     |   |                       |           |                 |   |
| Banks |   |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
| #     |   | ## Bank Purcha        | ## Des    | ##              |   |
| # Sub |   | ses of Life Insurance | cription: |  Guidelines for |   |
| ject: |   |                       |           |  National Banks |   |
+-------+---+-----------------------+-----------+-----------------+---+

individual dies. In such cases, term or declining term insurance may be
the most appropriate form of life insurance.[^6]

VI*. Analyze the Benefits of* *COLI*

The bank should analyze the benefits of COLI purchases being considered.
The analysis should include an assessment of how the purchase will
accomplish the objective specified in "I. Determination of the Need for
Insurance." It should also include an analysis of the anticipated
performance of the insurance. A more complete discussion of this
analysis is included in the "Transaction Risk" section of this bulletin.

VII*. Determine the Reasonableness of Compensation Provided to the
Insured Employee if the*

> *Insurance Results in Additional Compensation*

Split‑dollar insurance arrangements[^7] typically provide additional
compensation and/or other benefits to the employee. Before a national
bank enters into a split‑dollar arrangement, it should identify and
quantify the compensation objective, and ensure that the arrangement is
consistent with the stated objective. Also, the bank should combine the
compensation provided by the split­-dollar arrangement with all other
compensation to ensure that total compensation is not excessive.
Excessive compensation is prohibited as an unsafe and unsound practice.
Guidelines for determining excessive compensation can be found in
Appendix A to 12 CFR Part 30-- Interagency Guidelines Establishing
Standards for Safety and Soundness.

VIII\. *Analyze the Associated Risks and the Bank\'s Ability to Monitor
and Respond to those*

> *Risks*

Ownership of or beneficial interests in COLI may subject a national bank
to several risks. These risks include: transaction, credit, interest
rate, liquidity, compliance, and price. A bank\'s pre­purchase analysis
should include a thorough evaluation of these risks. An explanation of
each risk is included in the "Risks Associated With COLI" section of
this bulletin.

+-------+---+-----------------------+-----------+-----------------+---+
| # O   | # |                       |           |                 | # |
|       | # |                       |           |                 |   |
| ##    | # |                       |           |                 |   |
|       | # |                       |           |                 | # |
|       |   |                       |           |                 |   |
|       | O |                       |           |                 |   |
|       | C |                       |           |                 | # |
|       | C |                       |           |                 | # |
|       |   |                       |           |                 |   |
|       | 2 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
|       | - |                       |           |                 |   |
|       | - |                       |           |                 |   |
|       | 2 |                       |           |                 |   |
|       | 3 |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
|       | * |                       |           |                 |   |
|       | * |                       |           |                 |   |
|       | O |                       |           |                 |   |
|       | C |                       |           |                 |   |
|       | C |                       |           |                 |   |
|       | B |                       |           |                 |   |
|       | U |                       |           |                 |   |
|       | L |                       |           |                 |   |
|       | L |                       |           |                 |   |
|       | E |                       |           |                 |   |
|       | T |                       |           |                 |   |
|       | I |                       |           |                 |   |
|       | N |                       |           |                 |   |
|       | * |                       |           |                 |   |
|       | * |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
| ## Co |   |                       |           |                 |   |
| mptro |   |                       |           |                 |   |
| ller  |   |                       |           |                 |   |
| of th |   |                       |           |                 |   |
| e Cur |   |                       |           |                 |   |
| rency |   |                       |           |                 |   |
|       |   |                       |           |                 |   |
| > Adm |   |                       |           |                 |   |
| inist |   |                       |           |                 |   |
| rator |   |                       |           |                 |   |
| > of  |   |                       |           |                 |   |
| > Nat |   |                       |           |                 |   |
| ional |   |                       |           |                 |   |
| >     |   |                       |           |                 |   |
| Banks |   |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
| #     |   | ## Bank Purcha        | ## Des    | ##              |   |
| # Sub |   | ses of Life Insurance | cription: |  Guidelines for |   |
| ject: |   |                       |           |  National Banks |   |
+-------+---+-----------------------+-----------+-----------------+---+

Furthermore, the pre‑purchase analysis should allow a national bank to
determine whether the transaction is consistent with safe and sound
banking practices. In making this determination, a national bank should
consider, among other things:

-   The complexity of the transaction.

-   The size of the transaction relative to the bank\'s capital.

-   The diversification of the credit risk.

-   The financial capacity of the bank.

-   The financial capacity of the insurance carrier(s).

-   The bank\'s ability to identify, measure, monitor, and control the
    associated risks.

In assessing the size of the transaction, a national bank should
consider the CSV relative to its capital levels at the time of purchase.
The bank should also consider projected increases in the CSV and
projected changes in capital levels for the duration of the contract.

Consistent with prudent risk management practices, a national bank
should establish internal quantitative guidelines. These guidelines
generally limit the aggregate CSV of policies from any one insurance
company and the aggregate CSV of policies from all insurance companies.
Among other things, a bank should consider the legal lending limits (12
CFR Part 32) and concentration of credit guidelines (OCC Bulletin 95‑7,
dated February 9, 1995) when establishing the respective limits.

IX\. *Evaluate Alternatives*

Some COLI purchases involve indemnifying the bank against a specific
risk. For example, COLI is sometimes purchased to indemnify the bank
against the potential for loss arising from the untimely death of a
"key‑person." As an alternative to purchasing COLI, a bank may choose to
self‑insure against this risk. Other COLI purchases are used to recover
costs or provide for employee benefits. In these cases, a bank may
choose to generate the necessary funds through investments instead of by
purchasing insurance. Regardless of the purpose of COLI, a complete
pre‑purchase analysis will include an analysis of the alternatives.

+-------+---+-----------------------+-----------+-----------------+---+
| # O   | # |                       |           |                 | # |
|       | # |                       |           |                 |   |
| ##    | # |                       |           |                 |   |
|       | # |                       |           |                 | # |
|       |   |                       |           |                 |   |
|       | O |                       |           |                 |   |
|       | C |                       |           |                 | # |
|       | C |                       |           |                 | # |
|       |   |                       |           |                 |   |
|       | 2 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
|       | - |                       |           |                 |   |
|       | - |                       |           |                 |   |
|       | 2 |                       |           |                 |   |
|       | 3 |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
|       | * |                       |           |                 |   |
|       | * |                       |           |                 |   |
|       | O |                       |           |                 |   |
|       | C |                       |           |                 |   |
|       | C |                       |           |                 |   |
|       | B |                       |           |                 |   |
|       | U |                       |           |                 |   |
|       | L |                       |           |                 |   |
|       | L |                       |           |                 |   |
|       | E |                       |           |                 |   |
|       | T |                       |           |                 |   |
|       | I |                       |           |                 |   |
|       | N |                       |           |                 |   |
|       | * |                       |           |                 |   |
|       | * |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
| ## Co |   |                       |           |                 |   |
| mptro |   |                       |           |                 |   |
| ller  |   |                       |           |                 |   |
| of th |   |                       |           |                 |   |
| e Cur |   |                       |           |                 |   |
| rency |   |                       |           |                 |   |
|       |   |                       |           |                 |   |
| > Adm |   |                       |           |                 |   |
| inist |   |                       |           |                 |   |
| rator |   |                       |           |                 |   |
| > of  |   |                       |           |                 |   |
| > Nat |   |                       |           |                 |   |
| ional |   |                       |           |                 |   |
| >     |   |                       |           |                 |   |
| Banks |   |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
| #     |   | ## Bank Purcha        | ## Des    | ##              |   |
| # Sub |   | ses of Life Insurance | cription: |  Guidelines for |   |
| ject: |   |                       |           |  National Banks |   |
+-------+---+-----------------------+-----------+-----------------+---+

X*. Document Decision*

The primary objective of this bulletin is to provide guidelines that
will help national banks make informed decisions consistent with safe
and sound banking practices. In doing so, national banks generally
should consider the pre‑purchase analysis just described. A national
bank should maintain documentation adequate to show that the bank made
an informed decision. The bank should continue to monitor that decision
based on the standards set forth in this bulletin.

**RISKS ASSOCIATED WITH** **COLI**

For purposes of the OCC\'s discussion of risk, examiners assess banking
risk relative to its impact on capital and earnings. From a supervisory
perspective, risk is the potential that events, expected or
unanticipated, may have an adverse impact on the bank\'s capital or
earnings. The OCC has defined nine categories of risk for bank
supervision purposes. These risks are: *Credit, Interest Rate,
Liquidity, Price, Foreign Exchange, Transaction, Compliance, Strategic,
and Reputation.* These categories are not mutually exclusive; any
product or service may expose the bank to multiple risks. For analysis
and discussion purposes, however, the OCC identifies and assesses the
risks separately.

The applicable risks associated with COLI are: *Transaction, Credit,
Interest Rate, Liquidity, Compliance, and Price.* The definitions of
these six risks are summarized below. For complete definitions, see the
"Bank Supervision Process" booklet of the *Comptroller\'s Handbook.* An
analysis of how each of these risks impact the decision to purchase and
hold COLI is set forth in the following paragraphs.

####### 

####### Transaction Risk

Transaction risk is the risk to earnings or capital arising from
problems with service or product delivery. The degree of transaction
risk associated with COLI is a function of a bank not fully
understanding or properly implementing a transaction. In addition to
following the other guidelines included in this bulletin, national banks
should take two additional steps to help reduce transaction risk. Bank
management should have a thorough understanding of how the insurance
product works and the variables that dictate the product\'s performance.
The variables

+-------+---+-----------------------+-----------+-----------------+---+
| # O   | # |                       |           |                 | # |
|       | # |                       |           |                 |   |
| ##    | # |                       |           |                 |   |
|       | # |                       |           |                 | # |
|       |   |                       |           |                 |   |
|       | O |                       |           |                 |   |
|       | C |                       |           |                 | # |
|       | C |                       |           |                 | # |
|       |   |                       |           |                 |   |
|       | 2 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
|       | - |                       |           |                 |   |
|       | - |                       |           |                 |   |
|       | 2 |                       |           |                 |   |
|       | 3 |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
|       | * |                       |           |                 |   |
|       | * |                       |           |                 |   |
|       | O |                       |           |                 |   |
|       | C |                       |           |                 |   |
|       | C |                       |           |                 |   |
|       | B |                       |           |                 |   |
|       | U |                       |           |                 |   |
|       | L |                       |           |                 |   |
|       | L |                       |           |                 |   |
|       | E |                       |           |                 |   |
|       | T |                       |           |                 |   |
|       | I |                       |           |                 |   |
|       | N |                       |           |                 |   |
|       | * |                       |           |                 |   |
|       | * |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
| ## Co |   |                       |           |                 |   |
| mptro |   |                       |           |                 |   |
| ller  |   |                       |           |                 |   |
| of th |   |                       |           |                 |   |
| e Cur |   |                       |           |                 |   |
| rency |   |                       |           |                 |   |
|       |   |                       |           |                 |   |
| > Adm |   |                       |           |                 |   |
| inist |   |                       |           |                 |   |
| rator |   |                       |           |                 |   |
| > of  |   |                       |           |                 |   |
| > Nat |   |                       |           |                 |   |
| ional |   |                       |           |                 |   |
| >     |   |                       |           |                 |   |
| Banks |   |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
| #     |   | ## Bank Purcha        | ## Des    | ##              |   |
| # Sub |   | ses of Life Insurance | cription: |  Guidelines for |   |
| ject: |   |                       |           |  National Banks |   |
+-------+---+-----------------------+-----------+-----------------+---+

most likely to affect product performance are the policy\'s interest
crediting rate,[^8] mortality cost,[^9] and other expense charges.
Typically, the most significant variable is the interest crediting rate,

followed by the mortality cost. Therefore, before purchasing COLI, a
national bank should analyze projected policy values (CSV and death
benefits) from multiple illustrations provided by the carrier. Banks
should consider using different interest crediting rates and mortality
costs assumptions for each illustration.

Bank management should also understand and analyze how COLI will affect
the bank\'s financial condition. Given the anticipated performance of
the insurance, management should analyze the effect on the bank\'s
earnings, capital, and liquidity. Management should also consider the
impact on the bank\'s earnings and capital should the bank, for any
reason, surrender the insurance before maturity at the death of the
insured.

**Credit Risk**

Credit risk is the risk to earnings or capital arising from an
obligor\'s failure to meet the terms of any contract with the bank or
otherwise fail to perform as agreed. All life insurance policyholders
are exposed to credit risk. The credit quality of the insurance company
and duration of the contract are key variables. With term insurance,
credit risk arises from the insurance carrier\'s contractual obligation
to pay death benefits upon the death of the insured. Credit risk is
primarily a function of the insurance carrier\'s ability (financial
condition) and willingness to pay death benefits as promised. Credit
risk may be reduced by the support provided by state insurance guaranty
associations or funds. A bank\'s credit exposure through the ownership
of term life insurance is not reflected on the bank\'s balance sheet.

+-------+---+-----------------------+-----------+-----------------+---+
| # O   | # |                       |           |                 | # |
|       | # |                       |           |                 |   |
| ##    | # |                       |           |                 |   |
|       | # |                       |           |                 | # |
|       |   |                       |           |                 |   |
|       | O |                       |           |                 |   |
|       | C |                       |           |                 | # |
|       | C |                       |           |                 | # |
|       |   |                       |           |                 |   |
|       | 2 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
|       | - |                       |           |                 |   |
|       | - |                       |           |                 |   |
|       | 2 |                       |           |                 |   |
|       | 3 |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
|       | * |                       |           |                 |   |
|       | * |                       |           |                 |   |
|       | O |                       |           |                 |   |
|       | C |                       |           |                 |   |
|       | C |                       |           |                 |   |
|       | B |                       |           |                 |   |
|       | U |                       |           |                 |   |
|       | L |                       |           |                 |   |
|       | L |                       |           |                 |   |
|       | E |                       |           |                 |   |
|       | T |                       |           |                 |   |
|       | I |                       |           |                 |   |
|       | N |                       |           |                 |   |
|       | * |                       |           |                 |   |
|       | * |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
| ## Co |   |                       |           |                 |   |
| mptro |   |                       |           |                 |   |
| ller  |   |                       |           |                 |   |
| of th |   |                       |           |                 |   |
| e Cur |   |                       |           |                 |   |
| rency |   |                       |           |                 |   |
|       |   |                       |           |                 |   |
| > Adm |   |                       |           |                 |   |
| inist |   |                       |           |                 |   |
| rator |   |                       |           |                 |   |
| > of  |   |                       |           |                 |   |
| > Nat |   |                       |           |                 |   |
| ional |   |                       |           |                 |   |
| >     |   |                       |           |                 |   |
| Banks |   |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
| #     |   | ## Bank Purcha        | ## Des    | ##              |   |
| # Sub |   | ses of Life Insurance | cription: |  Guidelines for |   |
| ject: |   |                       |           |  National Banks |   |
+-------+---+-----------------------+-----------+-----------------+---+

With permanent insurance, credit risk arises from the insurance
carrier\'s obligation to pay death benefits upon death of the insured
and from its obligation to return the CSV to the policyholder upon
request. The risk is similar to that with term insurance, but there are
a few differences. With most permanent insurance COLI plans, the
expected time frame for collection of death proceeds is extremely long
term. Additionally, the CSV is an unsecured, long‑term, and
nonamortizing obligation of the insurance carrier. The risk inherent in
the insurance company\'s failure to return the CSV value is, reflected
on the bank\'s balance sheet.

Before purchasing life insurance, bank management should evaluate the
financial condition of the insurance company and continue to monitor its
condition on an ongoing basis. In addition to reviewing the insurance
carrier\'s ratings, the bank should conduct an independent financial
analysis consistent with safe and sound banking practices for commercial
lending. As with

lending, the depth and frequency of the analysis should be a function of
the relative size and complexity of the transaction.

**Interest Rate Risk**

Interest rate risk is the risk to earnings or capital arising from
movements in interest rates. General account[^10] products expose the
policyholder to interest rate risk. The interest rate risk of these
products is primarily a function of the policy\'s interest crediting
rate. Interest crediting rates are established by the insurance carrier.
Over the long term, interest crediting rates are primarily a function of
the carrier\'s investment portfolio performance. The policy\'s CSV is
negatively affected (grows at a slower rate) by a declining interest
crediting rate. Since a bank\'s investment in permanent insurance is
recorded at the policy\'s CSV, the bank\'s earnings decline as the
policy\'s interest crediting rate declines.

Due to the interest rate risk inherent in this product, it is
particularly important that management fully understand the risk before
purchasing the policy. Before purchasing permanent insurance, bank
management should:

> • Review the policy\'s past performance over various business cycles.
>
> • Analyze projected policy values (CSV and death benefits).

+-------+---+-----------------------+-----------+-----------------+---+
| # O   | # |                       |           |                 | # |
|       | # |                       |           |                 |   |
| ##    | # |                       |           |                 |   |
|       | # |                       |           |                 | # |
|       |   |                       |           |                 |   |
|       | O |                       |           |                 |   |
|       | C |                       |           |                 | # |
|       | C |                       |           |                 | # |
|       |   |                       |           |                 |   |
|       | 2 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
|       | - |                       |           |                 |   |
|       | - |                       |           |                 |   |
|       | 2 |                       |           |                 |   |
|       | 3 |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
|       | * |                       |           |                 |   |
|       | * |                       |           |                 |   |
|       | O |                       |           |                 |   |
|       | C |                       |           |                 |   |
|       | C |                       |           |                 |   |
|       | B |                       |           |                 |   |
|       | U |                       |           |                 |   |
|       | L |                       |           |                 |   |
|       | L |                       |           |                 |   |
|       | E |                       |           |                 |   |
|       | T |                       |           |                 |   |
|       | I |                       |           |                 |   |
|       | N |                       |           |                 |   |
|       | * |                       |           |                 |   |
|       | * |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
| ## Co |   |                       |           |                 |   |
| mptro |   |                       |           |                 |   |
| ller  |   |                       |           |                 |   |
| of th |   |                       |           |                 |   |
| e Cur |   |                       |           |                 |   |
| rency |   |                       |           |                 |   |
|       |   |                       |           |                 |   |
| > Adm |   |                       |           |                 |   |
| inist |   |                       |           |                 |   |
| rator |   |                       |           |                 |   |
| > of  |   |                       |           |                 |   |
| > Nat |   |                       |           |                 |   |
| ional |   |                       |           |                 |   |
| >     |   |                       |           |                 |   |
| Banks |   |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
| #     |   | ## Bank Purcha        | ## Des    | ##              |   |
| # Sub |   | ses of Life Insurance | cription: |  Guidelines for |   |
| ject: |   |                       |           |  National Banks |   |
+-------+---+-----------------------+-----------+-----------------+---+

> • Consider having the carrier use a different interest crediting rate
> for each set of policy projections.

Variable or separate account[^11] products may also expose the bank to
interest rate risk depending on the types of assets held in the separate
account. For example, if the separate account assets consist solely of
Treasury securities, the bank is exposed to interest rate risk in the
same way as holding Treasury securities directly in its investment
portfolio. However, because the bank does not control the separate
account assets, it is more difficult for the bank to control this risk.
Therefore, before purchasing a separate account product, bank management
should thoroughly review and understand the instruments governing the
investment policy and management of the separate account. Management
should understand the risk inherent within the separate account

and ensure that the risk is appropriate for the bank. Also, the bank
should establish monitoring and reporting systems that will enable the
bank to monitor and respond to price fluctuations.

**Liquidity Risk**

Liquidity risk is the risk to earnings or capital arising from a bank\'s
inability to meet its obligations when they come due, without incurring
unacceptable losses. Usually, life insurance policies are not marketable
and are illiquid. A secondary market for life insurance does not exist.
Although the CSV of policies can be accessed quickly, it typically
involves substantial loss. To access the CSV, the bank must withdraw
from or borrow against the policy. This may subject the bank to
surrender charges, taxes on the gain, and a tax penalty. In addition,
the policyholder generally does not receive any cash flow until the
death benefit is paid. The lack of liquidity in the product is more
significant given that banks normally purchase life insurance policies
through a conversion of a liquid asset (cash or marketable securities).

Before purchasing permanent insurance, management should recognize the
illiquid nature of the product and ensure the bank has the long‑term
financial flexibility to hold this asset in accordance with its expected
use. The inability of a bank to hold the life insurance until maturity
(collection of death benefits) may compromise the success of the COLI
plan.

+-------+---+-----------------------+-----------+-----------------+---+
| # O   | # |                       |           |                 |   |
|       | # |                       |           |                 |   |
| ##    | # |                       |           |                 |   |
|       | # |                       |           |                 |   |
|       |   |                       |           |                 |   |
|       | O |                       |           |                 |   |
|       | C |                       |           |                 |   |
|       | C |                       |           |                 |   |
|       |   |                       |           |                 |   |
|       | 2 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
|       | - |                       |           |                 |   |
|       | - |                       |           |                 |   |
|       | 2 |                       |           |                 |   |
|       | 3 |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
|       | * |                       |           |                 |   |
|       | * |                       |           |                 |   |
|       | O |                       |           |                 |   |
|       | C |                       |           |                 |   |
|       | C |                       |           |                 |   |
|       | B |                       |           |                 |   |
|       | U |                       |           |                 |   |
|       | L |                       |           |                 |   |
|       | L |                       |           |                 |   |
|       | E |                       |           |                 |   |
|       | T |                       |           |                 |   |
|       | I |                       |           |                 |   |
|       | N |                       |           |                 |   |
|       | * |                       |           |                 |   |
|       | * |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
| ## Co |   |                       |           |                 |   |
| mptro |   |                       |           |                 |   |
| ller  |   |                       |           |                 |   |
| of th |   |                       |           |                 |   |
| e Cur |   |                       |           |                 |   |
| rency |   |                       |           |                 |   |
|       |   |                       |           |                 |   |
| > Adm |   |                       |           |                 |   |
| inist |   |                       |           |                 |   |
| rator |   |                       |           |                 |   |
| > of  |   |                       |           |                 |   |
| > Nat |   |                       |           |                 |   |
| ional |   |                       |           |                 |   |
| >     |   |                       |           |                 |   |
| Banks |   |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
| #     |   | ## Bank Purcha        | ## Des    | ##              |   |
| # Sub |   | ses of Life Insurance | cription: |  Guidelines for |   |
| ject: |   |                       |           |  National Banks |   |
+-------+---+-----------------------+-----------+-----------------+---+

######## Compliance Risk

Compliance risk is the risk to earnings or capital arising from
violations of, or non‑conformance with, laws, rules, regulations,
prescribed practices, or ethical standards. Failure to comply with
applicable laws, rules, regulations, and prescribed practices (including
this bulletin) could compromise the success of a COLI program and result
in significant losses for the bank as a result of fines, penalties, or
loss of tax benefits. Because tax benefits are critical to the success
of most COLI plans, management of a national bank should exercise
caution to ensure that its plans comply with all applicable tax laws. In
addition, bank management should ensure compliance with other applicable
legal and regulatory standards. Other common legal and regulatory
considerations include compliance with state insurable interest laws,
the Employee Retirement Income Security Act of 1974 (ERISA), sections
23A and 23B of the Federal Reserve Act, 12 CFR Part 215 (Regulation O),
and Appendix A to 12 CFR Part 30 ‑ Interagency Guidelines Establishing
Standards for Safety and Soundness. Due to the significance of the
compliance risk, a national bank may want to seek the advice of
qualified counsel.

**Price Risk**

Price risk is the risk to earnings or capital arising from changes in
the value of portfolios of financial instruments. Typically, the
policyholder of separate account products assumes all price risk
associated with the investments within the separate account. Usually,
neither the CSV nor the interest crediting rate on separate account
products is guaranteed by the carrier. The amount of price risk is
dependent upon the type of assets held within the separate account.

Because the bank does not control the separate account assets, it is
more difficult for the bank to control the price risk. Therefore, before
purchasing a separate account life insurance product, bank management
should thoroughly review and understand the instruments governing the
investment policy and management of the separate account. Management
should understand the risk inherent in the separate account and ensure
that the risk is appropriate for the bank. Also, bank management should
establish monitoring and reporting systems that will enable them to
monitor and respond to price fluctuations.

+-------+---+-----------------------+-----------+-----------------+---+
| # O   | # |                       |           |                 |   |
|       | # |                       |           |                 |   |
| ##    | # |                       |           |                 |   |
|       | # |                       |           |                 |   |
|       |   |                       |           |                 |   |
|       | O |                       |           |                 |   |
|       | C |                       |           |                 |   |
|       | C |                       |           |                 |   |
|       |   |                       |           |                 |   |
|       | 2 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
|       | - |                       |           |                 |   |
|       | - |                       |           |                 |   |
|       | 2 |                       |           |                 |   |
|       | 3 |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
|       | * |                       |           |                 |   |
|       | * |                       |           |                 |   |
|       | O |                       |           |                 |   |
|       | C |                       |           |                 |   |
|       | C |                       |           |                 |   |
|       | B |                       |           |                 |   |
|       | U |                       |           |                 |   |
|       | L |                       |           |                 |   |
|       | L |                       |           |                 |   |
|       | E |                       |           |                 |   |
|       | T |                       |           |                 |   |
|       | I |                       |           |                 |   |
|       | N |                       |           |                 |   |
|       | * |                       |           |                 |   |
|       | * |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
| ## Co |   |                       |           |                 |   |
| mptro |   |                       |           |                 |   |
| ller  |   |                       |           |                 |   |
| of th |   |                       |           |                 |   |
| e Cur |   |                       |           |                 |   |
| rency |   |                       |           |                 |   |
|       |   |                       |           |                 |   |
| > Adm |   |                       |           |                 |   |
| inist |   |                       |           |                 |   |
| rator |   |                       |           |                 |   |
| > of  |   |                       |           |                 |   |
| > Nat |   |                       |           |                 |   |
| ional |   |                       |           |                 |   |
| >     |   |                       |           |                 |   |
| Banks |   |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
| #     |   | ## Bank Purcha        | ## Des    | ##              |   |
| # Sub |   | ses of Life Insurance | cription: |  Guidelines for |   |
| ject: |   |                       |           |  National Banks |   |
+-------+---+-----------------------+-----------+-----------------+---+

Banks may purchase separate account insurance products that hold equity
securities for the purpose of hedging their obligations under employee
compensation and benefit plans.[^12] This lessens the effect of price
risk on the bank's financial statements because changes in the amount of
the bank's liability will be hedged by changes in the value of the
separate account assets. An example of such a relationship would be
where the amount of the bank's deferred compensation obligation is
measured by the value of a stock market index, and the separate account
contains a stock mutual fund that mirrors the performance of that index.
If the insurance cannot be characterized as an effective hedging
transaction***,*** the presence of equity securities in a separate
account is impermissible.

In addition to the general considerations discussed above, which are
applicable to any separate account product, further analysis should be
performed when purchasing a separate account product involving equity
securities. At a minimum, national banks should:

1.  Analyze the bank liability being hedged (*e.g*., deferred
    compensation) and the equity securities to be held as a hedge in the
    separate account. Such an analysis usually documents the correlation
    between the liability and the equity securities, expected returns
    for the securities (including standard deviation of returns), and
    current and projected asset and liability balances.

2.  Determine a target hedge effectiveness ratio and establish a method
    for measuring hedge effectiveness. Establish a process for altering
    the program if hedge effectiveness drops below acceptable levels.
    Consideration should be given to the potential costs of program
    changes.

3.  Establish a process for analyzing and reporting the effect of the
    hedge on the bank's income statement and capital ratios. Such an
    analysis usually shows results both with and without the hedging
    transaction.

+-------+---+-----------------------+-----------+-----------------+---+
| # O   | # |                       |           |                 |   |
|       | # |                       |           |                 |   |
| ##    | # |                       |           |                 |   |
|       | # |                       |           |                 |   |
|       |   |                       |           |                 |   |
|       | O |                       |           |                 |   |
|       | C |                       |           |                 |   |
|       | C |                       |           |                 |   |
|       |   |                       |           |                 |   |
|       | 2 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
|       | - |                       |           |                 |   |
|       | - |                       |           |                 |   |
|       | 2 |                       |           |                 |   |
|       | 3 |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
|       | * |                       |           |                 |   |
|       | * |                       |           |                 |   |
|       | O |                       |           |                 |   |
|       | C |                       |           |                 |   |
|       | C |                       |           |                 |   |
|       | B |                       |           |                 |   |
|       | U |                       |           |                 |   |
|       | L |                       |           |                 |   |
|       | L |                       |           |                 |   |
|       | E |                       |           |                 |   |
|       | T |                       |           |                 |   |
|       | I |                       |           |                 |   |
|       | N |                       |           |                 |   |
|       | * |                       |           |                 |   |
|       | * |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
| ## Co |   |                       |           |                 |   |
| mptro |   |                       |           |                 |   |
| ller  |   |                       |           |                 |   |
| of th |   |                       |           |                 |   |
| e Cur |   |                       |           |                 |   |
| rency |   |                       |           |                 |   |
|       |   |                       |           |                 |   |
| > Adm |   |                       |           |                 |   |
| inist |   |                       |           |                 |   |
| rator |   |                       |           |                 |   |
| > of  |   |                       |           |                 |   |
| > Nat |   |                       |           |                 |   |
| ional |   |                       |           |                 |   |
| >     |   |                       |           |                 |   |
| Banks |   |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
| #     |   | ## Bank Purcha        | ## Des    | ##              |   |
| # Sub |   | ses of Life Insurance | cription: |  Guidelines for |   |
| ject: |   |                       |           |  National Banks |   |
+-------+---+-----------------------+-----------+-----------------+---+

##### ACCOUNTING CONSIDERATIONS

National banks should follow generally accepted accounting principles
(GAAP) for financial reporting and Call Report purposes. Financial
Accounting Standards Board (FASB) Technical Bulletin 85‑4, "Accounting
for Financial Purchases of Life Insurance" (TB 85‑4) discusses how to
account for investments in life insurance. The guidance set forth in TB
85‑4 is generally appropriate for all forms of COLI.

Under TB 85‑4, a national bank should record its interest in the
policy\'s CSV as an "other asset." The increase in the CSV over time
would be recorded as "other noninterest income." In accordance with Call
Report requirements, the bank should update its interest in the CSV at
least quarterly.

**APPLICATION OF THE GUIDELINES**

The guidelines in this bulletin are applicable to all purchases of life
insurance entered into after the date of this bulletin. Purchases of
life insurance policies entered into before the date of this bulletin
will be evaluated in the following manner.

[Policies purchased after issuance of former Banking
Circular]{.underline} [(BC)‑249, Bank Purchases of Life
Insurance]{.underline}

Policies purchased after February 4, 1991, should comply with either the
guidelines contained in former BC‑249 or with the guidelines in this
bulletin.

[Policies]{.underline} [Purchased before the issuance of]{.underline}
[former BC‑249, Bank Purchases of Life Insurance]{.underline}

Policies purchased before February 4, 1991, are provided a "safe harbor"
if the following three conditions are met:

• The policies are convenient or useful in connection with the conduct
of the bank\'s business.

• The policies do not threaten the safety and soundness of the,
institution.

-   The policies do not represent insider abuse or violate other laws,
    rules, or regulations.

+-------+---+-----------------------+-----------+-----------------+---+
| # O   | # |                       |           |                 |   |
|       | # |                       |           |                 |   |
| ##    | # |                       |           |                 |   |
|       | # |                       |           |                 |   |
|       |   |                       |           |                 |   |
|       | O |                       |           |                 |   |
|       | C |                       |           |                 |   |
|       | C |                       |           |                 |   |
|       |   |                       |           |                 |   |
|       | 2 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
|       | 0 |                       |           |                 |   |
|       | - |                       |           |                 |   |
|       | - |                       |           |                 |   |
|       | 2 |                       |           |                 |   |
|       | 3 |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
|       | * |                       |           |                 |   |
|       | * |                       |           |                 |   |
|       | O |                       |           |                 |   |
|       | C |                       |           |                 |   |
|       | C |                       |           |                 |   |
|       | B |                       |           |                 |   |
|       | U |                       |           |                 |   |
|       | L |                       |           |                 |   |
|       | L |                       |           |                 |   |
|       | E |                       |           |                 |   |
|       | T |                       |           |                 |   |
|       | I |                       |           |                 |   |
|       | N |                       |           |                 |   |
|       | * |                       |           |                 |   |
|       | * |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
| ## Co |   |                       |           |                 |   |
| mptro |   |                       |           |                 |   |
| ller  |   |                       |           |                 |   |
| of th |   |                       |           |                 |   |
| e Cur |   |                       |           |                 |   |
| rency |   |                       |           |                 |   |
|       |   |                       |           |                 |   |
| > Adm |   |                       |           |                 |   |
| inist |   |                       |           |                 |   |
| rator |   |                       |           |                 |   |
| > of  |   |                       |           |                 |   |
| > Nat |   |                       |           |                 |   |
| ional |   |                       |           |                 |   |
| >     |   |                       |           |                 |   |
| Banks |   |                       |           |                 |   |
+-------+---+-----------------------+-----------+-----------------+---+
| #     |   | ## Bank Purcha        | ## Des    | ##              |   |
| # Sub |   | ses of Life Insurance | cription: |  Guidelines for |   |
| ject: |   |                       |           |  National Banks |   |
+-------+---+-----------------------+-----------+-----------------+---+

If these conditions are met, no further action by the bank is needed.
However, the OCC may require corrective action at any time during the
bank\'s ownership or while it has a beneficial interest in a policy, if
any of the three conditions are not met. Such determinations will be
made on a case by case basis.

**ORIGINATING OFFICE**

For further information about this bulletin, contact the Office of the
Deputy Comptroller for Credit Risk at (202) 874‑5170.

Emory W. Rushton

Senior Deputy Comptroller for Bank Supervision Policy

[^1]: The appendix contains a discussion of each of these four uses of
    COLI.

[^2]: Permanent insurance and cash surrender value are described in the
    appendix on page 1.

[^3]: ^?^ The purchase of life insurance on borrowers whose obligations
    have been charged‑off, or are expected to be charged‑off, is further
    discussed in the appendix on pages 6‑7.

[^4]: Life insurance acquired through DPC is further discussed in the
    appendix on page 7.

[^5]: The relationship between "key‑person" insurance and management
    succession planning is discussed in the appendix on pages 4‑5.

[^6]: "Key‑person" insurance and life insurance on borrowers are
    discussed further in the appendix on pages 4‑7.

[^7]: Split-dollar insurance arrangements are defined and discussed in
    the appendix on pages 3-4.

[^8]: The interest crediting rate refers to the gross yield on the
    investment in the insurance policy, *i.e.,* the rate at which the
    cash value increases before considering any deductions for mortality
    cost, load charges, or other costs that are periodically charged
    against the policy\'s cash value. Insurance companies frequently
    disclose a current interest crediting rate and a guaranteed minimum
    interest crediting rate. The guaranteed rate may be less than the
    current rate. As a result, the potential exists for future declines
    in the interest crediting rate.

[^9]: Mortality cost represents the cost imposed on the policyholder by
    the insurance company to cover the amount of pure insurance
    protection for which the insurance company is at risk.

[^10]: General account products are defined in the appendix on page 2.

[^11]: Variable or separate account products are defined in the appendix
    on page 2.

[^12]: An economic hedge exists when changes in the value of the
    liability or other risk exposure being hedged are offset by
    counterbalancing changes in the value of the hedging instrument.