Missouri Code of State Regulations › Title 20 - DEPARTMENT OF COMMERCE AND INSURANCE › Division 1140 - Division of Finance › Chapter 2 - Banks and Trust Companies › Section 20 CSR 1140-2.055 - Purchase of Bank Owned Life Insurance

Current through Register Vol. 49, No. 14, July 15, 2024
PURPOSE: The Division of Finance routinely receives
				  inquiries about the purchase of life insurance. Some bankers indicate they have
				  considered purchasing life insurance policies and treating the cash surrender
				  value as a significant portion of the bank's capital account. A bank may,
				  within the bank's incidental powers, purchase life insurance reasonably related
				  to a legitimate bank interest. A bank may not purchase life insurance for
				  investment purposes. This rule sets guidelines for the purchase of bank owned
				  life insurance.
(1) The
				powers and authorities of banks and trust companies (bank) are set out in
				section
				362.105,
				RSMo. This statute is specific in the type of investments authorized by banks
				and it does not include the purchase of life insurance for the bank's own
				account as an investment. Accordingly, any purchase of insurance is allowed
				only if it is within the incidental powers of a bank or it is reasonably
				related to a legitimate bank interest such as the interest in protecting itself
				against loss.
(2) A bank may
				purchase life insurance to indemnify itself against the loss of key management
				personnel. The amount of insurance purchased must be reasonable in relation to
				the size and needs of the bank. Also, the board of directors must document the
				basis upon which it determines who qualifies to be covered by the insurance.
				The board must document the basis for determining the amount of insurance
				needed to indemnify the bank against the death of each individual. The bank
				must document and be able to demonstrate an insurable interest and a legitimate
				insurance need when insuring a key person. The authority to hold such a policy
				lapses if, because of a change in employment status or responsibilities, the
				individual is no longer considered a key person.
(3) A bank may purchase life insurance in
				conjunction with providing employee compensation and benefits or when the
				insurance is paid in part to the bank and to the employee, which is commonly
				referred to as split dollar insurance. A bank may also purchase life insurance
				in connection with an employee compensation and benefit plan. The bank's
				funding obligation must be reasonable and the projected cash flow from a life
				insurance policy must not substantially exceed the projected liabilities to
				fund the compensation or benefit program. Such life insurance policies may be
				held only so long as the bank's liability under the associated compensation or
				benefit plan continues.
(4) A bank
				may purchase, at the bank's expense, insurance on the life of a borrower to
				protect its interest in the event of the death of the borrower. The maximum
				amount of insurance should not exceed the principal balance of the borrower's
				obligation. Similarly, a bank may take security interest in an existing policy.
				In no event may the bank's decision to make a loan be based on the availability
				of the insurance proceeds for repayment of the loan.
(5) Accounting for bank owned life insurance
				policies must be consistent with the requirements of generally accepted
				accounting principles. However, in no event may a bank carry the value of that
				policy as an asset on its books in an amount which exceeds the current cash
				surrender value of the policy.
(6)
				The cash surrender value of the policy represents funds due from a corporation
				and therefore may not exceed the limit on loans to one (1) borrower set by
				section
				362.170,
				RSMo. The legal loan limit also will apply to the aggregate book value of all
				policies, including subsequent earnings, which are purchased from the same
				company. The bank should examine the financial condition of the insurance
				company before purchasing the policy and maintain access to and periodically
				review recent financial statements of the insurance company. Finally, if the
				aggregate cash surrender value of all these policies owned by the bank is large
				in relation to the bank's total capital account, these amounts will be
				considered a concentration of credit.
*Original authority: 361.105, RSMo 1967, amended 1993,
					 1994, 1995 and 362.105, RSMo 1939, amended 1949, 1963, 1965, 1967, 1977, 1983,
					 1986, 1990, 1991, 1992, 1995, 2000,
					 2001.