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Many banks hold life insurance policies on their key executives and employees, though few non-bankers know about this growing industry practice.

Because dividends on the policies are tax-free if held to maturity, banks can use the additional income to offset the costs of their employee compensation and benefits packages, and eventually collect the death benefits as well.

“Banks have been purchasing insurance as an owner and beneficiary since the mid-1980s,” said Jamie Corbin, director of financial institutions with Silverstone Group Inc. The Omaha-based insurance firm, which specializes in customized risk-management programs, employee benefits and private-client services, recently hired Corbin to launch an office in Greater Des Moines. He will specialize in offering bank-owned life insurance (BOLI) to banks in Iowa and across the Midwest.

In recent years. issuers of BOLI policies have largely focused on banks with more than $500 million in assets. Silverstone will focus primarily on offering the products to community banks, Corbin said. “That’s where the significant opportunity is,” he said.

Corbin, who has 27 years of experience in the financial services industry, originally came to Des Moines in 1997 when he joined AmerUs Group Co., where he launched a bank distribution group for the insurer. He left AmerUs, now part of British insurance giant Aviva plc, in 2002 to become a partner in a New York firm specializing in BOLI. He joined Silverstone earlier this year.

Silverstone, which has nearly 200 employees, works with companies of all sizes in the areas of employee benefits and risk-management products as well as human-resource consulting, said Tom Von Riesen, who leads the firm’s BOLI practice from its Omaha headquarters. It also has offices in Lincoln, Neb., Council Bluffs and Sioux Falls, S.D.

Earlier this month, Silverstone announced an affiliation with M Benefit Solutions – Bank Strategies, an executive and director benefit planning firm based in Portland, Ore. As an adviser firm to M Benefit Solutions, Silverstone plans to significantly expand its BOLI business by offering the insurance in addition to its other employee benefits programs.

In addition to establishing a presence for the first time in Greater Des Moines, “this will be a new focus to really concentrate on the financial services industry,” Von Riesen said. “Another opportunity is that banks also have needs for employee benefits that our company provides. So it’s not only a way to grow our BOLI practice, but to grow the firm as a whole.”

An industry research firm estimates that U.S. banks last year held more than $126 billion in bank-owned life insurance assets, a 5 percent increase from 2007.

Banks’ use of the insurance products has come under greater scrutiny from regulators in recent years, in response to instances of some banks acquiring high concentrations of insurance assets relative to their capital. Under rules created in 2004, banks may not use BOLI for speculative purposes or to generate funds for normal operating expenses other than employee compensation, among other restrictions. In 2006, Internal Revenue Service guidelines were enacted requiring enhanced reporting by banks of their BOLI transactions.

Corbin said BOLI policies have evolved over the years from off-the-shelf products to highly customized solutions that maximize benefits to the banks holding them while addressing increased regulatory requirements.

“I think to have a special focus in that area is something that creates a big opportunity (for Silverstone), as opposed to a general practitioner that doesn’t have that expertise in that area,” he said.

Despite the additional regulations, at least three major banks lost hundreds of millions of dollars last year after investing significant portions of their BOLI assets in a hedge fund managed by Citigroup Inc. in a move to ramp up earnings on those assets.

Congress is now considering making dividends on BOLI policies taxable, a move that the Independent Community Bankers of America (ICBA) opposes, saying it “would do significant damage” to many of its members. The organization represents more than 5,000 financial institutions.

“BOLI has long been an important tool used by our members to protect jobs and provide employer benefits, including retirement plans,” ICBA President and CEO Camden Fine wrote in a June 11 letter to Sen. Charles Grassley and other key congressional leaders. “Banks and their small business customers are under great duress during the financial crisis, capital crunch, and deep recession. The proposed BOLI alterations would only make things worse.”

M Benefit Solutions has been the ICBA’s preferred service provider for executive and director benefits for the past five years, and recently renewed that affiliation for another two years.

The use of BOLI by state-chartered banks in Iowa is “fairly common,” said Iowa Banking Commissioner Tom Gronstal. Though the Iowa Division of Banking does not maintain statistics on BOLI, Gronstal estimated that between one-third and one-half of Iowa’s state-chartered banks have BOLI policies.

State banking regulations prohibit banks from holding more than 15 percent of their capital with any one insurance company, or more than 25 percent of their capital in BOLI investments, Gronstal said.

Additionally, “we try to encourage banks to use the old-line companies with traditional life insurance products, because you really don’t get into any problems with those,” he said.

Taking away the tax-exempt status of BOLI dividends would significantly lessen the appeal of bank-owned life insurance, Gronstal said.

“It really only works well because of the tax advantages, so it they took the tax advantages away, it’s not going to be a very good product,” he said.

Corbin said the provision has not yet been attached to any legislation, and that he’s hopeful the measure won’t advance.

“The key thing that banks look at is that it provides an offset, really, for a lot of the employee benefits costs,” Corbin said. “And because of the tax-free nature, BOLI provides a good increase in net income, return on assets and return on equity. So that’s been a significant driver for banks that have moved into a bank-owned life insurance program.”