I guess it depends; Cash values grow tax-deferred ,tax-free if held until death. BOLI is considered to be a long term illiquid asset not because of its lack of liquidity, as it can be surrendered at any time without policy charges. However if a BOLI contract is surrendered by the bank the gains within the policy become taxable as well as a 10% IRS penalty on the gain similar to surrendering an IRA prior to age 59 1/2. So,BOLI can be surrendered at any time for its cash surrender value. However, doing so may cause adverse tax consequences to the bank. If the policy is held to the death of each insured, the gain becomes part of the tax free death benefit and no tax is incurred. Assuming the bank is in a profitable position it is unlikely they would wish to pay taxes on the gain unless the liquidity of the asset is needed. most life insurance companies offer beneficiaries the option of receiving death benefit proceeds as a series of equal payments over a pre-determined period of time, I mean as annuity, rather than in a single lump sum. Recipients who select this payout method typically receive more money because the benefit amount is transferred into an interest-bearing account. In those cases, the portion of each payment considered interest earnings above the actual death benefit is fully taxable as ordinary income.
Typically, beneficiaries do not have to pay income tax on life insurance death benefits when they are received as a lump sum. However, some insurance companies usually offer beneficiaries a choice of payout options other than a single lump sum. In this case, a portion of these payouts may be considered taxable earnings. There are also other circumstances in which life insurance benefits may be taxed. Life insurance policy proceeds are distributed to named beneficiaries without income tax liability. Beneficiaries who receive a single lump sum as a life insurance death benefit are not obligated to report the payout or include it in gross income calculations. The only exception to this rule would be if a beneficiary received an amount greater than the actual death benefit. Although rare, this situation may occur when the insurance company temporarily places the death benefit in an interest-bearing account while awaiting documentation, or while the beneficiary investigates possible consequences of the various payout options. In addition to the lump sum distribution, the beneficiary would receive any interest generated by the policy proceeds, and that excess is taxable