Your life, your employer's tax-free cash.

[Samuel]

I was under the impression insurance rates were set so that individuals, on average, would not make a profit with life insurance (or else the insurance companies would be out of business). How are these companies managing to pull this off?

[Master of Ossus]

I was under the impression insurance rates were set so that individuals, on average, would not make a profit with life insurance (or else the insurance companies would be out of business). How are these companies managing to pull this off?

Yeah, it's purely so they can arbitrage the tax-free nature of life insurance policies. The idea in the scheme that was shown to me (they're probably more sophisticated, by now) was basically that you have a bank loan you money to buy term life insurance policies on all your employees. You then name yourself as nominal beneficiary, but assign the proceeds to the bank (with the bank having agreed to accept the life insurance payments in lieu of repayment of the principal on the loan and maybe even part of the interest). You may have to pay interest on that loan (say, 10%--the rate is usually pretty high for this sort of transaction), but that's in pre-tax dollars because the interest is deductible.

The insurance company doesn't care what's going on--they're just selling you a whole bunch of insurance policies--so from their perspective this is just a typical transaction, if an unusually large one. You "lose" money because you're paying the high interest rate, but interest is tax-deductible and so you're spending only pre-tax money. If you're in a sufficiently high tax bracket as a company then you can make post-tax money when you repay the loan using the proceeds from the life insurance, because the life insurance proceeds come back tax free and the interest rate you're paying is tax-deductible, too. So in essence you take out a "sham" loan against future "earnings" on which you pay pre-tax interest but receive post-tax dollars in the form of life insurance proceeds that you can send on to the bank to repay the principal. It's basically a textbook tax shelter: no one would do this for any reason other than tax savings; it's clearly outside what Congress and the Treasury intended. It used to work with large companies (I'm surprised it still does), and I still wish I had thought of it.

[Coalition]

Well considering the record with Winn-Dixie exposing their employees to all kinds of toxic stuff, I guess they got busted for insurance fruad....

Maybe. But many kinds of life insurance policies specifically don’t cover work accidents so that’s not a given.

Are the life insurance companies also keeping an eye on the company and employee, so that if the company effectively stresses the employee to death, that company doesn't get anything? The company doesn't physically harm them, but it just exposes the employee to higher and higher amounts of stress, until the employee quits or dies from too much stress.

Essentially, the company practices insurance fraud to kill the employee, and collect on the policy.

The insurance company would want to pay off after the employee leaves though. This keeps them from having to pay out several copies of the same policy if one person dies.

[SirNitram]

To clear up any confusion or mis-attributing my post.. The title is literal. As long as you have a pulse, this is a nice pile of tax-free and tax-deferred money for your corporation. The last two things I am upset about are due to what I think are how life insurance works. Please correct if not:

1) Insurance plans and money are safe from debtors. THerefore, if a company holding many of these goes down, the money goes to the CEO or some other member of the executives, no matter how many debtors are owed.

2) You can overpay premiums, and get 'cash value', a handy source of loan backing, which again benefits from insurance protections and is tax deferred.

This are hazy memories, but I'll be eager to hear if I'm right or wrong.

[Master of Ossus]

Are the life insurance companies also keeping an eye on the company and employee, so that if the company effectively stresses the employee to death, that company doesn't get anything? The company doesn't physically harm them, but it just exposes the employee to higher and higher amounts of stress, until the employee quits or dies from too much stress.

Presumably the life insurance company has looked into the employer ahead of time and knows what sort of risks it's taking by agreeing to the policies. Also, the bank has to have a good idea of what's going on.

Essentially, the company practices insurance fraud to kill the employee, and collect on the policy.

The insurance company would want to pay off after the employee leaves though. This keeps them from having to pay out several copies of the same policy if one person dies.

But it's not a "blanket" policy that covers all the employees working for an employer: the employer is insuring the specific people that it has working for it at a given time, and has separate policies for everyone who works there.

[Master of Ossus]

To clear up any confusion or mis-attributing my post.. The title is literal. As long as you have a pulse, this is a nice pile of tax-free and tax-deferred money for your corporation. The last two things I am upset about are due to what I think are how life insurance works. Please correct if not:

1) Insurance plans and money are safe from debtors. THerefore, if a company holding many of these goes down, the money goes to the CEO or some other member of the executives, no matter how many debtors are owed.

They shouldn't be (assuming you mean "creditors"). The insurance policies would all be assets of the bankruptcy estate, and the bankruptcy court would decide what to do with them. I mean, the policy doesn't belong to the executives--the company bought them. It's just like any other asset that the company owns and operates, in this sense.

2) You can overpay premiums, and get 'cash value', a handy source of loan backing, which again benefits from insurance protections and is tax deferred.

This are hazy memories, but I'll be eager to hear if I'm right or wrong.

I don't know what you mean by "overpay premiums," but yes, the point of this is to free up financing by arbitraging the tax advantages Congress gives to life insurance.

[aerius]

I wonder if a self-employed person could take out a life insurance policy on himself and claim it as a deductible as well as using it as a tax write-off? If possible, that would be one hell of a nice scam to pull off.

[Samuel]

So basically this is just a loophole in the tax laws. Why hasn't the government fixed this yet? How much money are these companies managing to keep out of the possession of the IRS?

[Master of Ossus]

I wonder if a self-employed person could take out a life insurance policy on himself and claim it as a deductible as well as using it as a tax write-off? If possible, that would be one hell of a nice scam to pull off.

That's not how it works, at all. You buy the insurance with post-tax dollars, and the benefits of it go tax-free to the beneficiary. It's the same rules for everyone.

So basically this is just a loophole in the tax laws. Why hasn't the government fixed this yet? How much money are these companies managing to keep out of the possession of the IRS?

I thought that the government had fixed this. I don't know how much it's worth.

[PainRack]

Why? It has absolutely no effect on the employee. It's like saying that people should be able to opt out of having their name on a list of all of the people employed by the company that HR keeps and updates quarterly.

Frankly, it seems to me like the guy's family is just looking for an issue--any issue--to sue someone about. The practical effect of this dumb rule is non-existent: companies that do this will just require you to agree to this as a condition of employment (oh, and by the way, those money-grubbers might get some sort of settlement). What a great victory for the little guy in America.

Because its an ethics issue. Even though the payer is the company in question and no consequences happen to the employee, its his name on the contract and as an adult, informed consent should be paramount.