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

[SirNitram]

Link

Life insurance used to be rather straightforward, known for offering security to loved ones in a tough time.

So when Irma Johnson learned that her husband, Daniel, who died of brain cancer, had been insured for $1.5 million, it should have been at least a small comfort.

But she did not receive the money. His employer did.

It's one of the strangest free-market perversions that Michael Moore highlights in his latest film, "Capitalism: A Love Story."

In the corporate practice dubbed "Dead Peasants" life insurance, companies wager on employees' lives, expecting to make money when they die.

And it's pervasive, said Mike Myers, an attorney who has uncovered many of these cases and helped angry relatives sue.

"Life insurance is traditionally used to guard against the death of breadwinners. This is an investment scheme," he said.

Dozens of blue chip companies have these policies, according to Myers. But only banks are forced to reveal them, and several have billions of dollars worth of policies.

"The driving force behind it is the tax deductions," he said.

The life insurance policies were designed to allow companies to insure a few crucial executives. Savvy companies then realized they could also get a tax break by insuring many lower-level employees.

The financial scheme doesn't actually cost the employees anything, except, some say, their trust.

Betina Tillman felt shocked and deceived when a reporter from The Wall Street Journal told her that her brother, a music store cashier, was insured by his employer for $339,000 when he died, despite the fact that he no longer worked at the store.

"We were just in disbelief they were able to do it, and actually cash the policy and cash in on the policy," Tillman said.

Families Battle in Court

She sued, and won. Now, the government mandates that companies obtain the consent of employees.

In the case of Daniel Johnson, Amegy Bank told ABC News that Johnson did give his consent, but Irma disputes that, and she's suing. Rep. Gene Green, D-Texas, has pushed for even tougher restrictions. "We hope our laws are based on not only fairness, but morals," Green told ABC News. "And to me, it's immoral to benefit from your death if I don't know you." Meanwhile, for those who feel they have been wronged and were never told about the insurance, it's up to them to brave the court system.

"It was a matter of making sure we did the right thing and something that would honor our brother," Tillman said. "We sent a message across to that company, to let them know you may have gotten away with it all these years, but not this time."

All I can say, in the knowledge that your death enriches your boss, is this.

"St. Peter don't you call me 'cause I can't go...
I owe my soul to the Company Store."

[Serafina]

To be fair, they are only betting on the death of their employees, not robbing their life insurances.

Which is still horrible, and while i can not find a good reason to call it immoral yet, it is simply revulsing.

[Master of Ossus]

Yeah, this was a tax scheme for a while. I thought that the courts had dealt with this by determining that this was a form of tax-fraud, but obviously not. Virtually all companies have insurance policies on their executives and board members, and no one has a problem with that because they're expensive and difficult to replace, and so the argument was that if that was okay then it should be okay to take out policies on managers, and eventually on every employee in the company. I think that Winn-Dixie was the one that finally got busted by the IRS for this, and I assumed that that eliminated the schemes, but obviously not.

(Also, given the way the scheme works, it's kind of hard to argue that the employee's "death" is the thing that enriches the employer--the death of an employee is pretty much a non-factor for them--they're just out for the deduction and then take out a high-interest loan against the proceeds, so the proceeds go somewhere else. Really the employee's existence is what's doing it--the company and the bank and the insurance company are all just looking at the law of large numbers and understanding that this would work for all of them, given the tax implications for the various parties. If anything, the bank that makes the loan is the one that gets the benefits of the policy).

Edit: I don't really see why the employee would object to this type of thing. It's not like a company is telling them that this is some great employment benefit they'll receive if they work there. It arguably screws taxpayers in general, since the IRS isn't getting as much in tax revenue as it ordinarily would, but I don't understand how an employee's family would later have a claim against the company that would mandate employee consent on this type of policy.

[Kodiak]

Edit: I don't really see why the employee would object to this type of thing. It's not like a company is telling them that this is some great employment benefit they'll receive if they work there. It arguably screws taxpayers in general, since the IRS isn't getting as much in tax revenue as it ordinarily would, but I don't understand how an employee's family would later have a claim against the company that would mandate employee consent on this type of policy.

I think what's horrifying is that big companies keep screaming about how they can't afford the cost of insurance/benefits/etc and so rather than slash overhead or executive bonuses they take out insurance policies on their "peasants" without their knowledge. It's not illegal, it's just rather macabre.

[SCRawl]

I don't really see why the employee would object to this type of thing. It's not like a company is telling them that this is some great employment benefit they'll receive if they work there. It arguably screws taxpayers in general, since the IRS isn't getting as much in tax revenue as it ordinarily would, but I don't understand how an employee's family would later have a claim against the company that would mandate employee consent on this type of policy.

I think that it's pure emotion. Someone's loved one dies, usually tragically, and then finds out that a faceless company gets to profit from that tragedy. Logically, the employee has no standing to be outraged, but people don't always behave logically.

[Master of Ossus]

I think what's horrifying is that big companies keep screaming about how they can't afford the cost of insurance/benefits/etc and so rather than slash overhead or executive bonuses they take out insurance policies on their "peasants" without their knowledge.

It's not an "either/or" thing. And companies don't owe a duty to their employees to tell them about every activity that they're engaging in.

It's not illegal, it's just rather macabre.

Why?

[Mr Bean]

As happens once a employee leaves the company, they get to keep the policy on them as Walmart does. Work at Walmart for any length of time? You might have a life insurance policy on you still. And will until you dieing day or until they stop paying the premiums.

[Knife]

It's not an "either/or" thing. And companies don't owe a duty to their employees to tell them about every activity that they're engaging in.

Except they should if it has their name on it. If any policy affects you or has your name on it or is related to you in any way, such as having your name attached to it, you should at the very least know about it if not be able to say yes/no about it.

[Master of Ossus]

It's not an "either/or" thing. And companies don't owe a duty to their employees to tell them about every activity that they're engaging in.

Except they should if it has their name on it. If any policy affects you or has your name on it or is related to you in any way, such as having your name attached to it, you should at the very least know about it if not be able to say yes/no about it.

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.

[AMT]

It's not an "either/or" thing. And companies don't owe a duty to their employees to tell them about every activity that they're engaging in.

Except they should if it has their name on it. If any policy affects you or has your name on it or is related to you in any way, such as having your name attached to it, you should at the very least know about it if not be able to say yes/no about it.

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.

So in other words, I should be able to put a life insurance claim out on you, even though I have no personal contact with you, without your knowledge, and, when you die, be able to collect on it. And you'd have no problem with that, right?

[Sea Skimmer]

I don’t see the problem with regular companies trying to make money off the insurance industry, which rapes everyone else on earth every chance it gets. Like the article says its just an investment scheme and not at all a new one.

[The Yosemite Bear]

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

[Sea Skimmer]

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.

[Master of Ossus]

So in other words, I should be able to put a life insurance claim out on you, even though I have no personal contact with you, without your knowledge, and, when you die, be able to collect on it. And you'd have no problem with that, right?

If you were my employer, I would have no problem with that whatsoever. In fact, my employer does have an insurance policy out on my life (as well as on my inability to come to work). That you can't do that with random strangers is an entirely different policy question.

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

No, they were just assessed for the tax deficiency, IIRC. There was no allegation of insurance fraud.

[Beowulf]

So in other words, I should be able to put a life insurance claim out on you, even though I have no personal contact with you, without your knowledge, and, when you die, be able to collect on it. And you'd have no problem with that, right?

So long as you don't hire someone to kill me in order to collect, I don't actually see any problem with that. You're effectively betting that I'm going to die before your insurance premiums are collectively more than the insurance payout. It's a form of gambling on your part.

[Mr Bean]

So long as you don't hire someone to kill me in order to collect, I don't actually see any problem with that. You're effectively betting that I'm going to die before your insurance premiums are collectively more than the insurance payout. It's a form of gambling on your part.

So if I say start mining data for low intelligence people who live in areas with the high likelihood of natural disasters as a possible investment strategy? Or say famous rich people since payout is based on future income projections can we all take one out on Britney spears?

[Sea Skimmer]

I’m not too sure you can take out life insurance on just any random person if you can’t show a relationship. Certainly that would raise alarm bells. Companies can do it on employees under the cover of claiming to protect themselves from lost work if a person unexpectedly dies. This is most relevant for the movie industry when more then one film has been ruined and become a complete financial loss after a coke addicted actor over dosed.

[AMT]

I’m not too sure you can take out life insurance on just any random person if you can’t show a relationship. Certainly that would raise alarm bells. Companies can do it on employees under the cover of claiming to protect themselves from lost work if a person unexpectedly dies. This is most relevant for the movie industry when more then one film has been ruined and become a complete financial loss after a coke addicted actor over dosed.

Which is fine, as long as the person is still working for the company. However, after the person has left the company or project, and the now former employer continues to hold the policy even after having no relationship with the person, it goes away from "protecting their investment" to "exploiting a relationship".

If you were my employer, I would have no problem with that whatsoever. In fact, my employer does have an insurance policy out on my life (as well as on my inability to come to work). That you can't do that with random strangers is an entirely different policy question.

Nice strawman. We are not talking about people who are currently employed with a company who may lose an investment. We're talking about (at least from the OP) companies that keep former employee's policies open to collect on.

So, since no one is actually talking about the issue of current employers insuring their current employees, howsabout you explain what makes it right for the company to continue the insurance policy after the relationship between employee and employer ends.

[Master of Ossus]

Which is fine, as long as the person is still working for the company. However, after the person has left the company or project, and the now former employer continues to hold the policy even after having no relationship with the person, it goes away from "protecting their investment" to "exploiting a relationship".

Except that the policy doesn't magically terminate as soon as the person leaves. They can't renew the life insurance policy, at that point, but you also can't expect them to engage in the sort of minute-by-minute upkeep that would be required in order to eliminate any possible overlap, particularly since the way in which I've seen this sort of thing set up, the bank is the ultimate beneficiary of the insurance benefits; not the company that is the named beneficiary. Indeed, the bank and the original employer are almost certainly in a contractual relationship that may even make this sort of "early termination" a breach of contract. Also, how is this "exploiting a relationship" once the worker leaves or is fired? It's not abusive or exploitative to engage in this sort of practice with your employees, except insofar as it appears to violate the tax code (and, clearly, there's some more sophisticated scheme going on than just the simple one I'm familiar with, because that loophole really was closed down).

Nice strawman. We are not talking about people who are currently employed with a company who may lose an investment. We're talking about (at least from the OP) companies that keep former employee's policies open to collect on.

First of all, the OP was describing both scenarios, and up until your random interjection in the thread everyone was discussing the simple scenario in which an employer has an insurance policy on the life of an active employee.

More importantly, your fantastic "analogy" is the strawman, anyway, because no one (posters other than you, the OP, etc.) is talking about taking out a policy on a stranger--a feature unique to your misleading hypothetical. The minimum contact required for this sort of thing to occur would be for the employee to be employed by the named beneficiary, the company (named beneficiary) would then open up a policy on that employee's life while that relationship exists. Only then (while the policy term is still in effect) does the person leave the company and subsequently die. The employee and employer were both obviously in an employment relationship at the time the employer took out the policy. Your scenario, and your response to my rebuttal, entirely ignores this feature even though it is the critical distinction that I was trying to illustrate.

So, since no one is actually talking about the issue of current employers insuring their current employees, howsabout you explain what makes it right for the company to continue the insurance policy after the relationship between employee and employer ends.

Again, people were clearly talking about that precise scenario in this thread. Moreover, people cannot take out life insurance policies on another's life unless they are in a specially defined relationship, but once they have taken out such a policy, even if their original relationship terminates, the policy continues in existence.

A similar result occurs, for instance, if a married couple takes out a life insurance policy on the husband with the wife as beneficiary, and the two subsequently divorce. The life insurance policy is not instantly voided, even though their relationship no longer exists. Indeed, the divorce court could even use the cash surrender value of the life insurance policy to pay to the wife, in that example (so, for instance, if the husband runs off then the cash surrender value could be used to pay alimony or child support). Some states automatically revoke the former spouse as beneficiary if alternative beneficiaries remain on the policy and the original insurance policy isn't used in the divorce settlement, but if the employer has something like a pension plan and the wife is the named beneficiary on that plan in the event of death, then I believe that the ex-wife's status as the nominal beneficiary is honored even in those states, because it's recognized that the third-party (pension plan company) doesn't have an obligation to track the relationship between the parties.

[Mr Bean]

Except that the policy doesn't magically terminate as soon as the person leaves. They can't renew the life insurance policy, at that point, but you also can't expect them to engage in the sort of minute-by-minute upkeep that would be required in order to eliminate any possible overlap

I'm going to stop you right there Ossus because I'm going to have to ask, has any company managed to keep paying you for an addition year or two of work after you were let go or quit? Because if so, I'd love to work for a company with such utterly rubbish book-keeping ability that they don't know if I'm working for them or not. If they were asked to only keep policies as long as they paid their employee's it would be kinda easy to cancel that policy. After all they manage to cancel your heath insurance just fine and manage to stop paying you.

[Master of Ossus]

I'm going to stop you right there Ossus because I'm going to have to ask, has any company managed to keep paying you for an addition year or two of work after you were let go or quit? Because if so, I'd love to work for a company with such utterly rubbish book-keeping ability that they don't know if I'm working for them or not.

I'm not talking about the employer, there, I'm talking about the insurance company. When I buy a life insurance policy, I buy it for a period of years (in fact, IIRC for various tax reasons it helps them to make the policy be as long-running as possible), and then I'll have to keep paying for it down the road, even if I decide I no longer want that policy--I've entered into a contract with them. The employer would be breaching its contract if it stopped paying when the employee left, and the insurance company isn't obligated to keep investigating--that would be impractical and expensive. When you layer in the fact that the employer is also in a contractual relationship with the bank, which may or may not have an "out" clause for this sort of thing since it's probably just a slight modification of the bank's normal Pooling and Servicing Agreement, and it's pretty easy to see why it's not nearly as seamless as stopping payments on a paycheck.

Edit: Assuming that this scheme is at all similar to the old one, there can't be a free-flow situation going on where the bank, insurance company, and employer all just assume that the employer will continue to employ the same number of people over time. There has to be a "pool" that's made of specific policies taken out on specific people, so you can't just ax individual policies and add in others at whim--it's sort of an "all-or-nothing" that would make it hard to keep updating for people who had left or who were hired. In fact, when I was looking into this, it was preferred that the policies themselves be term-life policies, but I think Congress actually stepped in to bar that, and so (if that's true) then the fall-back would be long-standing life insurance policies that fit just within what Congress decided to allow.

If they were asked to only keep policies as long as they paid their employee's it would be kinda easy to cancel that policy. After all they manage to cancel your heath insurance just fine and manage to stop paying you.

Both health insurance and salaries are benefits that are contingent on your continued employment, so when you quit or are terminated you're no longer entitled to those (and, usually, they have to pay a fee to terminate the health insurance policy--that part's just invisible to you). The way that these contracts are entered into, that's usually not how the life insurance policy works.

[Mr Bean]

If they were asked to only keep policies as long as they paid their employee's it would be kinda easy to cancel that policy. After all they manage to cancel your heath insurance just fine and manage to stop paying you.

Both health insurance and salaries are benefits that are contingent on your continued employment, so when you quit or are terminated you're no longer entitled to those (and, usually, they have to pay a fee to terminate the health insurance policy--that part's just invisible to you). The way that these contracts are entered into, that's usually not how the life insurance policy works.

Which simply again begs the question of why in the hell they should be allowed to take out life insurance policies on anyone. Because if you do, they will and do argue that every single member of the company is a high value employee. And to your earlier example what if your actor is a contract employee? If you permit companies to buy it on contract employee's but not normal employee's you will find the companies switching to contract only employee's but that's another story.

[Master of Ossus]

Which simply again begs the question of why in the hell they should be allowed to take out life insurance policies on anyone. Because if you do, they will and do argue that every single member of the company is a high value employee.

Key-man insurance strikes me as being totally reasonable for lots of reasons. For one thing, investors and financiers generally demand that you have key-man insurance because otherwise they view their investments as being at risk. What is Apple Computer going to do if Steve Jobs dies in a car crash, tomorrow? It would be difficult and expensive to replace him, even if we assume he could be replaced. Thus, Apple will almost certainly have to assure bondholders and maybe even equity owners that their money is safe, even if something happens to Steve. It's easy to make similar arguments for board members, other executives, and maybe even top managerial personnel. So for these people, it might be good corporate policy, even ignoring financing concerns, to take out life insurance policies with their company listed as the beneficiary. When you layer in the fact that financiers worry about this type of thing I don't see anything controversial about it at all.

I don't have a good answer for why they still allow peons to be insured--indeed, I had thought that this loophole had been closed until this article was posted. However, even then, I don't think that the peon is the one who should be crying foul over this. It should be the Treasury. The peon isn't hurt in the slightest.

And to your earlier example what if your actor is a contract employee? If you permit companies to buy it on contract employee's but not normal employee's you will find the companies switching to contract only employee's but that's another story.

Possibly, but again I don't know that this should be allowed: I think that the tax-scheme (as it was presented to me) is one of those things that's clearly outside of Congressional intent; it ought not to work, for policy reasons; but it did work (at least at the time) and I wish I had thought of it. My issue, though, is that the person complaining about this is the employee--he shouldn't care in the slightest. I can see no possible mechanism through which this can cause him any type of injury at all, except insofar as that the government has lost revenue.

The whiny sympathy-ploy story that they're trying to spin is total bunk for a whole bunch of reasons, and the families filing these suits strike me as either consisting entirely of retards or else emotional opportunists seeking to capitalize on the death of their loved one and a seemingly-odd but totally innocuous life insurance policy. Moreover, even if the law were changed so that they would have to consent to this, it wouldn't change a damn thing: no one is going to not sign an employment contract because it has such a clause in it. Thus, the families' position is total bullshit. Also, if the scheme is anything like the one that I remember, the company isn't even benefiting from the death of any of the insured employees--it's just the nominal beneficiary, and the real proceeds go to the bank. The company just needs a lot of employees to enter into one of these types of things.

If we want to go after these schemes, it should be on the basis of lost tax revenue and the fact that this really is the absolute definition of a tax shelter: it's something that has no economic justification whatsoever and that these companies engage in only for tax benefits. But that argument has nothing to do with the whiny scumbags who complain to Michael Moore: it has to do with Congress and the Treasury.

[Gil Hamilton]

I'm reminded of a Dilbert cartoon, where Dogbert comes around to Wally's cubicle. The dialogue goes something like this

Dogbert: "We've decided to take a life insurance policy out on you."
Wally: "Because I'm such a valuable employee?"
Dogbert (wagging): "Because you are worth more to us dead."

I'm not sure I get your "emotional opportunists seeking to capitalize on the death of their loved one" statement, there, MoO. Isn't taking a life insurance policy out on someone EXACTLY capitalizing on the death of someone's loved one? I can understand a breadwinner of a family taking out a life insurance policy with his family as benificiaries and I can understand key-man insurance on indispensible employees.

What I can't understand is your argument here. The companies are, basically, gambling on the lives of their people. You wouldn't think it was macabre that someone would go "If you kick the bucket before this many years, I stand to make oodles of money on your death! Finger's crossed!.. uh, that you don't die! Uh, of course. Ahem." Those life insurance schemes aren't to protect the company; chances are for a "peon" as you put it, their financial loss upon the person's death would be negligable. The only reason in that case to take out a life insurance policy on a "peon" is to gamble on their life, that is, placing a bet with the hope that they will die before their premiums equal the pay out of the policy.

You don't understand why people would be offended by the notion that the tragic death of their loved ones was nothing but a money making opportunity for someone else? The person's very life was just an investment scheme to profit on them dying?

That's frankly bizarre that you don't see the offense in that.

[Master of Ossus]

I'm not sure I get your "emotional opportunists seeking to capitalize on the death of their loved one" statement, there, MoO. Isn't taking a life insurance policy out on someone EXACTLY capitalizing on the death of someone's loved one? I can understand a breadwinner of a family taking out a life insurance policy with his family as benificiaries and I can understand key-man insurance on indispensible employees.

What I can't understand is your argument here. The companies are, basically, gambling on the lives of their people.

Not in any meaningful sense of the term--the company is unaffected by the deaths of its employees. Arguably the bank and insurance company are doing that, but with large companies they don't care too much, either, about any individual insured. The employer itself would be unaffected even if all of its employees magically lived forever, although the Bank might lose out. But the Bank isn't betting on any individual employee: it's just counting on the law of large numbers. The arbitrage going on is the fact that the insurance company is allowed to invest the premiums tax-free.

You wouldn't think it was macabre that someone would go "If you kick the bucket before this many years, I stand to make oodles of money on your death! Finger's crossed!.. uh, that you don't die! Uh, of course. Ahem." Those life insurance schemes aren't to protect the company; chances are for a "peon" as you put it, their financial loss upon the person's death would be negligable. The only reason in that case to take out a life insurance policy on a "peon" is to gamble on their life, that is, placing a bet with the hope that they will die before their premiums equal the pay out of the policy.

Nonsense. The reason that they're doing this is for the tax shelter; it has nothing to do with the peon's life.

You don't understand why people would be offended by the notion that the tragic death of their loved ones was nothing but a money making opportunity for someone else? The person's very life was just an investment scheme to profit on them dying?

That's frankly bizarre that you don't see the offense in that.

No. It doesn't affect the peon at all. The families, here, are just being whiny bitches who either don't understand that this didn't affect them whatsoever or else they're trying to score emotional sympathy points and win nice, fat, settlement (and face it: their argument that the law should be changed is bullshit since their proposed law would have no practical impact whatsoever on anything). In either case, they're scumbags and they deserve derision for how they're taking advantage of their loved one's death; not sympathy.

Do you complain, when a loved one dies, about the existence of an undertaker who has the audacity to charge you money for handling your loved one's corpse? That really is an instance in which someone is financially taking advantage of the fact that your loved one has kicked the bucket. Indeed, the whole industry relies on the fact that in communities of a given size, people are going to die every so often. So, no, I don't see the offense that these whiny little bitches are taking, except insofar as that they're obviously money-grubbers.