Dead Peasant” Insurance: Are Corporations Betting on Your Death?
In the shadows of corporate America, a controversial business strategy known as “dead peasant” insurance, or corporate-owned life insurance (COLI), has been stirring up debates. Rumors suggest that large corporations, including prominent names like Walmart and other Fortune 500 companies, take out life insurance policies on low-level employees, using the payout to fund executive bonuses. This article aims to shed light on the history, implications, and moral concerns surrounding this practice.
What is “Dead Peasant” Insurance?
Corporate-owned life insurance, also known as “dead peasant” insurance, has a long history, with origins dating back to the Russian upper class “buying” deceased feudal serfs in the 19th century. Today, numerous corporations, such as Nestle, Pitney Bowes, and Winn-Dixie, have adopted this business structure.
History and Reforms:
Initially, corporations would purchase whole or universal life insurance policies on their employees without their knowledge of being worth more dead than alive. In the 1980s, the Internal Revenue Service (IRS) intervened by capping deductible interest, prompting reforms. Despite restrictions, companies continued to use COLI to fund employee pension programs and provide key man insurance coverage.
To curb potential abuse, Congress passed the Pension Protection Act in 2006, which introduced requirements such as employee notification, written consent, limitations on coverage, and annual reporting to the IRS.
How Does COLI Work?
Today, some companies still utilize COLI to safeguard against the unexpected death of key personnel and bolster their balance sheets. However, the process may seem opaque to employees, as consent forms are often hidden within a stack of paperwork during the onboarding process.
While the official beneficiary is typically the pension fund, the line between insurance payouts and business revenue can blur. Companies retain control over the insured’s cash value, using it for various purposes, such as funding employee benefits. Unfortunately, this can lead to disappointment for the deceased’s family, who may find themselves unable to access the life insurance policy.
Tax Implications and Different COLI Types:
Tax advantages associated with COLI policies, including tax-free growth and death benefits, have made them appealing to corporations. Policies can be tailored to specific needs, with two commonly used types being key person insurance and split-dollar life insurance.
The Purpose and Harm of COLI:
While COLI serves to protect companies from financial harm and regulate their balance sheets, it raises moral concerns. The potential for abuse, exploitation, and conflicts of interest have led to public outcry and legal actions against companies involved in “dead peasant” insurance schemes. The principle of insurable interest, which ensures policyholders and beneficiaries have a genuine connection, can be compromised in such scenarios.
Companies Linked to “Dead Peasant” Insurance:
Several high-profile cases have shed light on the practice of “dead peasant” insurance. Walmart, McDonald’s, AIG, J.C. Penney, Nestle, Dow Chemical, and PepsiCo have all faced allegations of taking out life insurance policies on their employees without their knowledge or consent, and profiting from death benefits.