Ya work for a company, you die, the company collects on life insurance.

Ya work for a company, you die, the company collects on life insurance.

Corporate America is taking out life insurance on its employees so companies can profit from workers’ deaths | National Post

Employees at The Orange County Register received an unsettling email from corporate headquarters this year. The owner of the newspaper, Freedom Communications, was writing to request workers’ consent to take out life insurance policies on them.

But the beneficiary of each policy would not be the survivors or estate of the insured employee, but the Freedom Communications pension plan. Reporters and editors resisted, uncomfortable with the notion that the company might profit from their deaths.

After an intensive lobbying campaign by Freedom Communications management, a modified plan was ultimately put in place. Yet Register employees were left shaken.

The episode at The Register reflects a common but little-known practice in corporate America: Companies are taking out life insurance policies on their employees, and collecting the benefits when they die.

Because company-owned life insurance offers employers generous tax breaks, the market is enormous; hundreds of corporations have taken out policies on thousands of employees. Banks are especially fond of the practice. JPMorgan Chase and Wells Fargo hold billions of dollars of life insurance on their books, and count it as a measure of their ability to withstand financial shocks.

But critics say it is immoral for companies to profit from the death of employees, while employees themselves do not directly benefit. And despite a law enacted in 2006 that sought to curb the practice – companies now are restricted to insuring only the highest-paid 35 percent of employees, who must give their consent – it remains a growing, opaque and legal source of corporate profit.

“Companies are holding this humongous amount of coverage on the lives of human beings,” said Michael D. Myers, a lawyer in Houston who has brought class-action lawsuits against several companies with such policies.

Companies and banks say earnings from the insurance policies are used to cover long-term health care, deferred compensation and pension obligations.

“Life insurance is one of the ways of strengthening the long-term health of the pension plan and ensuring its ability to pay benefits,” Freedom Communications’ chief executive, Aaron Kushner, said in an interview.

And because such life insurance policies receive generous tax breaks – the company-paid premiums are tax-free, as are any investment returns on the policies and the death benefits eventually received – they are ideal investment vehicles for companies looking to set aside money to pay for pension plans. Companies argue that if they had to finance such obligations with investments taxed at a normal rate, they would incur losses and would not be able to offer the benefits to employees.

But in many cases, companies and banks can use the tax-free gains for whatever they choose. “If you want to take that money and go build a new bank branch, fine,” said Joseph E. Yesutis, a partner at the law firm Alston & Bird who specializes in banking regulation. “Companies don’t promise regulators they will use it for any specific purpose.”

Hundreds of billions of dollars of such policies are in place, providing companies with a steady stream of income as current and former employees die, even decades after they have retired or left the company.

Aon Hewitt estimates that new policies worth at least $1 billion are being put in place annually, and that about one-third of the 1,000 largest companies in the country have such policies. Industry analysts estimate that as much as 20 percent of all new life insurance is taken out by companies on their employees.

But determining the exact size of the market for corporate- and bank-owned life insurance is impossible. With the exception of banks, companies do not have to report their insurance holdings.

“There is no reliable reporting of the use of who’s buying life insurance, of what they’re buying it for,” said Steven N. Weisbart, chief economist of the Insurance Information Institute.

Banks have to report their holdings because regulators want to know how much cash they could access if they had to redeem the policies in a pinch before the death of the insured employee.

That figure, known as the “cash surrender value” – or the amount they could withdraw immediately – provides a glimpse of just how big such policies can be.

Bank of America’s policies have a cash surrender value of at least $17.6 billion. If Wells Fargo had to redeem its policies tomorrow, it would reap at least $12.7 billion. JPMorgan Chase would collect at least $5 billion, according to filings with the Federal Financial Institutions Examination Council.
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I've heard of this before, they've been doing it for years. They're paying the premiums so they're not taking anything away from anybody. In some cases it actually makes some sense, particularly for smaller companies with key personnel, if they die suddenly production can literally stop but the bills keep coming. I know several small to medium sized business that have a policy on the life of the president payable to the company, a lot of times that person really is the company no matter how many people they may have working for them.

Still, it would make me feel a little wary of 'on the job accidents', lol.
those elderly"greeters" at Wal-mart? Do you honestly believe they hire them to improve their community image?

Wal-mart was investigated for this harvesting of their elderly employees a while back.

"Millions of current and former workers at hundreds of large companies are thus worth a great deal to their employers dead, as well as alive, yielding billions of dollars in tax breaks over the years, as well as a steady stream of tax-free death benefits. Nestle USA has policies covering 18,000 workers, Pitney Bowes Inc. has policies covering 23,000, and Procter & Gamble Co. has 15,000 covered workers, spokespeople for these companies confirm.

The coverage is called broad-based insurance, or corporate-owned life insurance, usually shortened to COLI. For years, companies could insure only key personnel deemed essential to the business. But a loosening of state rules in the 1980s allowed for an explosion in a new kind of COLI that covers rank-and-file workers -- known in the insurance industry as janitors insurance or, in at least one instance, dead peasants insurance. "I want a summary sheet that has ... the Dead Peasants in the third column," one of Winn-Dixie Stores Inc.'s insurance consultants wrote in a 1996 memo. Winn-Dixie wouldn't comment on the memo."





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FROM THE ARCHIVES: April 19, 2002

Companies Profit on Workers' Deaths
Through 'Dead Peasants' Insurance


Felipe M. Tillman loved music -- opera, jazz, country. He played keyboards and drums, sang and was choral director at his Tulsa, Okla., church. To make ends meet, he worked at record stores, where "he could be close to the music," says his brother Anthony Tillman. One of those jobs was a brief stint in the early 1990s at a Camelot Music store.

In 1992, Felipe, then 29 years old, died of complications from AIDS. He never bought life insurance, so his family received no death benefit. But CM Holdings Inc., then the parent company of Camelot Music, did. It received $339,302.

Like hundreds of other large companies, CM Holdings took out life-insurance policies on thousands of its employees, with itself as the beneficiary. Most workers covered this way don't know it, nor do their families.

"If someone is going to use your name for something, even though you're an employee of theirs, you should know what's going on in your name," says Anthony Tillman, who was surprised to learn that his brother's death benefited Felipe's onetime employer. "It isn't fair."

The practice is as widespread as it is little-known. Millions of current and former workers at hundreds of large companies are thus worth a great deal to their employers dead, as well as alive, yielding billions of dollars in tax breaks over the years, as well as a steady stream of tax-free death benefits. Nestle USA has policies covering 18,000 workers, Pitney Bowes Inc. has policies covering 23,000, and Procter & Gamble Co. has 15,000 covered workers, spokespeople for these companies confirm.

The coverage is called broad-based insurance, or corporate-owned life insurance, usually shortened to COLI. For years, companies could insure only key personnel deemed essential to the business. But a loosening of state rules in the 1980s allowed for an explosion in a new kind of COLI that covers rank-and-file workers -- known in the insurance industry as janitors insurance or, in at least one instance, dead peasants insurance. "I want a summary sheet that has ... the Dead Peasants in the third column," one of Winn-Dixie Stores Inc.'s insurance consultants wrote in a 1996 memo. Winn-Dixie wouldn't comment on the memo.

Companies have put millions of dollars into COLI policies. These policies yield tax-free income as their investment value rises, just like conventional whole life policies. Companies also borrow against the policies to raise cash. Public Service Co. of New Mexico has noted in public filings in recent years that it once set up life-insurance coverage on hundreds of its managers to raise money to enable it to eventually take its nuclear-power plants out of service.

Until 1996, the biggest lure was the tax deductions companies were taking on interest they paid on these loans. But then the Internal Revenue Service began disallowing these deductions, arguing in subsequent disputes that these COLI arrangements serve no legitimate business purpose. Now, the agency is investigating more than 85 companies that it says took $6 billion in illegal deductions, an IRS spokeswoman confirms.

Even without those deductions, a company's bottom line still benefits from the tax-free investment gains on the policies and the death benefits. Companies can use the death benefits for anything they like. CM Holdings used $168,875 of the death benefit on Mr. Tillman for executive compensation, court documents show. The documents also show that $280 went to "Star County Children's Services" to help cover child-support payments from a nephew of Camelot Music's founder who was working at the company at the time.


Companies that have life-insurance policies on employees profit when the employees die*

• American Electric Power

• AT&T

• Ball

• Basset Furniture

• Dow Chemical

• Eaton

• Nestle USA

• Olin

• Pitney Bowes

• PPG Industries

• Procter & Gamble

• Trans World Entertainment**

• Walt Disney

*Some policies also cover ex-employees and retirees
**Acquired Camelot Music/CM Holdings

Most companies say they use money from the insurance to help pay for various employee benefits. A Pitney Bowes spokeswoman says the company instituted the program in 1994 "to offset the rising cost of employee benefits." A spokesman for Nestle says, "We have not done this for financial gain." A spokeswoman for Procter & Gamble says the company uses the insurance "partially to finance retiree health benefits."

Tom Ayres, spokesman for American Electric Power Inc., a Columbus, Ohio, gas-and-electric utility that has COLI policies covering more than 20,000 workers, says the policies improve the company's bottom line. Investment gains on the policies add to income, he says, and "as the insured employees die, we're getting death benefits, which is cash income." But he adds that the death benefits are "dedicated to retiree benefits," though the individuals covered by the insurance receive nothing directly.

John Sullivan, chief financial officer of Trans World Entertainment Corp., an Albany, N.Y., company that acquired CM Holdings in 1999, said he couldn't comment in detail because of a case pending in the U.S. Court of Appeals in Philadelphia. In that case -- similar to others brought by Winn-Dixie, AEP and Dow Chemical Co. -- Trans World is seeking to have reinstated some interest-payment tax deductions it took on borrowings against its janitors insurance. A federal district court had earlier granted an IRS request to disallow the deductions during CM Holdings' bankruptcy proceedings.

Mr. Sullivan does say that Trans World "inherited the policies" from CM Holdings. Those policies covered at least 1,400 employees in 1990, based on a company document reviewed by The Wall Street Journal. The document, called a death run, lists on page after page the names, ages and Social Security numbers of the workers, as well as how much money the company will receive for each employee's death, even those who die long after leaving the company. Younger workers will generate from about $400,000 to almost $500,000 in death benefits each, the document shows, while older workers will bring the company about $120,000 to $200,000 each. (Younger workers yield bigger payouts because, based on actuarial calculations, they are less likely to die soon, so the same premium amount buys more coverage for them.)

Another name on CM Holdings' 1990 death run is Margaret Reynolds, of Uniontown, Ohio. Mrs. Reynolds suffered from amyotrophic lateral sclerosis, or Lou Gehrig's disease. In her final years, her five grown children took turns caring for her. At one point, says her son John, they begged CM Holdings for $5,000 to pay for a specialized wheelchair so they could take their mother to church. "They said it wasn't covered," Mr. Reynolds says.

Mrs. Reynolds, a $21,000-a-year administrative assistant and buyer, died in 1998 at age 62. Her family received a $21,000 benefit from a life-insurance policy provided to employees by CM Holdings. CM Holdings received a COLI payout of $180,000.

"They got what?" John Reynolds says when told. He sells life insurance himself, to small businesses, but he says he had never heard of janitors insurance. "It's mind-boggling."

For decades, a corporation or an individual wanting to buy life insurance on someone else had to have a significant financial or emotional stake in the person's survival, known as an "insurable interest." Thus, companies were able to buy life insurance on certain executives, and partners in law and accounting firms could buy life insurance on each other. The rule had evolved to prevent incentives for murder or negligence, and to discourage one person from profiting from the death of another.

But in the 1980s, insurers persuaded regulators in most states -- Texas being a notable exception -- to rewrite the rules to allow employers to buy life insurance on the lives of all employees. The practice took off as employers became aware of the tax advantages, especially the ability to borrow against the policies and then deduct the interest payments.

Federal tax law prohibits the use of life insurance as a tax shelter if there isn't a legitimate business purpose for having it. From the start, many companies have asserted that they use COLI to pay for employee benefits. Still, they aren't required to disclose how they do use COLI money.

In 1996, Congress clamped down, forcing companies to begin phasing out the interest-payment deductions they were taking on COLI loans. And the IRS began working on collecting some of the money the companies had deducted from their taxes. Some government officials say the sum under investigation is probably much higher than the $6 billion the IRS confirms, and involves as many as 700 companies.


Like many companies, Winn-Dixie took out insurance policies on its rank-and-file workers that pay death benefits to the company when the workers die. Here's how these workers were referred to in internal company memos:

• "Bruce -- Here is a very rough beginning of the booklet we are preparing for Winn-Dixie. A section on Dead Peasants remains to be written ... "

• "I want a summary sheet that has ... the Dead Peasants in the third

Security and Exchange Commission filings provide some clues about the amounts of tax dollars at stake. In 2001, American Greetings Corp. recorded a charge of $143 million for potential exposure to disallowed deductions on COLI-loan interest payments. R.R. Donnelley & Son Co., a Chicago printing company, agreed this month to pay the IRS $150 million for disputed deductions related to policies covering more than 20,000 workers. And W.R. Grace & Co. indicated in its 2001 filings that it deducted $163 million in interest after 1992 and has current unresolved tax exposure of $57 million. "We believe the loans had and continue to have a valid business purpose," says a Grace spokesman, who adds that the company took out the policies to pay for benefits programs.

The courts have tended not to accept companies' rationale for using COLI. "We do not believe that the purpose of the was to fund employee benefits," wrote Judge Robert P. Ruwe in a 1999 federal Tax Court ruling against Winn-Dixie. The Jacksonville, Fla., supermarket chain brought the case against the IRS, seeking to reinstate deductions it took on COLI policy loans covering 56,000 workers.

Judge Ruwe noted that Winn-Dixie had high staff turnover and didn't end up providing retiree medical benefits to most of its workers, while it continued to collect death benefits on those who leave the company before retirement. The judge concluded that the executives "recognized that it was a tax shelter," and that ultimately, over the 60-year life of the policies, the company hoped to save $2 billion in taxes.

In June last year, the U.S. Court of Appeals for the Eleventh Circuit in Atlanta upheld the Tax Court decision. And just Monday, the U.S. Supreme Court declined to hear Winn-Dixie's appeal. A Winn-Dixie spokesman says the company is disappointed with the high court's decision, but is "sufficiently reserved for any liability" arising from the case.

While the IRS can find out about COLI policies directly from the companies, disclosure requirements aren't tight, making it hard for others to determine just how much money is squirreled away in the insurance. Employers do, in fact, use other kinds of COLI to pay for lavish retirement benefits for executives. But disclosure rules don't require them to distinguish between executive COLI and janitors COLI.

Further, companies report all their life insurance in aggregate. Accounting rules require only that they report increases in the aggregate cash values of their life-insurance policies -- and only if the increases are "material." Materiality isn't defined.

"So, some large companies with COLI don't need to report it at all," says a former government tax official. Congress would have to ask its economists to estimate the cost to taxpayers, says another former official, J. Mark Iwry, who was chief pension regulator at the Treasury. "They'd have a hard time coming up with a number."

Big Business

Even with the phaseout of the most attractive tax breaks, COLI is still big business. Among the major marketers of COLI are Marsh & McLennan Cos. and MONY Group Inc. Marsh & McLennan itself "inherited" a policy covering an undisclosed number of employees when it acquired insurance consultant Johnson & Higgins in the mid-1990s, a spokeswoman says. She says that the company no longer pays premiums on the coverage, and that it hasn't received any death-benefit payments for its 295 employees who died in the World Trade Center on Sept. 11.

Among insurers, Hartford Life is a major COLI provider. At the end of 2001, Hartford Life had janitors insurance with a face value of $4.3 billion in force among its clients, according to its latest annual report. COLI in all its forms brought the company $37 million of its $1 billion of net income last year.


Death Benefits
How companies profited from the deaths of their employees

Felipe Tillman William Smith Doug Sims Peggy Stillwagoner
Employment Music-store worker Convenience-store clerk Distribution-center worker Home-health nurse
Died Jan. 1992 Dec. 1991 Dec. 1998 Oct. 1994
Age 29 20 47 51
Cause AIDS Murdered at work Heart attack Car accident
Death Benefit $339,302 $250,000 $64,504 $200,000
Paid to Camelot Music/CM Holdings National Convenience Stores Wal-Mart Stores Advantage Medical Services

Source: WSJ research


Since Congress reined in some of the tax breaks, most employers have nonetheless left their janitors coverage in force. After all, they still enjoy the tax-free buildup of value in the policies, which adds to net income. (This income is referred to in financial statements under generic headings like "other income" and "other assets.") And then the death benefits go to the company, tax-free.

These future death benefits become an "attractive off-balance sheet asset," says Albert "Bud" Schiff, president of the Association for Advanced Life Underwriting and chief executive of NYL Executive Benefits LLC, a leading marketer of COLI for executive benefits in Stamford, Conn. "Companies understand that they have this significant downstream earnings growth."

That's why they keep an eye out for the deaths of employees after they have left the company. One way they can do that is by checking the Social Security Administration's database of deaths. When AEP bought its policies in 1990, a company memo noted that "in an effort to keep the tracking of reported deceased participants of the AEP COLI plan as simple as possible," the company "would track each individual reported to us either by AEP or the Social Security sweep."

Employees rarely know about a company's plan to buy COLI policies. In some states, including California, Michigan, Ohio, Illinois and Minnesota, companies are required by law to secure employee consent to include them in coverage. In that case, the employer may offer workers an incentive of a modest amount of life insurance without charge.

That happened to Gloria Jacobs. A few years before she retired in 1993 as a benefits manager for Walt Disney Co. in Orlando, Fla., she received a letter telling her that if she agreed to be covered under a COLI program to finance employee benefits, she would receive free life insurance of $10,000. The alternative was to pay for life insurance herself. Ms. Jacobs agreed to participate.

A Disney spokeswoman declines to say how much the company will receive when Ms. Jacobs dies, nor how many employees and retirees are covered under COLI.

Even when employees are informed about the insurance, they may be unaware that the company stands to benefit more than they themselves, or that the offer of free insurance to get them to consent is not protected under federal benefits law. Employers can cancel it at any time.

Wal-Mart Stores Inc. took out COLI on about 350,000 of its workers in the 1990s, offering $5,000 in life insurance to those who agreed to be covered.

NOTE: Article points out Wal-mart stopped this practice in 2000 because of lawsuits filed against them.

WSJ.com - Companies Profit on Workers' Deaths Through 'Dead Peasants' Insurance (external - login to view)
If the company asks and the employee says yes what is wrong with that
If the employee said no that would be a different matter Honestly its just
nonsense. Actor studios insured women's legs for millions and throats
and all kinds of other things
When a company does it its bad am I missing something here, The employee
can say no
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