Did you know that, since the 1980s, many companies in the United States regularly took out life insurance policies on their staff without ever telling the employees about it? Payouts in the millions were collected, all without the policy subject ever knowing…
In New Zealand companies can take out insurance policies on key employees, a sensible approach that protects the company from any sudden loss of staff. However in the United States less ethical practises occurred for decades before finally being halted in mid 2000s.
Called rather unpleasantly ‘Dead Peasant Insurance’, corporate-owned life insurance (or COLI) involved companies taking out insurance on low-level employees, which they often held long after the employee has ceased working for them. COLI provided both valuable tax breaks for the company and, in the case of death, a substantial payout.
While the approach has now effectively ceased the motivations and methods behind the insurance scheme certainly makes for interesting reading.
COLI first came to the attention of the masses in a 2002 Wall Street Journal article. Companies had for a long time taken out policies on important employees. This ‘key person’ insurance was considered a sensible approach for ‘hedging’ against the financial loss such an event can incur.
However from the 1980s through the 90s and into the new century the approach changed dramatically. During these years many companies took out policies on thousands of workers, using these policies to borrow money against and/or reduce their required tax payments.
“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.”
Wall Street Journal
The process raised serious questions about the care these big companies had for their employees – or lack thereof. The argument was made that long working hours, stressful situations and unsafe working environments could all contribute to a payout for the policy owner.
As with so many aspects of life in the United States, the entire process has resulted in many lawsuits and legal battles over the right for an employer to keep any (or all) payouts from the subject of the insurance policy.
Fact-checking website Snopes undertook an investigation into the practise in 2015, concluding that, while the ‘dead peasant insurance’ was at one time widespread, “increased scrutiny in the early 2000s (and corresponding litigation) led to the decreased use of dead peasant insurance policies after 2006.”
Here in New Zealand companies don’t have the same motivation to take out such policies and there are protections in place to prevent the rise of ‘dead peasant’ insurance. Companies must inform all employees of any applicable policies and the employee must be part of the application process.
If you would like to know more about key person insurance get in touch with us today.