Dear GirlLegal: My family member recently passed away from cancer. Her family has to pay huge amounts for the medical bills and funeral costs, in addition to loss of her income. Her husband received a call from an insurance company that his wife’s employer received almost a quarter-million dollars because of his wife’s death, but they never gave him a penny of this. Is this legal? Can companies do this?

Answer: I am so sorry to hear about your family member passing. Cancer takes away so many of our loved ones, including my dad who passed away a few years ago. To answer your question - yes, this is legal in some states; companies can take out insurance policies on their employees and name themselves beneficiaries - this is known in the insurance industry as “Dead Peasant Insurance.”

Corporate-owned life insurance (COLI ) (sometimes referred to as dead peasant insurance ) is life insurance on employees’ lives that is owned by the employer corporation, with benefits payable to the corporation. COLI was originally purchased on the lives of key employees and executives by a company to hedge against the financial cost of losing key employees to unexpected death, the risk of recruiting and training replacements of necessary or highly-trained personnel, or to fund corporate obligations to redeem stock upon the death of an owner. This use is commonly known as “key person” insurance.  Congress and the IRS set some guidelines and limits on this practice. Today, COLI is most common for senior executives of a firm, but its use for general employees is still practiced.

Dead peasant insurance is a term used within the insurance industry to describe rank-and-file employees whose lives are insured by policies of corporate owned life insurance for an employer’s benefit. This means that the company receives the life insurance benefits when the covered employees die. You may be surprised to find out that young female employees who die generally generate the highest amount in insurance benefit payouts.

Please keep in mind that this money does not go to the deceased employees’ family - the company adds it to its books and keeps it. These benefits pay out a lot of money to the employers for the loss of an employee, and the company might use this policy to pay for retirement benefits and other perks not for you or your fellow workers, but for your company’s top executives. In recent years, the Office of the Comptroller of the Currency affirmed that banks can buy life insurance to finance employee benefits. But filings show that executive compensation accounts for most of the benefits. Companies don’t use the policies as piggy banks to pay for compensation and benefits. Rather, they benefit from keeping the money in the contracts: thanks to accounting rules for life insurance, gains on the investments — from stocks, hedge funds, bonds and the like — aren’t just tax free, but are reported as income each quarter.

To quickly recap, there is a difference between “Key Person” life insurance (that’s the type of policy that a company secures on a CEO, executives, or a highly-trained specialist) and “Dead Peasant” life insurance, which is the type of policy that a company secures on any non-executive and/or interchangeable employee.

Above, I mentioned that Dead Peasant policies are legal in some states, but they are illegal in most states for very good reason. Historically they were abused and encouraged employers to skimp on safety in high-risk occupations because many employees were worth far more dead than alive, particularly if they were unskilled and easily-replaceable laborers.

These days COLI, including dead peasant policies, are basically a tax shelter - although that may change if the IRS starts taxing the payouts. Under the Internal Revenue Code (”IRC”) dealing with life insurance benefits paid due to the death of the insured, the benefits are usually excluded from the taxable income of the beneficiary. Because of the tax-free nature of death benefits, the IRC prohibits the deduction of the premiums paid for life insurance when the premium payor is also the owner of the insurance.

Companies should have to disclose when they take out a policy on you as an employee - or, even better, obtain your permission to do so - And, a number of our lawmakers agreed. As it stands, most states have advise and consent laws (See 26 U.S.C. §101(j)(4) Notice and Consent requirements ) that technically require companies to get workers permission before buying life insurance on them, but many businesses circumvent these laws by purchasing the insurance in one of the states that do not require notice or consent, including Delaware, Georgia, New Jersey, North Carolina, Pennsylvania and Vermont.

Among the corporations that have bought such insurance on rank-and-file workers , nicknamed “janitors’ ” or “dead peasants’ ” insurance, are AT&T, Dow Chemical, Nestle USA, Procter & Gamble, Walt Disney, Winn-Dixie, Wal-Mart, American International Group Inc., Fannie Mae, Freddie Mac, Kimberly-Clark Corp. and Tyson Foods, Inc. Efforts to rein in the practice largely have been unsuccessful, including the most recent rules Congress enacted in 2006. The rules limit companies to buying life insurance to just the top third of earners, who must provide consent. But the rules don’t apply to life-insurance that employers bought before August 2006, which cover millions of current and former employees - including employees that have long since left the company.

The website provides a list of companies that have taken out policies on their employees. I was not surprised to find a number of well known companies on this list, in addition to those listed above. It turns out that this information is hard to obtain, so if the company that you work for is not listed, that doesn’t mean that they have not taken out insurance policies on their employees. You can find more generalized information on dead janitor and dead peasant insurance at: .

For educational purposes, I’d like to point out another insurance policy known as STOLI (stranger-originated-life-insurance). These STOLI arrangements have gained attention because, generally, a party purchasing life insurance must have an “insurable interest” in the person being insured. For example, a person has an insurable interest in his or her spouse, or a company has an insurable interest in their executive or employee. In a STOLI transaction, however, a person with no insurable interest (a stranger) in another persuades the other person to obtain life insurance with the understanding that after a certain time (usually two years) the insured will sell the policy to the stranger. If you feel that you have been a victim of a STOLI arrangement, please contact your state’s Office of Insurance Regulation.

Again, I am sorry about your family member. And, I hope that you find this information useful.

Thanks for visiting - I strive to respond to all questions as a  free service to the internet community on an ongoing basis. The intent is to provide answers that are both practical and useful. Feel free to ask questions and link back to this website.

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