Reynolds suffered from amyotrophic lateral sclerosis, or Lou Gehrig's disease. In her final years, her five grown children took turns caring for her. Reynolds says. He sells life insurance himself, to small businesses, but he says he had never heard of janitors insurance.
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. 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 s, 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 , 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.
Security and Exchange Commission filings provide some clues about the amounts of tax dollars at stake. In , American Greetings Corp. And W.
The courts have tended not to accept companies' rationale for using COLI. Ruwe in a federal Tax Court ruling against Winn-Dixie. The Jacksonville, Fla. 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.
In June last year, the U. And just Monday, the U. 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. 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. 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. Even with the phaseout of the most attractive tax breaks, COLI is still big business. She says that the company no longer pays premiums on the coverage, and that it hasn't received any death-benefit payments for its employees who died in the World Trade Center on Sept. 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. 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 , 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 as a benefits manager for Walt Disney Co. The alternative was to pay for life insurance herself. 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.
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Most people purchase a life insurance policy for themselves to financially support loved ones after their death. However, it is also possible for organizations to purchase life insurance for their employees, which is called dead peasant life insurance or corporate-owned life insurance.
Dead peasant life insurance is highly controversial, yet many companies have this type of policy for tax or revenue purposes. Some businesses may opt to use it for more than tax or revenue benefits. It is also argued that it can help businesses cover the cost of hiring and training an executive in the event of their death, as well as provide funding for certain employee benefit plans.
Corporate-owned life insurance is a special type of life insurance that employers take out on their employees. Corporate-owned life insurance can be written on one employee or an entire workforce.
Company-owned life insurance was originally designed to help businesses stay afloat financially after high-ranking executives passed away. Today, companies will typically purchase corporate-owned life insurance to fund employee benefit plans, such as non-qualified executive health plans and deferred compensation plans. There are several tax advantages because cash value growth and death benefit payouts do not count toward annual revenue.
There are two different types of corporate-owned life insurance — key person and split-dollar:. Corporate-owned life insurance is not the same thing as group life insurance , which is offered to employees as part of their employment benefits. With most group life insurance policies, the employee pays the premiums and chooses their beneficiaries to receive the full death benefit.
Company-owned life insurance is commonly referred to as dead peasant life insurance because of its historical use. In the s, many major corporations began purchasing corporate-owned life insurance on low-wage workers without telling them.
The lead character buys dead serfs from a landowner in the book and uses them to secure a high-value loan. March 26, Dead peasant insurance allows corporations to collect money when an employee passes away.
Keep reading to learn more about this type of insurance policy. Types of Dead Peasant Insurance Split-Dollar Life Insurance Under a split-dollar life insurance policy, an employer and employee agree to share the costs and benefits of a life insurance policy.
Key Person Life Insurance Key person life insurance helps protect companies against financial losses associated with the death of a key staff member.
Reasons to Buy Dead Peasant Insurance Before the Pension Protection Act went into effect, many employers used corporate-owned life insurance policies to reduce their tax liability. Find Coverage Compare life insurance plans, side by side.
Related Articles. Read More. Guide to Comparing Medicare Advantage Plans. This step-by-step guide can help you compare Medicare Advantage Part C plans to find the right type Read Article. United of Omaha Life Insurance. United of Omaha Life Insurance offers policies designed to protect policyholders and their loved ones
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