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Corporate-owned life insurance, sometimes called dead peasant insurance, has led to unethical business practices in the past. Should you worry about being an unwitting victim of this type of insurance?
Corporate-owned life insurance is a practice in which companies take out insurance policies on their employees in order to collect the death benefit when those employees die
Corporate-owned life insurance was originally intended as a way for companies to protect themselves financially from the death of top executives
Because of employer abuses of this practice in the past, it’s sometimes known as dead peasant insurance
Corporate-owned life insurance (COLI), also known as company-owned life insurance, is a practice in which companies take out life insurance policies on their employees then collect the death benefit when those employees die.
If you think this sounds questionable, you’re not alone. Thanks to abuses of this practice in the past — including some companies taking out coverage on a large number of low-level employees without their knowledge — corporate-owned life insurance has also earned the nickname dead peasant insurance. So how, exactly, does this type of life insurance work, and how much do you need to worry about it?
In this article:
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Corporate-owned life insurance is any type of insurance in which a company purchases life insurance coverage for employees and names itself as the beneficiary in order to collect the death benefit when their employees die.
Note that corporate-owned life insurance is not the same as employer-sponsored group life insurance, which is a type of employer-subsidized life insurance where the employee chooses their own beneficiary (usually their family).
There are a few different ways that companies utilize corporate-owned life insurance. Two of the most common include:
Like its name suggests, key person insurance is a type of corporate-owned life insurance that insures a company’s top executives, decision-makers, or other highly skilled employees whose deaths would cause a significant financial setback for the company. Key person insurance can be either term life insurance or permanent life insurance.
Split-dollar insurance is the general term for any arrangement where an employer and an employee split the cost and/or payout of a cash value life insurance policy. As with key person insurance, companies often use split-dollar insurance to protect themselves from the loss of top executives. Split-dollar insurance also benefits employees by allowing them to save money on expensive cash value policies.
In many cases, the employer will pay the premiums on the policy, then split the death benefit with the employee’s family if the employee dies. The exact breakdown of how each employer splits the cost of insurance with their employee will vary from company to company.
So how did a type of life insurance originally intended to insure only the top executives at a company ultimately earn the nickname dead peasant insurance?
Starting in the 1980s, a number of large companies — including Walmart, Procter & Gamble, Nestle, and Winn-Dixie — began taking out corporate-owned life insurance policies on thousands of lower-level employees without notifying them.
In most cases, this was done to exploit a tax loophole, not profit directly from the deaths of employees. But because companies instituted this practice without their employees’ knowledge or consent — and raked in millions through tax breaks and death benefits — critics started calling it “dead peasant insurance,” a reference to the Nikolai Gogol novel Dead Souls, in which the main character purchases dead serfs from landowners to use as collateral for a massive loan in a get-rich-quick scheme.
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Following several media exposés and lawsuits against employers engaged in this practice, the 2006 Pension Protection Act instituted new guidelines to curb the abuse of corporate-owned life insurance, including requiring employers to obtain the consent of employees before taking out insurance policies on them.
Thanks to these regulations, you probably don’t need to worry about your employer secretly taking out a life insurance policy on you. Today, if your employer wants to purchase life insurance coverage for you and name themselves as the beneficiary, they must legally follow these guidelines:
That said, corporate-owned life insurance is not illegal, and many companies continue to use it as key person insurance and, in some cases, for income. For instance, a 2014 report in the New York Times found that banks such as Chase, Bank of America, and Wells Fargo have purchased billions of dollars in corporate-owned cash value policies to use as investments.
Again, because all employees must consent to enrollment in corporate-owned life insurance, the chances that you’re an unwitting victim of this practice are slim. But if you’re not sure if you consented to this practice in the past, check with your HR department or benefits manager — they’re required to let you know.
Finally, if the thought of anyone other than your loved ones receiving money as the direct result of your death makes you uneasy, consider purchasing your own life insurance coverage. Term life insurance is an affordable, straightforward way to create a financial safety net for your family in the event of your death.
You can use Policygenius’ free pricing calculator below to determine how much coverage you need and to compare quotes from different insurers:
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