Corporate-owned life insurance (COLI), also known as company-owned life insurance , refers to life insurance policies employers take out on one or more employees with the company as the policy’s beneficiary. If the employee dies, the company collects the death benefit.
COLI policies ensure a company’s financial stability if an employee central to the business passes away, like a top executive or founder. The nickname dead peasant insurance comes from past abuses of company-owned policies, when some employers bought coverage on low-level employees without their knowledge.
It’s no longer legal for companies to insure low-level employees without their approval. There are still instances when COLI makes sense, however, particularly for smaller businesses that may not be able to replace key executives quickly or easily.
Corporate-owned life insurance is a life insurance policy a company takes out on an employee
These policies help companies 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
Abuse of corporate-owned policies is unlikely now that regulations require your consent to be part of such a policy
There are a few different ways that companies legitimately utilize corporate-owned life insurance. Two of the most common include key person insurance and split-dollar life insurance .
Key person insurance is a type of corporate-owned life insurance that insures top executives or other highly skilled employees whose deaths would cause a significant financial setback for a company. Key person insurance can be either term life insurance or permanent life insurance.
The premiums are paid by the company, and if a key employee dies, the death benefit goes toward the cost of hiring a replacement and any profit loss resulting from their passing.
Split-dollar insurance includes any arrangement where an employer and an employee split the cost and/or payout of a cash value life insurance policy. Companies offer split-dollar policies as an executive employee benefit or use them to protect against the loss of top executives.
Split-dollar insurance also benefits employees by allowing them to save money on expensive cash value policies. The employer pays the premiums, but the employee’s family gets some portion of the payout when the employee dies. The exact breakdown of how each employer splits the cost of insurance with their employee will vary.
How did a type of life insurance intended to insure only top executives earn the nickname dead peasant insurance?
Starting in the 1980s, several 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.
This was usually 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.
The term references 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.
Dead peasant insurance is not the same as group life insurance, which is a type of employer-subsidized life insurance where the company pays some or all of your premiums and you choose your beneficiary.
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Following several media exposés and lawsuits against employers engaged in this practice, the 2006 Pension Protection Act instituted new regulations to curb the abuse of corporate-owned life insurance.
Today, if your employer wants to purchase life insurance coverage for you and name themselves as the beneficiary, they must follow these guidelines:
You must be notified and give written consent
COLI can only be taken out on the top 35 percent of highest-earning employees
Your employer cannot retaliate against you for refusing to participate in the plan
Corporate-owned life insurance is not illegal if an employer follows regulations, and many companies continue to use it as key person insurance.
Because all employees must consent to enroll in corporate-owned life insurance, the chances that you’re an unwitting victim of this practice are slim. 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.
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If you’re a business owner, you may need a company-owned policy in addition to a personal policy for your loved ones. An independent insurance broker can help you find the right combination of life insurance to protect your beneficiaries and your business.
Dead peasant insurance is a moniker given to corporate-owned life insurance policies after large corporations were found buying policies on low-level employees without their knowledge to earn tax breaks and other benefits.
Company-owned life insurance is legal, but it’s highly regulated. An employer can no longer take a policy out on you without your knowledge and consent.
A company pays some or all of the premiums for a policy on a highly valuable employee (with their consent). The business receives some or all of the death benefit if the employee dies.
Businesses buy life insurance for employees without whom their business would suffer, like a founder or CEO. The death benefit goes toward the high cost of replacing that employee or business losses due to their passing.
Your company is required to secure your consent before buying a life insurance policy on you. If you’re unsure, ask your benefits administrator, who is required to disclose that information.
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Key person insurance is a life insurance policy taken out on an executive member of a business. The business is the beneficiary and pays the premiums.