More on Life Insurance
More on Life Insurance
Corporate-owned life insurance (COLI), also known as company-owned life insurance, is when companies take out life insurance policies on one or more employees and name the company 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. However, some employers abused these policies in the past by taking out coverage on a large number of low-level employees without their knowledge — hence the nickname dead peasant insurance.
Luckily, it’s no longer legal for companies to insure low-level employees without their approval. There are still instances when a company-owned policy makes sense, however, particularly for smaller businesses and business owners that may not be able to replace key executives quickly or easily.
Corporate-owned life insurance is a practice in which companies take out insurance policies on their employees
These policies are intended 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
Regulations now require your consent to be part of such a policy, making abuse of the system unlikely
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.
Note that dead peasant insurance is not the same as employer-sponsored 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.
There are a few different ways that companies normally utilize corporate-owned life insurance. Two of the most common include key person insurance and split-dollar life insurance.
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.
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 that might result from their absence.
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.
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. 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. 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.
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.
A legal application of corporate-owned life insurance involves a company paying some or all of the premiums for a policy on an employee highly valuable to the company’s operation. The business is the policy’s beneficiary and receives 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 whether you’ve consented in the past, ask your benefits administrator, who is required to disclose that information.
Amanda Shih is a life insurance editor at Policygenius in New York City. She has a passion for making complex topics relatable and understandable, and has been writing about insurance since 2017 with specialities in life insurance cost and policy types. She's previously written for Jetty and LegalZoom.
Amanda has a B.A. in literature and communication from New York University.
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