You got the job you wanted with the company you chose. And now you’ve gotten your employee benefits package. Read the paperwork carefully. It could contain an insert asking for your signature that you’ll accept a life insurance policy paid for by the company.
Often the employer is offering a group life policy benefitting your family, which usually provides a death benefit of one to two times your annual salary if you die under normal circumstances. It might even include a rider for accidental death or dismemberment (AD&D) if you’re injured or killed while working.
But be aware of another type of life insurance policy for which your company might want your signature. Its beneficiary is the employer. So, if you die, your family doesn’t benefit at all because your employer gets the money.
This type of policy is called Company-Owned Life Insurance (COLI) or Bank-Owned Life Insurance (BOLI) if purchased by a bank.
There’s no way of knowing how many COLI/BOLI policies have been written but “it is a very very big market,” says Bruce Elliott, who handles compensation and benefits for the Society for Human Resource Management.
“It’s a very lucrative market for life insurers,” says Houston attorney Michael Myers of McClanahan Myers Espey LLP, who has tangled with companies offering these policies, such as American Greetings, Wal-Mart and Winn-Dixie. “The number of people insured is clearly in the millions.”
These policies are lucrative, as they not only pay benefits to employers but are also a tax-dodge. But toxic might be a better word for the policies on employees who had this insurance, including cashiers and stock clerks who might only have been hired seasonally or temporarily.
That’s why COLI/BOLI was nicknamed “dead peasant” or dead janitor insurance. It was deemed so objectionable that:
- Lawyers like Myers took Wal-Mart and the others to court winning million-dollar class-action lawsuits for these low-level employees “slammed” into policies without their consent.
- The Internal Revenue Service (IRS) investigated and put the brakes on some of the worst abuse.
- Congress passed a 2006 law requiring companies to enroll only the top 35 percent of its highest paid personnel and to require these employees to sign off on their acceptance of the policy.
‘Growing, opaque and legal’
But if you want to be seen as a loyal employee and are asked to give your consent, is it a request . . . or command? Will your opportunities to advance stagnate if you turn it down?
That’s the quandary Freedom Communications’ employees found themselves in when corporate headquarters wanted their consent to take out dead peasant policies on them.
After what The New York Times described as an “intensive lobbying campaign,” a modified plan was put into place. “The practice . . . remains a growing, opaque and legal source of corporate profit,” says the paper.
Any agent will tell you that the reason it’s so lucrative is due to the tax benefits of whole life insurance. Once money is placed in a whole life policy, it accrues tax-free. So it’s a great cash cow for any corporation seeking investment growth without the pain of losing it on April 15.
Banks really like it because their life insurance holdings are considered ready money, a key measure of financial strength. While some companies claim to use the proceeds of dead peasant policies to bolster employee pension plans, the truth is that it’s just money to be used wherever and whenever.
There’s also a moral issue. You can’t take out a life insurance policy on just anyone. Instead you’re supposed to have what the life insurance industry calls “an insurable interest” in that person, such as a wage-earning spouse, thereby wanting them to live. But employers rarely have that interest.
But life insurers seem to have no problem with companies like Wal-Mart having a claim on your life. Perhaps up to 20 percent of all new life insurance consists of policies taken out by companies on their workers, estimates The Times.
Conversely, there are certain instances in which a company should be able to protect itself against the death of a key executive. For example, the loss of Apple’s creative genius, Steve Jobs, had a material effect on the company. But is this true for every executive asked to sign consent for a “dead peasant” policy? Probably not.
So is COLI/BOLI nothing more than a tax dodge? Its supporters say no.
“Like any investment, this insurance has strict rules and guidelines from bank regulators, the Securities and Exchange Commission (SEC) and the IRS,” says Todd Chambley, who heads Aon Hewitt’s executive benefits practice. “Bank regulators want to ensure that a bank is diversified in its investments, so they try to make sure they don’t own too much life insurance and that they do not have too much exposure to only one insurance company.”
The best advice for a new employee: Keep track of what you’re offered and whether or not you benefit. If presented with a consent form for a COLI/BOLI policy, make sure it has a “split-dollar” clause so that both you and the company share the money when you die.
And even if you have group life insurance through work that will benefit your family, remember it ends if you leave the job or are fired. That's why it's always wise to carry your own life insurance.