Irma Johnson, a Texas widow, is suing after she was mistakingly informed that the employer of her late husband Daniel Johnson was to receive $1.6 million after his death under a practice known in the industry as a “dead peasant” insurance policy. Under this common practice, employers take out life insurance on employees and write off the payments as a business expense. They then collect a windfall when one of the “peasants” die.
The postal service triggered the lawsuit by misdirecting the check made out to Amegy Bank, her husband’s former employer.
These policies can continue for years after an employee has left an employer.
Wal-Mart was recently sued over its use of dead peasant policies of low-level employees and agreed to pay $10.4 million to the families of 380 employees. This has led to protests, including this video. The Walmart litigation was protracted and once again the company fought the lawsuit to guarantee bad press and then settled.
When a policy was written in 2001 for Daniel Johnson, he already had been diagnosed with terminal brain cancer. The project manager had undergone two brain surgeries to remove a tumor and was getting radiation treatments. He was unable to walk or talk. It appears that, while most insurance companies would laugh at individuals seeking insurance at such a medical stage, a bank can get a $1.6 million policy without difficulty.
What is particularly galling is that the bank (then Southwest Bank of Texas), criticized his job performance and demoted him. After buying a supplemental insurance policy, he was fired five months later and then died the following summer.
Here is a clip from a Walmart-Amegy corporate retreat. The key is to first insure the peasants before using them for clay pigeons.
For the full story, click here.
Business is Business.
Since when did any Business care about anything but profits.
People are a loss not like equipment that depreciates.
This process makes us depreciate with big win fall.
It is as friendly as a reverse mortgage.
Oh yeah the government cares about us also.
And the lobbyist care for us too.
Why regulate anything? people suck!
and credit cards are not loan sharking
(I hope you see my sarcasm)
It’s my opinion that if the state, where the policy is written in, would adopt a “next of kin law” that would hold all policies until kins ,family or someone that has a legal right in that policy are notified before a pay out is issued ,this could prevent this type of activity from becoming what it has already. A state has to issue a death certificate before any money is paid. People have civil rights ,not corporations.
I have policies on children (mine) and three close friends, none of which could pay for a funeral or provide for their families if they passed. I think technicly the same thing as Dead Peasants ins.. What most troubles me and some other posters here but not stated as such is that this is a CONFLICT of interest. At least on my part, I would not want to work for someone who would profit from my death.
I’m not a lawyer nor am I directly involved in the insurance business. There is a lot of information here that smells. One, our clever lawyer from Houston seems to be trying to taint the jury pool. The facts as I know them from a friend who sells Boli insurance to banks:
Banks use BOLI as a tax free way to fund benefits. Banks buy a single premium whole life policy that accrues cash value. They borrow tax free against the accrued value of the policy. The real effect of the transaction is the same as a loan from the bank to the underwriter.
The policy rates the risk of the employees involved.
The employees have the option not to sign the consent.
The rate of return on the policy is based on the risk of the group. If you smoke or have a terminal condition it affects the rate of the group.
Banks can only have a percentage of their capital in Boli policies.
The executive group in a bank is normally the only group covered.
Employees have no financial interest in the transaction.
The whole process is regulated and governed by insurance and banking laws and is totally above board.
In reality it is good banking practice to increase capital by way of low risk financial transactions with insurance companies.
Linking this to a term like “peasant insurance” is totally misleading and inflammatory. Just look at some of the previous misinformed posts.
PS, I’m not sure how COLI and IOLI (insurance company owned life insurance) differ.
It seems pretty screwed up that companies can take out large life insurance policies on employees (45k to 4.5M) that pay the said company when the employee dies. This practice is ridiculous and unnecessary, while I agree that the company will need to train a replacement which will cost money, it seems more logical not to pay for insurance during the employees employment, which would save the company money immediately, rather than them keeping their fingers crossed that you die young so they get a bigger payout. Walmart takes this insurance out on stock room peons that covers just short of 100k, which we all know is much more than what it takes to retrain and rehire a new stock boy (A manager accepting and faxing a job application to headquarters and then training someone to lift boxes doesn’t equal 100k even if you add the shuffling of other paper work). “Dead Peasant Insurance” is a practice that doesn’t only hurt company image, it also hurts the family of the deceased if they find out. Capitalism is great, but without regulation can lead itself to great evils such as the business practices of the Industrial Revolution where many employees were not paid in United States currency, but in a privately owned currency created by the company; which in turn meant that their employees only could buy stuff from their stores and shops, this practice is comparable to economic slavery. It’s great if you are the boss, not so much if you are anyone else.
Mr King
What “principle” is it about? I have explained that the longer the employees lived, the more money the companies made. What part of that annoys you?
I’m not a lawyer nor a paralegal but as a hard working middleclass citizen to hear that there are insurance policies taken out on people like me for any reason at all without knowledge or consent is just morally wrong… Whether these companies do it for profit (which it seems a large sum of these corporations are) it is morally unjust… This is not about how these companies use these funds it’s about the principle! If these corporations are not illegally gaining money from the deaths of these employees some of which it seems had already left of their own will or been fired why not be transparent about the whole situation??? There is something deeply disturbing about this no matter what anyone else says to defend it…
An update to this story:
Mike In The News, February 14th, 2010 1:38 AM
The boss’ secret: Cashing in on your death
….Actually, they’ve been common in a number of industries. In fact, so many companies have them that U.S. Rep. Gene Green, a Democrat from Houston, has been trying to pass a law making it illegal to keep the policies secret….
“If you buy an insurance policy on Gene Green, I ought to have notice,” said the Congressman. He also has tried to take away the favorable tax treatment that companies get for paying the premiums.
“They even kept insurance policies on people who’d long since left the company,” Rep. Green said.
As things are now, lawyers say there’s virtually no way you can make your employer reveal if it has taken a policy out on you. But if you could?
But in the case of rank-and-file workers—the so-called “dead peasants”—Texas courts have generally ruled in their favor, ruling that companies are not entitled to make money off an employee’s death.
http://www.michaelmoore.com/words/mike-in-the-news/boss-secret-cashing-your-death
Mr. Kramer,
If indeed you are correct the practice is still reprehensible and should be made illegal.
1. The last thing corporations in the US need is another methodology to avoid taxes, they do that well enough as it is.
2. Part of why American business is in the state it is in, is because corporations rather than concentrating on the core needs of their particular business, search for gimmicks to goose profits.
3. If I worked for a company I would personally be offended that they were finding ways to benefit from my work, over and above what my job was. Corporations today basically screw all their workers who don’t reside in management suites.
I anyone is still following this thread, maybe I can help.
These broad-based programs were not underwritten like ordinary insurance. The only health test was typically a requirement that the insured have been actively at work for the past ninety days or so. The law of averages takes care of the rest. Some of the employees are healthy, some are not. The price of the insurance is based on the predictable level of average health of the employee pool. Some live long, some live short; the actuary has it covered because the number of people insured is large enough to make the outcome virtually certain to fall within predictable limits.
Just in case the actuary was wrong, most of these pools were “experience-rated,” which is a fancy way of saying that the cost of the insurance was adjusted periodically so that neither the insurer or the purchaser made any money on the death claims. That’s right. The dastardly employer made NOTHING on the death of employees. What it made on one, it either lost on others, or it gave it back in future premiums.
No, the money was made by virtue of a tax arbitrage. As some of you may know, part of the premium on a life insurance policy can be used to create a cash value. It’s basically a savings account within the policy. When the insured dies, the savings account is repaid, with interest, and it’s all tax free. Meanwhile, the insurance company lets the owner of the policy borrow money, using the cash value as collateral. The interest rate on these loans was typically 1% higher than the interest rate being credited to the savings accounts in the polioies. But, and this is where all the money is made, a corporation could deduct the interest on the loans for tax purposes. So, let’s say the savings account earned 7% and the interest on the loan was 8%. At a 40% tax rate, the 8% interest cost the company 4.8%, but the company received 7% tax free when the insured employee died. The purchaser made the 2.2% tax arbitrage, minus some money for middlemen who arranged the deal. (The insurance company made the 1% “spread” between the interest it charged and the interest it credited to the savings account.)
So, all of Mr. Moore’s ranting and raving notwithstanding, these policies rarely resulted in any windfall to the employer. Indeed, because the tax arbitrage grew exponenially with the policy values, the longer the employee lived, the more the company made. Each death meant one less tree in the tax avoidance orchard. The bet was that employees would live, not that they would die. (A bet that the employees would die would be a bet against the insurance company. Who here really believes the house loses in that casino?)
And as for how Dead Peasants insurance really got it’s name, the angry press has that one wrong, too.
“Anybody who believes that a lot of companies are profiting from the deaths of their employees is a fool.”
Pat,
Why then is it a fairly widespread practice if there is no money to be made and most of the employees insured are not keypeople?
“The purpose is to eventually recoup the lifetime cost of medical benefits.”
But life insurance companies make profits, even after paying their operational expenses, including advertising. To do that, they must, on the average, collect substantially more in premiums than they pay out in death benefits (or collect them long enough before they pay out that they may make money off investing the premiums).
On the average, the employers will pay out more in life insurance premiums than they get back from the insurance companies. They’re better off “self-insuring” and leaving the insurer middle man out of the tranaction.
In the case of Key Person insurance, where a small number of very important people are insured, the damage done by the death of that one person is so high that it can’t be budgeted for. In a case like that, the company takes out the policy for the right reason: Insurance is for an event that is unlikely, but if it happens would be financially devastating.
Hello? Are there any real capitalists in here? Can anybody explain how it makes sense for a company to insure its peasants? Life insurance in the aggregate is a terrible investment; that’s how life insurance companies are able to pay their agents and maintain their offices and the like. It is only because life insurance makes sense on an individual basis (if mostly for peace of mind) that it actually gets sold at all. If life insurance is such a terrific investment, why doesn’t everybody insure their parents, for example?
Anybody who believes that a lot of companies are profiting from the deaths of their employees is a fool.
I have been a Capitalist all my life and responsible for the creation of over 40 businesses. I can not fathom the black hearted greed that could allow a company to gamble and profit on the death of an employee. I only became aware of this wide spread practice after seeing Michael Moore’s “Capitalism: A Love Story”. And while the concept of “Dead Peasant insurance” is repulsive, it is nothing compared to the damage wrought to our social fabric by the enormous concentration of wealth highlighted in the movie. I highly reccommend the movie. I hope it will change our world.
Can I take out a policy on my neighbors then?
I was a key employee with one — at least we were asked and (I think) maybe given the “option” – although it was pretty well known, if you didn’t choose the “option”, you could easily have been replaced.
The woman in the bakery at Wal-mart had left the company by the time she died and hers was a record payoff because she was only 26 or so. I don’t get how the insurance helped the company recoup any losses — 1 million dollars for a worker they replaced probably for less than 10 dollars an hour – and with the turnover they have, they will replace her again.
A nice sideline business for them come to think of it … insure everyone who comes to work for you – many leave after 3 months but if the costs is right, you could have millions of cheap policies out there that will pay off.
The peasants should revolt…because this is pretty revolting.