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article image'Dead Peasants Insurance' - insure your employees, cash in when they die

By Paul Wallis     Mar 13, 2008 in Business
If you’ve never had bulimia, but have always wanted to try, this is the news you’ve been waiting for. Dead peasants insurance is an $8 billion a year industry in America, and comprises 20% of insurance sold per year. It’s a real cottage industry.
This quaint practice is a little controversial in those obscure places like Congress, the IRS, and other hick areas like courts. Congress tried to introduce legislation, and the insurance industry got it blocked. The IRS considers it a tax shelter, possibly because companies cash in their policies tax-free, and the policies themselves also get tax breaks.
MSN Moneycentral has a very informative piece on this free post-mortem lunch for employers, by a lady called Liz Pulliam Weston, who obviously doesn’t write to fill blank spaces on websites. The opening paragraphs say a lot:
Right now, your company could have a life insurance policy on you that you know nothing about. When you die -- perhaps years after you leave your employer -- the tax-free proceeds from this policy wouldnt go to your family. The money would go to the company.
Whats more, the company might use this policy to pay for retirement benefits and other perks not for you or your fellow workers, but for your companys top executives.
There’s even a list of happy campers out there on the prairie:
Hundreds of companies -- including Dow Chemical, Procter & Gamble, Wal-Mart, Walt Disney and Winn-Dixie -- have purchased this insurance on more than 6 million rank-and-file workers.
Some of the biggest employers in America, and if you figure out that 6 million people in terms of $20 billion a year, that’s $3000+ per employee. At normal life insurance rates, those premiums, when cashed, would come back as huge money.
Maybe the IRS has a point.
I really don’t want to add much to the original source here, because the information is the sort which needs to be seen as a whole
This is a case study:
Jane St. John had two children and was pregnant with a third when her husband, a butcher at a Winn-Dixie store, was killed in an auto accident. When the Killeen, Texas, woman called the company to ask about insurance, she said she was told about a $17,500 policy to which she was entitled. St. John said Winn-Dixie told her nothing about the $102,000 the company collected from a corporate-owned policy on his life. She found out about it this summer, eight years after his death, from a lawyer who researched court records. The idea that the company would secretly insure lives, and then not share the benefits with the families, "is sick," she said. "That is creepy."
Ms. St. John has a talent for understatement. This isn’t a random business thing, it’s systemic. Most states have “advise and consent” laws that require companies to tell employees about their policies, but some don’t.
So the insurance business is doing quite a trade in the states that don’t. Not so much a loophole, as an insurance version of the Grand Canyon.
That opens up the legal situation, and there’s an important legal principle involved, and questions deriving from it:
What are the rights of a person who is a party to a legal contract?
Can a contract be said to be legally made, if the primary party is ignorant of even its existence?
What reasonable legal claims does an insured person’s estate have against such a contract?
The IRS got Al Capone, and they’ve been having a bit of success with the purveyors of this profitable massacre, even if the families of the deceased haven’t:
Companies insist that janitors policies (same thing, different name) have a legitimate business function, but the IRS has been cracking down, arguing that many of the arrangements are nothing more than tax shelters. The agency has been particularly harsh on once-popular leveraged policies, in which policy loans were used to pay premiums. In the mid-1990s, the tax agency began disallowing billions of dollars in interest payment deductions the companies had been taking on such loans. Companies efforts to defend their programs have been largely unsuccessful; a U.S. Tax Court judge called Winn-Dixies program a sham, saying it lacked economic substance and business purpose.
There’s one talking point for business in favor of these policies. They can be used as a hedge against compensation claims, in theory. The problem with that theory is it doesn’t seem to be happening.
It definitely doesn’t fit with the bit about adding some obviously much needed comfort to those famously restrained executive lifestyles.
The families and dependents of deceased workers have to fight for any entitlements. It can take years, and they can wind up with costs to pay, too. That can mean hardship on top of hardship, on top of bereavement.
Some employers, notably Disney and Wal-Mart, have dropped the policies. Understandably, they didn’t like the controversy, according to Ms. Weston.
Few people with any sense of self-respect would like it, or want anything to do with it. “Shabby” hardly begins to describe it. There’s a stench of graft you could export wholesale.
The fact remains.
Justice, anyone?
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