Mike the Mad Biologist

Employee Death and Executive Bonuses

By way of David Sirota, I came across this Wall Street Journal article about the latest corporate sleaze–collecting insurance when your employees die:

Banks are using a little-known tactic to help pay bonuses, deferred pay and pensions they owe executives: They’re holding life-insurance policies on hundreds of thousands of their workers, with themselves as the beneficiaries.

The insurance policies essentially are informal pension funds for executives: Companies deposit money into the contracts, which are like big, nondeductible IRAs, and allocate the cash among investments that grow tax-free. Over time, employers receive tax-free death benefits when employees, former employees and retirees die.

Though not improper, the practice is similar to what is known as “janitors insurance,” an insurance-on-employees technique that has long been controversial. Critics say the banks’ insurance contracts are a way for companies to create tax breaks for funding executive pensions. And some families have complained that employers shouldn’t profit from the deaths of their loved ones.

And I thought CDOs were pointless speculation. I’m sure there’s a good airport thriller novel in there somewhere. But what I don’t get is why the insurers are letting them take out these contracts. The only way I can see both parties making money on this–and let’s ignore the dead person–is that the tax breaks make this worthwhile for the insured. Kudos to Obama for trying to close this tax expenditure, since this isn’t wealth creation, but a transfer from working Americans to wealthy executives.

Comments

  1. #1 D. C. Sessions
    May 23, 2009

    Bear in mind that insurance companies keep track of the total amount of life insurance held on each of us. Your rates for insurance go up when someone else holds a policy on your life. (Says /me, whose ex-wife still holds a policy on me which is keeping me from taking out a policy benefiting our kids.)

    That means that these policies are a rather more direct wealth transfer than you might have thought.

  2. #2 Troublesome Frog
    May 23, 2009

    D. C. Sessions,
    Interesting about the ex-wife thing. I would have thought that you would legally have the right to decide who gets to take out a life insurance policy on you (or, I suppose in your case, continue with an existing policy). I assume that you took out and signed for the policy when you were married. There’s no way to cancel it? Bizarre and unfortunate.

  3. #3 D. C. Sessions
    May 23, 2009

    Interesting about the ex-wife thing. I would have thought that you would legally have the right to decide who gets to take out a life insurance policy on you (or, I suppose in your case, continue with an existing policy).

    It was a condition of the property settlement. In order to have any money left for the kids’ educations, I had to defer the full load of alimony for a few years, so she got the insurance. Now that she has it, the insurance company won’t cancel without her say-so. In theory I could petition the Court to order her to cancel the policy, but at this point I’m not prepared to spend the money on lawyers.

    However, that does raise the interesting question of whether the employees in the original situation have any legal recourse. I’ve worked in places where having the Company profit from my demise would be more than creepy, it would be downright terrifying.

  4. #4 peter - Life Quotes
    September 15, 2010

    What I find surprising is that anyone is surprised by this. Corporate greed is reaching new levels every day. I don’t even want to know how many of us have been killed to fund the new exec’s yacht.

    I would guess most of us be “terrified” if we knew. Therefore, I don’t want to know.

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