Dead Peasant Insurance: Why Can Employers Receive My Death Benefits?
Dead peasant insurance gained notoriety after it was revealed in a Wall Street Journal article that businesses were insuring the lives of their workers to get tax-free profits. While this form of insurance known as COLI is not illegal, it is strictly regulated and needs an employee's consent. Because some COLI policies also benefit an employee's family, some workers may still opt into this as part of a company's pension plans.
But, how do COLI plans work? And how do you know if your company has taken one out over your life? Keep reading to find out more about this practice, and if you should agree to be covered by it.
What Is Corporate-Owned Life Insurance?
Corporate-owned life insurance, aka COLI, is a common practice used by employers to protect themselves against the loss of certain workers. Also known as janitor's life insurance, dead peasant insurance, or company-owned life insurance, these are life insurance policies taken out by employers on their employees' lives. Even if the employee retires or leaves their employment, a business can still retain these COLI policies.
Upon the death of the employee, the policy's death benefit will be payable to either the company or directly to the families of the deceased. This benefit is tax-free, making it an attractive offer for both employers and employees.
Kinds Of Corporate-Owned Life Insurance
There are two kinds of COLI policies which are still commonly taken out by an employer. Here's a basic description of each one:
Key Person Insurance
Key person insurance is a type of COLI that insures a company's prime "decision-makers" or top-level employees – think highly-ranked executives whose loss could greatly affect their operations and lead to potential financial setbacks. This kind of insurance is either term or permanent in duration.
Split-Dollar Life Insurance
This kind of life insurance policy is an employee benefit, where companies and their employees agree to split the cost and payout of cash value policies. This benefits the employer by protecting them from the fallout of losing valued employees, while employees benefit by saving money on paying insurance premiums.
In the event of the employee's death, the benefit from the cash value policy will be split between the family of the deceased and the company.
Why Did The Term “Dead Peasant Insurance” Become Popular?
The spotlight came onto this corporate practice when Michael Moore released the movie Capitalism: A Love Story. The film highlighted how large companies like Walmart took out these insurance policies – not to protect themselves from the loss of key executive employees, according to the film, but to get massive tax breaks on low-level employees.
By insuring low-level employees, a company was essentially benefiting from their death with very little additional cost. People were appalled that the deaths of their loved ones were giving death benefits and tax benefits to employers who had long ceased to employ them.
The negative reception of COLI has given it this unfortunate nickname, emphasizing the ownership that companies appear to still have over the lives – and deaths – of their employees.
Is COLI A Legal Business Practice?
Yes, taking out life insurance policies over employees is still legal. Many employers still take out COLI policies to protect themselves against losing valued business executives – but also to use the cash value policies to generate investment returns.
Despite their legality, they are strictly regulated by federal law. This is to prevent an employee from becoming an unknowing victim of a business' tax loopholes, or from a company getting tax-free death benefits on employees who haven't been employed by them for years.
What If My Employer Is Using Dead Peasant Insurance?
The law has several requirements for a business to take out a life insurance policy over an employee. If it does not meet these guidelines, they cannot take out a COLI policy on your behalf:
The employee must be notified of the COLI policy
The employee must give their consent
An employee has the freedom to refuse coverage under the policy
Companies cannot retaliate against people who do not consent to be covered
COLI policies can only be taken out on companies' top 35 percent of highest-earning employees
Some businesses offer COLI as a way to fund a pension plan or pension fund for retiring employees. If you're not sure if you've consented to this practice, you can check with your employer's HR department or talk to your company benefits officers.
Companies are required to inform you if they've taken out a policy over you – otherwise, they will be liable under the 2006 Pension Protection Act. Find out what the terms of your workplace COLI plan are, because under the law, an employer can deduct COLI premiums from their profits even after your beneficiaries are paid.
What Are My Alternatives To A Dead Peasant Policy?
There are other forms of coverage that you can get apart from a COLI plan. Here are some options offered by life insurance companies, which you can get separately from any plan offered by your company:
Term Life Policies
This kind of policy insures your life for a specified period, where your beneficiaries will receive a death benefit if you die within that period. These are more affordable but won't protect you once the period is finished.
Whole Life Policies
Given this name because they're meant to cover you for your whole life, these policies will require you to pay higher premiums. These premiums will be the same value every year, and will gradually build a cash value over time. Apart from providing benefits to your loved ones when you're dead, they also act as a form of investment.
Universal Life Policies
This is a permanent life policy with a flexible premium structure. The cost of insurance will rise over time with this plan, but it should be more than covered by a cash value account. With this account, any amount paid in excess of the cost of the insurance is added to the cash value. This total amount will then grow according to prevailing rates in the insurance industry, with a guaranteed minimum return of 2% per annum.
Variable Universal Life Policies
These are similar to universal policies because they have varying premiums and a rising cost of insurance. However, its cash value account doesn't pay a guaranteed rate of return. Instead, the value will be invested in mutual funds, and your return will depend on stock market fluctuations.
While you may enjoy higher returns if the market is performing well, there's also the chance that you will end up with losses due to a market downturn.
Protect Your Family’s Interests With The Help Of Financial Experts!
If your boss offers COLI policies in their employee benefit plans, you may want a second opinion on whether or not to accept these life insurance products.
Talk to a financial expert at Wesley LLC – we can advise you on how beneficial these employee benefits may be. We can also propose alternatives if you're not comfortable with this type of insurance, so contact us today!