​Why employers collect insurance when workers die

Many people might consider it ghoulish or even immoral when a company takes out life insurance on its employees, pocketing profits if they die. But some in corporate America argue the practice is beneficial, helping to lift a company's financial outlook or even buttress pension plans.

No matter what your view of so-called "dead peasant" life insurance, the fact is the practice is alive and kicking, despite a law in 2006 that was aimed at restraining the policies. In fact, billions of dollars in such life insurance policies are now held on the books at banks such as JPMorgan Chase and Wells Fargo, The New York Times reports.

The practice, reportedly named after Nikolai Gogol's novel "Dead Souls," in which a character buys dead serfs to use as collateral, was the focus of a dust-up earlier this year when media firm Freedom Communications asked its employees to allow it to take out life insurance policies on them. Freedom, which owns The Orange County Register, defended the action by noting that payouts would benefit its pension plan.

Freedom employees were uncomfortable with the idea, and a modified plan was later enacted, The Times notes.

While the practice has been used by corporations for years, what's surprising is how tenacious the "dead peasant" tactic remains, despite restrictions placed on company-owned life insurance in 2006. In that year, a federal law required companies to receive employee consent before taking out life insurance on them.

Given the hurdles, why has the practice maintained its hold on corporations? One reason is that the policies provide tax breaks, such as tax-free investment returns and any death benefits that are ultimately paid. Corporations can also use the payouts in any way they like.

About $1 billion in new corporate- and bank-owned life insurance policies is being added annually, Aon Hewitt told Global Finance magazine late last year. A major motivation for the new policies is to help fund pension and retirement benefits, similar to Freedom's plan for its "dead peasant" policies.

It may be no coincidence that the increase in "dead peasant" policies is coming at a time when many corporate pension plans are suffering from funding deficits.

That purpose was defended by Freedom chief executive Aaron Kushner, who told The Times that buying policies "is one of the ways of strengthening the long-term health of the pension plan and ensuring its ability to pay benefits."

Some employees who were covered by company-0wned life insurance before 2006 might not be aware of the policies, according to McClanahan Myers Espey, a law firm that has been involved in class-action lawsuits against companies using the tactic.

In a letter sent earlier this year to Freedom employees, Kushner defended the practice as "not novel, complicated or extraordinary." He added, "Life insurance, by its very nature, was created to benefit the people we love and care about most."

  • Aimee Picchi

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