Dead Peasants Insurance Policies

Written by Ralph E. Stone. Posted in Opinion, Politics

Published on October 03, 2009 with 14 Comments

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By Ralph E. Stone

October 3, 2009

I learned about a new low in corporate greed from Michael Moore’s latest documentary “Capitalism: A Love Story,” which, by the way, I highly recommend. It is called “dead peasant” insurance. Companies take out secret insurance policies on their employees and name themselves as beneficiaries. And we are not talking about key employees since losing their expertise, knowledge and contacts of top managers can be financially devastating for companies. Rather, companies also write policies for rank-and-file employees. When the employee dies, the company, not his or her family, gets the insurance money. In Moore’s movie, Wal-Mart took out a secret policy on a cake decorator, and when she died, Wal-Mart received $80,000, but her family received nothing but medical bills and funeral costs.

I cannot take out an insurance policy on my neighbor’s life with me as the beneficiary because I have no insurable interest in his life. That would be an invitation for me, if I was that kind of guy, to bump him off. Insurance is largely regulated by the individual states and, in the 1980s, many states permitted these type of insurance policies. Congress over the years has tried to crack down on the practice, but the insurance industry so far has managed to derail reforms.

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. Companies pay $8 billion in premiums each year for such coverage. The policies make up more than 20% of the all the life insurance sold each year and companies expect to reap more than $9 billion in tax breaks from these policies over the next five years. The policies are treated as whole life policies. Therefore, companies can borrow against the policies. And the death benefits are tax-free.

No one knows how many corporate-owned policies are issued on executives versus rank-and-file workers. Wal-Mart alone had taken out about 350,000 such policies between 1993 and 1996. Nestle USA had policies on 18,000 workers in 2002. Enron had $500 million in policies on workers.

Congress should ban the practice for rank-and-file employees or at the very minimum require companies to obtain employees’ permission for the policies.

Ralph E. Stone

Ralph E. Stone

I was born in Massachusetts; graduated from Middlebury College and Suffolk Law School; served as an officer in the Vietnam war; retired from the Federal Trade Commission (consumer and antitrust law); travel extensively with my wife Judi; and since retirement involved in domestic violence prevention and consumer issues.

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  • Sanjay

    It is important to double check anything Michael Moore says.

    Here is AP’s Fact Check on the film’s discussion of life insurance:

    “Fact-checking Moore’s ‘Capitalism’
    By RACHEL BECK (AP) – Sep 24, 2009
    NEW YORK — Despite the title of his new movie, Michael Moore really hates capitalism. He says it’s a scheme for businesses to profit at the expense of the little guy.
    The provocateur filmmaker is campaigning for an end to what he says is the “evil” in our economic system and a return to the days when our lives weren’t so defined by money. It’s an ambitious theme, but some of his arguments in “Capitalism: A Love Story” fall apart on closer inspection….
    ___
    MOORE’S TAKE: You’re better off dead — at least that’s how some companies view their workers.
    THE FACTS: Moore highlights an ugly truth about insurance policies that benefit companies, not the employees, when workers die. Wal-Mart Stores Inc. is scathed for its use of such “dead peasant” policies. Moore notes how the sudden death of a 26-year-old former Wal-Mart worker resulted in a $81,000 life insurance payout to the retailer.
    But it’s never mentioned in the body of the film that in 2000 the world’s largest retailer canceled all 350,000 of these policies it took out on employees between 1993 and 1995.
    MOORE’S RESPONSE: No misrepresentation here, he says: Wal-Mart’s termination of the insurance policies is included in a 7-minute-long presentation of facts and quotes on different issues relating to the movie shown in the closing credits.”

    ….
    Also, in 2006, Congress passed a law imposing a significant tax penalty on companies buying life insurance without employee consent or on rank-and-file workers, even with their consent. See Internal Revenue Code section 101(j).

    Moore is a poor historian.

  • greg kamin

    So Sanjay,
    Tell me again which part of Moore’s accusation is untrue?

  • wallstsucks

    This is to Sanja…

    First off, I agree w/ Greg.

    Second, Michael Moore has been promoting his film all week on talk shows. I watched his interview on the View and on O’Brian. When he was on the View earlier this week, he did state Wal-Mart has changed their policy regarding the “dead peasant” policy because of the bad publicity. So it’s not like he already knows Wal-Mart stop doing it.

    Third,

    Check out this link:

    http://blogs.wsj.com/law/2009/02/24/dead-peasant-policies-the-next-big-thing-in-insurance-litigation/

    It appears Amegy Bank of Texas received a nice paycheck in 2008! Hmmmm, can you say way past the so called 2006 Internal Revenue Code section 101(j)

    Sanjay is a poor researcher!

  • rich stone

    Sanjay,
    At the end of the movie, right when the credits were rolling it mentioned the fact that Walmart discontinued the service. Michael Moore tries to give people a sense of hope through all the economic misery, so please take your ‘debbie-downer’ attitude elsewhere!!! (WAH-WAAH!!!)

  • Lyn

    I just say Michael Moore’s movie and was stunned to find out about the insurance story aka dead peasant money…how does one find out about other companies?

  • tazinlwfl

    Co-worker from Albania said it reminded him of this story by Nikolai Gogol where the main character buys up “Dead Souls” to bloat his apparent wealth. Soul is a term used to describe Serfs (peasants) that labored on the Russian farms.

    http://en.wikipedia.org/wiki/Dead_Souls

  • tazinlwfl

    note: because it looked like he has so many servants, he could take out loans and make purchases using the “souls” as a form of collateral.

    The dead peasant insurances can be considered losses for a company, but payouts are tax-free. so the $8billion/yr they pay in premiums could easily be made up.

  • montag451

    Mr. Stone, Congress ihas regulated this type of insurance and does require consent for non-essential employees, just not for E. COLI’s- research this at WIKI….Also this is rather distacteful, immoral and unfortunately NOT ILLEGAL….go capitalism …what a wonderful world we live and die in….

  • Eratosthenes

    Capitalism is not inherently Evil,
    but Capitalism, without morality, Is.

    Eratosthenes

  • folamil

    I just saw the movie. While these policies are pretty ghoulish the companies that bought them did so for tax reasons, not because they were hoping the employees will die. The insurance companies that sell them have to make a profit, and the corporations that buy them wouldn’t break even unless they could deduct the tax on the policies. The real story on these “dead peasant” policies is that the taxpayers are the ones getting screwed; we are paying the billions of dollars to underwrite these otherwise useless policies to the insurance companies and then some, and not getting any benefit from it. It’s a shame Moore didn’t have time to really explain this, and just took the cheap shot.

  • folamil

    The other question I have is whether insurance fraud is involved. We now know that that mortgage backed insurance was vastly mispriced. If these dead peasant policies were mispriced by AIG or the like, that would be yet another way the insurance companies could have sucked our money down the drain. I have no evidence about this, just wondering about the real story of why corporations would continue fighting congress for these policies even after their tax benefits seem to have been curtailed.

    See the wiki page on Corporate Owned Life Insurance for background on dead peasant policies.

  • http://remarksremarks.blogspot.com remarkl

    What’s wrong with Moore’s account is this:

    Almost all of these plans were “experience-rated,” which is a fancy way of saying that whatever the company got in death benefits it had to give back as premium in future years. This may not have been true for every company, but it almost certainly was true for the ones getting all the press. Because of this feature, companies did not benefit from employees’ deaths.

    These plans were tax schemes. They only worked while employees LIVED. Every living active and former employee provided a tax benefit to the employer. Deaths reduced the insured base, reducing the benefit. So the company actually LOST money on deaths.

    Aside from these small details, Moore nailed it. (Oh, one more thing – the “Dead peasants insurance” was never a term used by the industry, and the term “dead peasants” referred not to dead employees but to former employees who served as a basis for a tax benefit even though they were no longer employed. Atty. Mike Myers says otherwise, but since his authority is a memo I wrote, I’m not sure he’s the one whose account I’d rely upon. )

    I have no problem with the claim that these plans were tax dodges. But that’s not what has everyone here so revved up, is it?

  • http://remarksremarks.blogspot.com remarkl

    tazinlwfl – Your co-worker is right. “Dead peasants,” as originally used, was an allusion to Gogol’s novel.

  • Mandarc827

    This is pathetic that people are just now finding out about this policy. I’m a 14-year-old girl and I’ve known about this life insurance fraud situation for years. It is sad that even the people who die don’t know they’re family will suffer because the company they work for doesn’t care. If you work for a big corporation you don’t mean anything to them, you are simply just a pawn in their game.Also, calling your employees
    “dead peasants” isn’t very nice, those corporations that go bankrupt deserve it.