Life Insurance Policies on Employees Benefit Executives
Wall Street Journal recently had an article on how life insurance policies were being placed on employees by a number of companies in order to help fund executive pensions. I also mentioned this briefly in a post describing why we are moving away from Chase as our primary bank (Voting with Dollars: Banking).
The article specifically discusses a number of banks (all the “biggies”) that are using this tactic. Three of the banks have policy valuations totalling 12 billion or more. The kicker is that while the policy is on the employees, the beneficiary is the company itself. This money is then used to fund pensions for executives.
The practice helps the companies avoid taxes because the “proceeds” from the policies when the employee passes are tax free. This results in situations where the family of the employee (or former employee) may get little to nothing in insurance payout, but the company profits. For example, a current lawsuit has been filed over just such a situation. An employee who had survived two brain tumors signed an agreement for $150,000 in supplemental insurance which also acted as his consent for his employer to take out their own policy. His company later fired him, and he passed away not long after. His family received no life insurance money because he was fired. But a check was mistakenly mailed to his widow for $1.6 million, but made out to his former employer.
New rules in 2006 require companies wishing to implement this to get consent from the employees that they take policies out on. And the rules limit the employees that they can take policies out on to the higher earners.
Having an employer win when you work for them, or win when you die, is a terrible conflict of interest. Certainly companies wouldn’t resort to murder to fund pensions, would they? Probably not…but the situation described above demonstrates how murky this practice gets. The employer is no longer employed the individual, so his policy was canceled — but theirs remained in effect. Having survived two brain tumors, the company may have fired him as a result of failing health. Perhaps they were justified in doing so, assuming that his work was suffering. But benefiting from his death crosses a line.
