Employer Owned Life Insurance

Did you know that your company could get a life insurance policy on you without your knowledge and gain tax-free proceeds from this policy even years after you’ve left the organization? So your family could be left with a paltry sum or nothing after your demise. The money in turn would go to the insurance company. What’s worse is that your policy will pay for retirement benefits and perks of senior executives of your ex-firm.

Corporate-owned life insurance is indeed a thriving business and according to the American Council of Life Insurers, Companies spend up to $8 billion in insurance premiums annually, for such coverage. The policies add up to more than 20% of the total life insurances sold each year.

Corporate-Owned Life Insurance Actually Comes in Two Flavors
Life insurance coverage such as Executive or “key person” insurance policies and Broad-based or “janitors” policies have been in implementation for decades. The sole objective of first policy which insure the lives of top executives, is to protect corporates from any financial impact resulting from loss of expertise and knowledge of senior managers.

On the other hand “janitors” policies that insure rank-and-file workers are aimed at earning profit. Here life insurance proceeds are tax-free, allowing companies to take tax-free loans and earn tax-deferred returns even while the employee is alive. The resulting income pays for executive compensation or other benefits.

An Astonishing Example
Frustrated survivors of dead insured workers who got little or nothing from these policies are now fighting for their rights in court. One such incident occurred when Jane St. John’s husband, a butcher at a Winn-Dixie store, was killed in an auto accident. On inquiring the company about life insurance, she found that her children and she was entitled to a $17,500 insurance policy. Eight years later she discovered from a lawyer who researched court records, that Winn-Dixie collected about $102,000 from a corporate-owned life insurance policy on her husband’s life.

Unlike Jane, many families don’t get anything. Some labor leaders and lawmakers have denounced these insurance policies as “unjust” and “repulsive” but companies justify that profits from such policies payoff increased cost of employee benefits and enhance the businesses’ bottom lines.

Survivors’ Lawsuits…
Survivors continue battling with the law as to whether companies should have “insurable interest” in their employees’ lives and that they should be required to seek employees’ permission for the insurance policies?

Insurers consider “Insurable interest” important, so they try to ensure purchasers of life insurance have no incentive for bumping off the insured and should be a biologically related to people being insured, or bear financial losses if the insured died.

Soon, the increasing number of lawsuits will pressurize the Congress to make reforms giving lawmakers no option but to restrict companies from writing insurance policies on rank-and-file workers. Or companies will be compelled to get workers’ consent before buying any insurance policy and make clear whether the life insurance coverage will extend even after they resign.

Although companies feel that this is an important business planning tool and used for completely valid reasons, the fact is, employees are being cheated in the process.