This was in Michael Moore film capitalism a love story it’s called peasant insurance.

Maybe it's only been done on a state-by-state basis.

and often will use it to insure key employees.

More often they extend it pretty deeply into the company. Why? After buying the life insurance, they can take out cash loans against the policies without having to go to the board or shareholders.

i have not found anything that says it has been outlawed

If you have someone who is key to your company's success, their death would be a huge blow to the company, so you take out insurance to help you throw money at one or more people to entice them to your company to replace the deceased employee in the event of their death and hold the company over while its presumably making less money as a result.

But taking out life insurance on every employee? That's creepy.

company gave the money to the spouse/child.

I always thought the practice was pretty widespread. It costs almost nothing.


* 25 employees.

It's the main newspaper of conservative Orange County where I live. I don't recall them ever endorsing a liberal candidate in any election. But I assume the practice of American corporations that you describe applies to non-ideologically motivated entities as well.

those elderly"greeters" at Wal-mart? Do you honestly believe they hire them to improve their community image?

Wal-mart was investigated for this harvesting of their elderly employees a while back.


"Millions of current and former workers at hundreds of large companies are thus worth a great deal to their employers dead, as well as alive, yielding billions of dollars in tax breaks over the years, as well as a steady stream of tax-free death benefits. Nestle USA has policies covering 18,000 workers, Pitney Bowes Inc. has policies covering 23,000, and Procter & Gamble Co. has 15,000 covered workers, spokespeople for these companies confirm.

The coverage is called broad-based insurance, or corporate-owned life insurance, usually shortened to COLI. For years, companies could insure only key personnel deemed essential to the business. But a loosening of state rules in the 1980s allowed for an explosion in a new kind of COLI that covers rank-and-file workers -- known in the insurance industry as janitors insurance or, in at least one instance, dead peasants insurance. "I want a summary sheet that has ... the Dead Peasants in the third column," one of Winn-Dixie Stores Inc.'s insurance consultants wrote in a 1996 memo. Winn-Dixie wouldn't comment on the memo."

and:


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FROM THE ARCHIVES: April 19, 2002


Companies Profit on Workers' Deaths
Through 'Dead Peasants' Insurance

By ELLEN E. SCHULTZ and THEO FRANCIS
Staff Reporters of THE WALL STREET JOURNAL


Felipe M. Tillman loved music -- opera, jazz, country. He played keyboards and drums, sang and was choral director at his Tulsa, Okla., church. To make ends meet, he worked at record stores, where "he could be close to the music," says his brother Anthony Tillman. One of those jobs was a brief stint in the early 1990s at a Camelot Music store.

In 1992, Felipe, then 29 years old, died of complications from AIDS. He never bought life insurance, so his family received no death benefit. But CM Holdings Inc., then the parent company of Camelot Music, did. It received $339,302.

Like hundreds of other large companies, CM Holdings took out life-insurance policies on thousands of its employees, with itself as the beneficiary. Most workers covered this way don't know it, nor do their families.


"If someone is going to use your name for something, even though you're an employee of theirs, you should know what's going on in your name," says Anthony Tillman, who was surprised to learn that his brother's death benefited Felipe's onetime employer. "It isn't fair."

The practice is as widespread as it is little-known. Millions of current and former workers at hundreds of large companies are thus worth a great deal to their employers dead, as well as alive, yielding billions of dollars in tax breaks over the years, as well as a steady stream of tax-free death benefits. Nestle USA has policies covering 18,000 workers, Pitney Bowes Inc. has policies covering 23,000, and Procter & Gamble Co. has 15,000 covered workers, spokespeople for these companies confirm.

The coverage is called broad-based insurance, or corporate-owned life insurance, usually shortened to COLI. For years, companies could insure only key personnel deemed essential to the business. But a loosening of state rules in the 1980s allowed for an explosion in a new kind of COLI that covers rank-and-file workers -- known in the insurance industry as janitors insurance or, in at least one instance, dead peasants insurance. "I want a summary sheet that has ... the Dead Peasants in the third column," one of Winn-Dixie Stores Inc.'s insurance consultants wrote in a 1996 memo. Winn-Dixie wouldn't comment on the memo.

Companies have put millions of dollars into COLI policies. These policies yield tax-free income as their investment value rises, just like conventional whole life policies. Companies also borrow against the policies to raise cash. Public Service Co. of New Mexico has noted in public filings in recent years that it once set up life-insurance coverage on hundreds of its managers to raise money to enable it to eventually take its nuclear-power plants out of service.

Until 1996, the biggest lure was the tax deductions companies were taking on interest they paid on these loans. But then the Internal Revenue Service began disallowing these deductions, arguing in subsequent disputes that these COLI arrangements serve no legitimate business purpose. Now, the agency is investigating more than 85 companies that it says took $6 billion in illegal deductions, an IRS spokeswoman confirms.

Even without those deductions, a company's bottom line still benefits from the tax-free investment gains on the policies and the death benefits. Companies can use the death benefits for anything they like. CM Holdings used $168,875 of the death benefit on Mr. Tillman for executive compensation, court documents show. The documents also show that $280 went to "Star County Children's Services" to help cover child-support payments from a nephew of Camelot Music's founder who was working at the company at the time.

'JANITOR INSURANCE'



Companies that have life-insurance policies on employees profit when the employees die*

• American Electric Power

• AT&T

• Ball

• Basset Furniture

• Dow Chemical

• Eaton

• Nestle USA

• Olin

• Pitney Bowes

• PPG Industries

• Procter & Gamble

• Trans World Entertainment**

• Walt Disney


*Some policies also cover ex-employees and retirees
**Acquired Camelot Music/CM Holdings



Most companies say they use money from the insurance to help pay for various employee benefits. A Pitney Bowes spokeswoman says the company instituted the program in 1994 "to offset the rising cost of employee benefits." A spokesman for Nestle says, "We have not done this for financial gain." A spokeswoman for Procter & Gamble says the company uses the insurance "partially to finance retiree health benefits."

Tom Ayres, spokesman for American Electric Power Inc., a Columbus, Ohio, gas-and-electric utility that has COLI policies covering more than 20,000 workers, says the policies improve the company's bottom line. Investment gains on the policies add to income, he says, and "as the insured employees die, we're getting death benefits, which is cash income." But he adds that the death benefits are "dedicated to retiree benefits," though the individuals covered by the insurance receive nothing directly.

John Sullivan, chief financial officer of Trans World Entertainment Corp., an Albany, N.Y., company that acquired CM Holdings in 1999, said he couldn't comment in detail because of a case pending in the U.S. Court of Appeals in Philadelphia. In that case -- similar to others brought by Winn-Dixie, AEP and Dow Chemical Co. -- Trans World is seeking to have reinstated some interest-payment tax deductions it took on borrowings against its janitors insurance. A federal district court had earlier granted an IRS request to disallow the deductions during CM Holdings' bankruptcy proceedings.

Mr. Sullivan does say that Trans World "inherited the policies" from CM Holdings. Those policies covered at least 1,400 employees in 1990, based on a company document reviewed by The Wall Street Journal. The document, called a death run, lists on page after page the names, ages and Social Security numbers of the workers, as well as how much money the company will receive for each employee's death, even those who die long after leaving the company. Younger workers will generate from about $400,000 to almost $500,000 in death benefits each, the document shows, while older workers will bring the company about $120,000 to $200,000 each. (Younger workers yield bigger payouts because, based on actuarial calculations, they are less likely to die soon, so the same premium amount buys more coverage for them.)

Another name on CM Holdings' 1990 death run is Margaret Reynolds, of Uniontown, Ohio. Mrs. Reynolds suffered from amyotrophic lateral sclerosis, or Lou Gehrig's disease. In her final years, her five grown children took turns caring for her. At one point, says her son John, they begged CM Holdings for $5,000 to pay for a specialized wheelchair so they could take their mother to church. "They said it wasn't covered," Mr. Reynolds says.

Mrs. Reynolds, a $21,000-a-year administrative assistant and buyer, died in 1998 at age 62. Her family received a $21,000 benefit from a life-insurance policy provided to employees by CM Holdings. CM Holdings received a COLI payout of $180,000.

"They got what?" John Reynolds says when told. He sells life insurance himself, to small businesses, but he says he had never heard of janitors insurance. "It's mind-boggling."

For decades, a corporation or an individual wanting to buy life insurance on someone else had to have a significant financial or emotional stake in the person's survival, known as an "insurable interest." Thus, companies were able to buy life insurance on certain executives, and partners in law and accounting firms could buy life insurance on each other. The rule had evolved to prevent incentives for murder or negligence, and to discourage one person from profiting from the death of another.

But in the 1980s, insurers persuaded regulators in most states -- Texas being a notable exception -- to rewrite the rules to allow employers to buy life insurance on the lives of all employees. The practice took off as employers became aware of the tax advantages, especially the ability to borrow against the policies and then deduct the interest payments.

Federal tax law prohibits the use of life insurance as a tax shelter if there isn't a legitimate business purpose for having it. From the start, many companies have asserted that they use COLI to pay for employee benefits. Still, they aren't required to disclose how they do use COLI money.

In 1996, Congress clamped down, forcing companies to begin phasing out the interest-payment deductions they were taking on COLI loans. And the IRS began working on collecting some of the money the companies had deducted from their taxes. Some government officials say the sum under investigation is probably much higher than the $6 billion the IRS confirms, and involves as many as 700 companies.

'DEAD PEASANTS'



Like many companies, Winn-Dixie took out insurance policies on its rank-and-file workers that pay death benefits to the company when the workers die. Here's how these workers were referred to in internal company memos:

• "Bruce -- Here is a very rough beginning of the booklet we are preparing for Winn-Dixie. A section on Dead Peasants remains to be written ... "

• "I want a summary sheet that has ... the Dead Peasants in the third
column."




Security and Exchange Commission filings provide some clues about the amounts of tax dollars at stake. In 2001, American Greetings Corp. recorded a charge of $143 million for potential exposure to disallowed deductions on COLI-loan interest payments. R.R. Donnelley & Son Co., a Chicago printing company, agreed this month to pay the IRS $150 million for disputed deductions related to policies covering more than 20,000 workers. And W.R. Grace & Co. indicated in its 2001 filings that it deducted $163 million in interest after 1992 and has current unresolved tax exposure of $57 million. "We believe the loans had and continue to have a valid business purpose," says a Grace spokesman, who adds that the company took out the policies to pay for benefits programs.

The courts have tended not to accept companies' rationale for using COLI. "We do not believe that the purpose of the [plan] was to fund employee benefits," wrote Judge Robert P. Ruwe in a 1999 federal Tax Court ruling against Winn-Dixie. The Jacksonville, Fla., supermarket chain brought the case against the IRS, seeking to reinstate deductions it took on COLI policy loans covering 56,000 workers.

Judge Ruwe noted that Winn-Dixie had high staff turnover and didn't end up providing retiree medical benefits to most of its workers, while it continued to collect death benefits on those who leave the company before retirement. The judge concluded that the executives "recognized that it was a tax shelter," and that ultimately, over the 60-year life of the policies, the company hoped to save $2 billion in taxes.

In June last year, the U.S. Court of Appeals for the Eleventh Circuit in Atlanta upheld the Tax Court decision. And just Monday, the U.S. Supreme Court declined to hear Winn-Dixie's appeal. A Winn-Dixie spokesman says the company is disappointed with the high court's decision, but is "sufficiently reserved for any liability" arising from the case.

While the IRS can find out about COLI policies directly from the companies, disclosure requirements aren't tight, making it hard for others to determine just how much money is squirreled away in the insurance. Employers do, in fact, use other kinds of COLI to pay for lavish retirement benefits for executives. But disclosure rules don't require them to distinguish between executive COLI and janitors COLI.

Further, companies report all their life insurance in aggregate. Accounting rules require only that they report increases in the aggregate cash values of their life-insurance policies -- and only if the increases are "material." Materiality isn't defined.

"So, some large companies with COLI don't need to report it at all," says a former government tax official. Congress would have to ask its economists to estimate the cost to taxpayers, says another former official, J. Mark Iwry, who was chief pension regulator at the Treasury. "They'd have a hard time coming up with a number."

Big Business

Even with the phaseout of the most attractive tax breaks, COLI is still big business. Among the major marketers of COLI are Marsh & McLennan Cos. and MONY Group Inc. Marsh & McLennan itself "inherited" a policy covering an undisclosed number of employees when it acquired insurance consultant Johnson & Higgins in the mid-1990s, a spokeswoman says. She says that the company no longer pays premiums on the coverage, and that it hasn't received any death-benefit payments for its 295 employees who died in the World Trade Center on Sept. 11.

Among insurers, Hartford Life is a major COLI provider. At the end of 2001, Hartford Life had janitors insurance with a face value of $4.3 billion in force among its clients, according to its latest annual report. COLI in all its forms brought the company $37 million of its $1 billion of net income last year.


--------------------------------------------------------------------------------

Death Benefits
How companies profited from the deaths of their employees

Felipe Tillman William Smith Doug Sims Peggy Stillwagoner
Employment Music-store worker Convenience-store clerk Distribution-center worker Home-health nurse
Died Jan. 1992 Dec. 1991 Dec. 1998 Oct. 1994
Age 29 20 47 51
Cause AIDS Murdered at work Heart attack Car accident
Death Benefit $339,302 $250,000 $64,504 $200,000
Paid to Camelot Music/CM Holdings National Convenience Stores Wal-Mart Stores Advantage Medical Services

Source: WSJ research


--------------------------------------------------------------------------------

Since Congress reined in some of the tax breaks, most employers have nonetheless left their janitors coverage in force. After all, they still enjoy the tax-free buildup of value in the policies, which adds to net income. (This income is referred to in financial statements under generic headings like "other income" and "other assets.&quot And then the death benefits go to the company, tax-free.

These future death benefits become an "attractive off-balance sheet asset," says Albert "Bud" Schiff, president of the Association for Advanced Life Underwriting and chief executive of NYL Executive Benefits LLC, a leading marketer of COLI for executive benefits in Stamford, Conn. "Companies understand that they have this significant downstream earnings growth."

That's why they keep an eye out for the deaths of employees after they have left the company. One way they can do that is by checking the Social Security Administration's database of deaths. When AEP bought its policies in 1990, a company memo noted that "in an effort to keep the tracking of reported deceased participants of the AEP COLI plan as simple as possible," the company "would track each individual reported to us either by AEP or the Social Security sweep."

Employees rarely know about a company's plan to buy COLI policies. In some states, including California, Michigan, Ohio, Illinois and Minnesota, companies are required by law to secure employee consent to include them in coverage. In that case, the employer may offer workers an incentive of a modest amount of life insurance without charge.

That happened to Gloria Jacobs. A few years before she retired in 1993 as a benefits manager for Walt Disney Co. in Orlando, Fla., she received a letter telling her that if she agreed to be covered under a COLI program to finance employee benefits, she would receive free life insurance of $10,000. The alternative was to pay for life insurance herself. Ms. Jacobs agreed to participate.

A Disney spokeswoman declines to say how much the company will receive when Ms. Jacobs dies, nor how many employees and retirees are covered under COLI.

Even when employees are informed about the insurance, they may be unaware that the company stands to benefit more than they themselves, or that the offer of free insurance to get them to consent is not protected under federal benefits law. Employers can cancel it at any time.

Wal-Mart Stores Inc. took out COLI on about 350,000 of its workers in the 1990s, offering $5,000 in life insurance to those who agreed to be covered.

NOTE: Article points out Wal-mart stopped this practice in 2000 because of lawsuits filed against them.

http://online.wsj.com/public/resources/documents/april_19.htm

It seems to me to be very in-line with contemporary American values.

Seems to be a trend with a lot of companies.

When an insurance company sets the premiums, they look at actuarial tables and calculate what their expected payouts are based on the ages of the insureds. They then calculate how much they need in premiums to cover the payouts and add their overhead and profit to that. A large company that insures all of its employees would recoup some, but not all of the premiums it paid in the form of death benefits. They would have no way to recoup the portion of the premiums that represents the insurer's profit and overhead.

To me, this strategy seems like a loser. What have I overlooked?

ETA: As I think about it, it may work as a tax dodge. Their premiums would be tax deductible, but I believe benefits paid to beneficiaries are not taxable if they own the policy. If the tax savings exceed the difference between the premiums paid and the death benefits received, then the strategy works.