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Most people who purchase a life insurance policy do so to financially support loved ones after their death. Most policies fit into this category, but there is another type of policy, called corporate-owned life insurance or dead peasant insurance, that exists to protect a company’s financial interests in the event of the death of a highly-valued employee, such as a founder or CEO.
As you might guess from the name, dead peasant insurance can be controversial, and it has in the past been misused by corporations to improve their bottom line at the expense of unsuspecting employees. When used properly, however, it may have tax or revenue benefits for the company or can cover the costs involved in hiring and training a new executive employee. To avoid misuse, Congress passed legislation in 2006 to prevent these policies from being purchased without the consent of employees.
What is corporate-owned life insurance?
Corporate-owned life insurance is a type of life insurance that employers may be able to take out on their employees. The employer acts as the policy’s beneficiary, and when the employee passes away, the employer receives the death benefit. Corporate-owned life insurance can be written on one employee or an entire workforce.
Company-owned life insurance was originally designed to help businesses stay afloat financially after high-ranking executives passed away. Today, companies will typically purchase corporate-owned life insurance to fund employee benefit plans, such as non-qualified executive health plans and deferred compensation plans. There are several tax advantages because cash value growth and death benefit payouts do not count toward annual revenue.
There are two different types of corporate-owned life insurance — key person and split-dollar:
- Key person life insurance: Key person life insurance specifically protects executives and decision-makers if their death would cause financial problems for the employer. This type of coverage is available in a term or permanent life insurance policy.
- Split-dollar life insurance: Split-dollar life insurance allows the employer and employee to share the payout of the policy’s cash value. Unlike key person insurance, the employer typically pays the split-dollar insurance premiums and splits the death benefit with the employee’s loved ones after their death.
Corporate-owned life insurance is not the same thing as group life insurance, which may be offered to employees as part of their employment benefits. With most group life insurance policies, the employee pays the premiums and chooses their beneficiaries to receive the full death benefit.
Why is it called dead peasant life insurance?
Company-owned life insurance is commonly referred to as dead peasant life insurance because of its historical use. In the 1980s, many major corporations began purchasing corporate-owned life insurance on low-wage workers without telling them.
Their intention was not solely to profit from the employees’ deaths, but the move was viewed as controversial because companies could secretly make millions off employee death benefits and the growth of the policies’ cash value.
As a result, the name “dead peasant insurance” was given to corporate-owned life insurance in reference to a novel called Dead Souls by Nikolai Gogol. The lead character buys dead serfs from a landowner in the book and uses them to secure a high-value loan.
Why do companies buy dead peasant life insurance?
A dead peasant policy may have several benefits for a company. It can be costly to hire and train upper-level employees who bring expertise and value to the company once they come on board. When they pass away, the company loses that value and has nothing to show for the costs it incurred in training them. If they are the company’s founder or CEO, their value to the company may be considerable. A corporate-owned policy may help businesses recoup some of that loss.
A split-dollar policy, meanwhile, can be added to a compensation package to help convince a desired job candidate to take the position since the potential employee’s beneficiaries would get money if they were to die. A policy death benefit may also be used by a company to fund benefit plans or pension plans, and the tax benefits can be favorable as well since death benefit payouts are not taxed in most cases.
Is dead peasant insurance legal?
Despite the controversy, dead peasant life insurance is legal but highly regulated. In 2006, the Internal Revenue Service (IRS) instituted the Pension Protection Act, which created a strict set of guidelines that made it more difficult for companies to exploit their employees with a corporate-owned life insurance policy.
The IRS guidelines essentially made it illegal for companies to take out a life insurance policy on their employees without their consent, regardless of how many employees the company has. In order for a company to get a corporate-owned life insurance policy, the following rules apply:
- The company must notify the employee of their intent to purchase the policy and get their written consent.
- Employees are allowed to refuse participation in the policy and employers cannot take any action against them.
- Companies can’t deduct certain expenses related to the policy from taxable income unless the covered employee worked there during the 12 months prior to their death. Before 2006, employers could buy policies that allowed for the collection of death benefits long after a person’s employment was terminated.
- Companies must track and report the number of company-owned life insurance policies they maintain to the IRS.
Frequently asked questions
Key person life insurance, sometimes called key man life insurance, is one of the two types of dead peasant insurance available. This kind of policy may be taken out by a company on high-ranking key employees whose loss might cause financial difficulties for the company. This may be the case if the insured person is a company founder or brings a unique skill to the company. The insurance may help replace some of the financial value lost to the company if this employee dies. These policies may be term or permanent life insurance with the company itself typically listed as the beneficiary.
It depends on which type of company-owned policy is written. With split-dollar life insurance, the employer usually shares the death benefit with the employees’ family members. However, it may not be an even 50/50 split. With a key person life insurance policy, the employer typically keeps the full death benefit.
When the IRS instituted the Pension Protection Act in 2006, it allowed employees the right to refuse to pay for corporate-owned life insurance. With dead peasant insurance, the employer pays the monthly premiums and has full control over the policy. If an employee chooses not to participate in the program, the employer is not allowed to take any action against the employee.