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Most people purchase a life insurance policy for themselves to financially support loved ones after their death. However, it is also possible for organizations to purchase life insurance for their employees, which is called dead peasant life insurance or corporate-owned life insurance.
Dead peasant life insurance is highly controversial, yet many companies have this type of policy for tax or revenue purposes. Some businesses may opt to use it for more than tax or revenue benefits. It is also argued that it can help businesses cover the cost of hiring and training an executive in the event of their death, as well as provide funding for certain employee benefit plans.
What is corporate-owned life insurance?
Corporate-owned life insurance is a special type of life insurance that employers 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, typically, the employer pays the 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 is 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.
What are the regulations against dead peasant life insurance?
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.
- Companies are only allowed to take out policies on the top 35% of their highest-paid workers.
- 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.
Frequently asked questions
Why do companies take out corporate-owned life insurance policies?
There are several reasons companies purchase corporate-owned life insurance policies, or dead peasant insurance. For one, it provides an additional tax-free source of revenue. It also helps fund employee benefits packages and covers the cost of hiring after an employee passes away.
Do employees’ family members receive any death benefit with a company-owned policy?
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.
Do employees have to pay for corporate-owned life insurance?
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.
How do I know what life insurance policy is right for me?
There are lots of options when it comes to life insurance. A good way to approach it is to research the various life insurance options available and then speak with a licensed insurance agent before purchasing.