Assessing Dead Peasant Life Insurance

Corporate Owned Life Insurance and Bank Owned Life Insurance are commonly referred to as ‘dead peasants life insurance’. It is not a new concept but it was one which was successfully hidden from employees that were insured by their employers, until negative publicity brought the practice to public attention. The documentary film maker Michael Moore exposed the practice in “Capitalism: A Love Story” at a time when some employers were already being sued for using such policies.

Dead peasants life insurance basically insures a company against the death of an employee. Originally designed to insure the life of key executives, companies and banks then began to insure the lives of their rank and file workers, even maintaining the policies after an employee leaves their employment. Employers benefit by earning tax free income on the policies and by being the sole beneficiaries of the policy if the employee or former employee dies.

Although most companies refuse to comment on the practice, Bank of America issued a statement saying they used BOLI “to help defray the cost of employee benefits.” It is estimated that half of all US banks purchased the insurance, as well as many American corporations including Wal-Mart and Fina Oil.

A list of companies and banks which purchased dead peasants life insurance is available here on the website provided by Mike Myers, a lawyer who specializes in the field.

Some companies have been successfully sued for taking out COLI policies whilst ironically some companies have also sued the issuing insurance companies for failing to warn of the inherent dangers involved in buying the policies.

The insured employees do not have to undergo health tests to be insured as actuaries calculate premiums based on the average mortality of a pool of employees. Typically the younger an employee is when they die the more the company will benefit in the size of the pay out. In Michael Moore’s documentary the fact that one company noted that mortality rates were only running at 78% of the expected level was highlighted.

The morality of dead peasants life insurance offends many people. The secrecy of the policies garnered much criticism. Reforms were introduced under the 2006 Pension Protection Act which stipulates that employers must receive the written consent of employees before insuring their lives. Additionally the employee must be notified in writing of the level of cover the employer obtains.

It is not necessarily the case that employees are aware of what they sign, or if employees will be hired if they refuse to sign. Whilst the morality of COLI and BOLI policies is suspect insurers can argue that the family of the deceased employee is not losing out by not benefiting from the policy as the deceased could have purchased their own life insurance.