Formally called Dead Peasant insurance, corporate-owned insurance is a strategic way organizations use to protect their financial interest.
Instead of providing coverage for just any employee, business or organizations uses it to insure important figures such as top executives and CEOS, whose sudden death could affect the business really hard.
The Dead peasant pay out would help the company in recovering, by providing finds to cushion the financial impact or hire a replacement. Although, the term “Dead peasant insurance” is no longer used, it purpose still remains important for the stability of a business.
How Does Corporate-Owned Life Or Dead Peasant Insurance Work
Just as I have said above, Corporate-owned life insurance (COLI) is a type of life insurance that businesses take out on their employees, with the company named as the beneficiary.
This insurance helps protect the company financially in case something happens to a key employee. Especially one whose loss would affect the business significantly. Companies typically use COLI for specific reasons, such as:
- Key person life insurance: This protects the company if an important employee or executive passes away. The funds from the life insurance policy can help cover expenses like finding and training a replacement.
- Buy-sell agreements: In businesses with multiple owners, the company may take out life insurance on each co-owner. If one co-owner dies, the life insurance payout helps the company buy out the deceased’s share from their estate.
- Split-dollar life insurance: In this arrangement, both the company and the employee share the benefits of the life insurance policy.
- Funding retirement and compensation plans: COLI can also be used to fund retirement plans or other compensation arrangements, offering tax benefits as the policy’s cash value grows over time.
It’s important to remember that while COLI can be purchased for multiple employees. It is usually taken out on key individuals who are vital to the company’s success, not the entire workforce.
Also, COLI is different from group life insurance, which is typically offered to all employees as a standard benefit. In group life insurance, the employer often pays the premiums, but the employees’ beneficiaries receive the full death benefit.
Why Was It Called Dead Peasant Life Insurance?
Company owned life insurance is formally referred to as dead peasant life insurance or sometimes called janitor insurance because of the way it was used in the past.
In the 1980s, many companies purchase this type of policy on low- wage employees without telling them. Although the intention was not to profit from the death of the workers, the move was viewed as being cunny.
And that is because the companies could make millions off the death of the employee and the policies cash value growth secretly.
As a result of this, the term “dead peasant insurance” was given to the corporate owned life policy in relation to the dead souls novel written by Nikolai Gogol.
The main character in the story purchased dead serfs from a landowner and make use of them to get a very expensive loan.
Why Do Companies This Life Insurance?
While life insurance for individuals typically helps families after a loved one passes away, corporate-owned life insurance (COLI) works differently.
If a business loses a critical person, like a founder or high-ranking employee. It can face huge costs to replace them, finding, hiring, and training someone new can be very expensive.
COLI helps the company manages those costs and stays stable during tough times.
For the policy to be valid, the company must inform the employee in writing that they plan to insure them. The employee must also agree in writing to be insured. And they need to know the company will receive part or all of the death benefit.
There are some exceptions to these requirements, such as if the employee passed away within 12 months of being insured. Or if they were a high-level employee or major stakeholder when the policy was taken out.
Is Dead Peasant Insurance Legal?
Dead peasant insurance is legal but strictly regulated. In 2006, the IRS introduced the Pension Protection Act, which set clear rules to prevent companies from abusing these policies.
In the past, especially during the 1980s and 1990s. Some companies misused COLI by secretly taking out policies on employees without their knowledge and collecting the death benefits long after those employees had left the company. To stop this, Congress and the IRS put stricter rules in place.
Now, for a company to take out a life insurance policy on an employee. They must have an “insurable interest,” meaning the company must prove it would suffer financially if the employee died.
This is typically reserved for key employees. But in some states, the rules also apply to employees who benefit from company plans.
Additionally, most states require that companies notify the employee about the policy and get their consent before taking out a COLI policy. Employees must be informed in writing and have the option to refuse without facing any retaliation from the employer.
