What is dead peasant insurance?

Most people buy life insurance to provide financial support to loved ones after they die. Most policies fall into this category, but corporate-owned life insurance, also known as dead peasant insurance, 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 expect from the name, dead peasant insurance is contentious, and it has been used in the past by corporations to boost their bottom line at the expense of unsuspecting employees. However, when used correctly, it may provide tax or revenue benefits to the company or cover the costs of hiring and training a new executive employee. To avoid abuse, Congress passed legislation in 2006 prohibiting the purchase of these policies without the consent of employees.

What is corporate-owned life insurance?

Corporate-owned life insurance is a type of life insurance that employers can provide to their employees. The employer is the beneficiary of the policy, and when the employee dies, the employer receives the death benefit. Corporate-owned life insurance can be purchased for a single employee or for the entire workforce.

Company-owned life insurance was originally intended to help businesses stay financially afloat after high-ranking executives died. Corporate-owned life insurance is now commonly used to fund employee benefit plans such as non-qualified executive health plans and deferred compensation plans. Because cash value growth and death benefit payouts do not count toward annual revenue, there are several tax advantages.

Corporate-owned life insurance comes in two varieties: key person and split-dollar:

• Key person life insurance: Executive and decision-makers are specifically protected by key person life insurance if their death would cause financial problems for the employer. This coverage is available in both term life insurance and permanent life insurance policies.
• Split-dollar life insurance: Split-dollar life insurance allows the employer and employee to split the cash value payout of the policy. In contrast to key person insurance, the employer usually pays the split-dollar insurance premiums and divides the death benefit with the employee's loved ones after their death.

Group life insurance, which may be provided to employees as part of their employment benefits, is not the same as corporate-owned life insurance. Most group life insurance policies require the employee to pay the premiums and designate beneficiaries to receive the full death benefit.

Why is it called dead peasant life insurance?

Because of its historical use, company-owned life insurance is also known as dead peasant life insurance. Many large corporations began purchasing corporate-owned life insurance on low-wage workers without informing them in the 1980s.

Their intention was not solely to profit from the deaths of their employees, but the move was viewed as controversial because companies could secretly make millions from employee death benefits and the growth of the policies' cash value.

As a result, corporate-owned life insurance was given the moniker "dead peasant insurance" in reference to Nikolai Gogol's novel Dead Souls. In the book, the main character buys dead serfs from a landowner and uses them to secure a large loan.

Why do companies buy dead peasant life insurance?

A company may benefit from a dead peasant policy in several ways. Hiring and training upper-level employees who bring expertise and value to the company once they join can be costly. When they die, the company loses that value and has nothing to show for the money spent on training them. If they are the company's founder or CEO, their worth to the company could be significant. A corporate-owned policy may assist businesses in recovering some of their losses.

Meanwhile, a split-dollar policy can be added to a compensation package to help persuade a desired job candidate to accept the position because the potential employee's beneficiaries would receive money if they died. A policy death benefit can also be used by a business to fund benefit plans or pension plans, and the tax advantages can be significant because death benefit payouts are not taxed in most cases.

Is dead peasant insurance legal?

Regardless of the controversy, dead peasant life insurance is legal but strictly regulated. The Internal Revenue Service (IRS) implemented the Pension Protection Act in 2006, which established strict guidelines that made it more difficult for businesses to exploit their employees with a corporate-owned life insurance policy.

The IRS guidelines effectively made it illegal for companies to take out a life insurance policy on their employees without their consent, regardless of the number of employees. The following rules apply in order for a company to obtain a corporate-owned life insurance policy:

• The company must notify the employee of their intention to purchase the policy and obtain written permission from them.
• Employees have the right to refuse participation in the policy, and employers cannot penalize them for doing so.
• Companies cannot deduct certain policy-related expenses from taxable income unless the covered employee worked there for the previous 12 months. Prior to 2006, employers could purchase policies that allowed employees to collect death benefits long after their employment was terminated.
• Companies must keep track of and report to the IRS the number of company-owned life insurance policies they maintain.