What is corporate-owned life insurance or dead peasant insurance?

Have you ever heard of corporate-owned life insurance or dead peasant insurance? Corporate-owned life insurance is life insurance taken out by companies on their top employees. 

In this guide, we’ll look at corporate-owned life insurance, who uses these policies, and the controversy surrounding this growing practice. 

How does corporate-owned life insurance work?

Corporate-owned life insurance (COLI) is often called dead peasant insurance. This type of insurance protects businesses if a key employee dies or becomes disabled. 

With this coverage, the corporation purchases and owns a life insurance policy on an essential team member and names themselves, the employer, as the primary beneficiary in the policy. 

COLI can replace lost revenues or expenses after one of the organization’s higher-ups dies. The two types of corporate-owned life insurance are: 

• Key person life insurance
• Split-dollar life insurance

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What is key person life insurance?

If a company loses one of its top executives or other valuable personnel, it would suffer irreparable financial losses without key person insurance. Most of these policies are term life insurance plans, though permanent insurance plans are also available. The organization owns this policy, pays the premiums, and receives the payout should something happen to their key person. 

The company can use the payout to: 

• Cover revenue losses 
• Purchase any shares of the deceased in the business
• Make payments on any outstanding loans 
• Cover recruitment costs or severance pay 

If a key person moves from the business, they can transfer their policy or convert it into a private policy.

Who needs key person insurance?

You already know the basics of dead peasant insurance, but who needs this coverage? Let’s look at some organizations that might benefit from key person life insurance.

Large Businesses & Corporations

Bigger companies are often the ones that need key person life insurance the most. If one of their top executives or someone with a high client base dies unexpectedly, the entire business could suffer. Key person life insurance can help cover these losses.

Small or Private Enterprises

Small businesses are especially vulnerable to losses because they typically rely on one or two people crucial to day-to-day operations and building relationships with clients. 

This is why private enterprises should consider getting key person insurance — so they can have a financial cushion if something happens to one of their key people.

Start-Ups

Early and late-stage start-ups may not have an extensive track record yet, but they certainly have founders or a small group of employees whose expertise is hard to replace. 

Although purchasing key life insurance for start-ups can be more complicated due to their lack of history, these policies can still be beneficial. 

How to Buy Key Person Insurance

Purchasing key person insurance is similar in many respects to buying life insurance. The main distinction is that while the insured employee will be the subject of a life insurance underwriting process, so too will your business. Before any policy can be issued, the insurer must assess the individual’s risk profile and your company’s. 

Financial Underwriting for Key Person Insurance

The underwriter needs to consider many factors, from the company’s remuneration and financial soundness to any other key personnel with coverage and the unique talents, skills, and history of the individual involved.

You’ll need to provide 

• Details on the company’s annual sales 
• The estimated cost of replacing a vital employee
• The company’s fair market value
• The key employee’s total compensation
• Net business profit 
• Tax statements 

Then insurers consider all this information, the employee’s health, and the required coverage to determine how much the life insurance policy will cost. 

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How much key person coverage do businesses need?

The coverage will depend on your business size and needs. Experts, however, advise having five to ten times their employee’s gross pay covered in life insurance. 

Therefore, you’ll want to factor in an employee’s gross pay components. Salary, supplements, equity/stock, expenses spent in relation to business services, and transportation are all part of this calculation.

For instance, if an employee’s salary package totals $100,000 a year, you can look into life insurance policies that cover anywhere from $500,000 to a million.

The Use of Company-Owned Life Insurance Is Rapidly Growing

Companies are rapidly taking advantage of dead peasant life insurance and other corporate-owned and bank-owned life insurance policies to generate tax benefits and investment returns. 

The use of such policies has been growing at an exponential rate of $1 billion each year, allowing companies better financial security while also providing them a considerable tax benefit. 

This type of policy is becoming increasingly popular among businesses looking for creative ways to minimize costs while gaining value from corporate-owned life insurance policies. 

The Abuse of Company-Owned Life Insurance

Employers have been using dead peasant life insurance policies to their advantage. Companies take out life insurance policies on their employees without them ever knowing. The company then receives compensation if the employee dies instead of their family. Find out if you can buy life insurance for someone else.

Unfortunately, this includes cases where companies claim the lump sum even after employees have left or retired. This unethical tactic has been met with backlash as such a perverse approach diminishes the value of human life and denies grieving families their rightful compensation.

Company-Owned Life Insurance Regulations

Company-owned life insurance regulations are pretty specific. For instance, a COLI policy is only offered as an employee benefit to the company’s top 35% of earners.

In addition, if the company decides to purchase such a policy for an employee, they must notify them in writing first and let them know of their desire to insure them and how much coverage would be provided before anything is finalized.

If the company could benefit from the policy in any way, employees must also receive written information about that.

The Dead Peasant Insurance Controversy

The Dead Peasant Insurance controversy was a dilemma for many companies in the 1990s. Corporations were taking out life insurance policies on their entire employee base without the individuals’ consent, making them vulnerable to criticism and backlash. 

Fortunately, in 2006, Congress and the Federal Tax Service stepped in to impose restrictions on businesses utilizing COLI and bank-owned life insurance (BOLI) policies. 

These changes included limiting tax benefits to only the highest-paid 35% of employees, ensuring that individuals would receive appropriate compensation should a tragedy occur. 

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Case Studies: Corporate-Owned Life Insurance (COLI) or Dead Peasant Insurance

Case Study 1: The Unaware Employee

A multinational corporation secretly takes out life insurance policies on all of its employees without their knowledge or consent. The company leverages the policies as investments, benefiting from tax advantages and potential payouts upon the employees’ deaths. When one employee unexpectedly passes away, his family discovers the existence of the policy and questions the company’s motives and ethics.

Case Study 2: The Profit-Driven Corporation

A large corporation deliberately targets employees who are perceived to have significant value to the company. The company obtains life insurance policies on these key employees, ensuring that it will receive substantial payouts in the event of their untimely deaths. The corporation’s primary motivation is to generate profits from the policies, rather than providing genuine financial protection or support to the employees’ families.

Case Study 3: The Ethical Debate

While the company argues that it intends to use the policies to cover the costs associated with employee death, critics raise concerns about the ethical implications and the potential for exploiting employees’ lives for financial gain. This sparks a broader debate on the moral responsibilities of corporations and the need for transparent practices in the realm of corporate-owned life insurance.

Case Study 4: The Employee Advocate

An employee advocacy group discovers that their company has been using corporate-owned life insurance policies as an investment strategy. The group raises awareness among employees about the potential ramifications of such policies, including concerns regarding privacy, consent, and the exploitation of employees’ lives.

Through collective action, the advocacy group pushes for increased transparency, employee consent, and fair treatment in relation to corporate-owned life insurance.

Final Thoughts on Company-Owned Life Insurance

Company-owned life insurance is a great way for businesses to ensure their employees’ financial security and save on taxes.

This type of policy is a great option for start-ups, midsize businesses, and corporations, as it offers much-needed financial protection.

However, companies should always follow the guidelines and regulations set by the Federal Tax Service and Congress to ensure they are not engaging in unethical practices. Companies should also always be transparent with their employees and seek their consent before taking out a policy on them.

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