Today I’m revisiting a topic that I wrote about last summer concerning Wal-Mart and their purchase of what is commonly known as Dead Peasant Insurance. If you’d like to read that post, it’s really short and you can find it here.
Something I didn’t do in that previous post is tell you exactly where the term Dead Peasant insurance actually came from.
How did it get the name “Dead Peasant” insurance?
I actually found a great explanation of the origin of the term over at DeadPeasantInsurance.com:
Winn Dixie Stores bought life insurance policies on approximately 36,000 of its employees, without their knowledge or consent, and named itself as the policies’ beneficiary. The insurance brokerage firm that placed the policies prepared two memos describing the deceased employees as “Dead Peasants.” These memos were part of the court’s record in a lawsuit in which the United States Court of Appeals for the Eleventh Circuit held that Winn-Dixie’s policies were a sham transaction for federal income tax purposes.
Guess what Wal-Mart did that got them in trouble?
They bought life insurance on their employees for the benefit of the company without letting the employees know they had done it.
How did the employees eventually find out it was happening?
Well, supposedly a man who worked for Wal-Mart passed away. He had never purchased life insurance personally but his spouse gets a rather large check in the mail from a life insurance company with Wal-Mart as the payee.
You can guess that she wasn’t very happy to turn that check over to Wal-Mart.
At any rate, this was sort of the spark that started the class action suit against the company. It was actually discovered that Wal-Mart was buying life insurance on ALL of its employees without their knowledge.
Here’s a bit from the initial court case itself that will help to clarify what was happening:
In 1993, Wal-Mart adopted a corporate owned life insurance (“COLI”) program through which the company would purchase life insurance policies for its employees. Wal-Mart funded the policies, at no cost to the employees. The policies provided benefits of $5,000 to $10,000 to the decedents’ beneficiaries, with the remainder of the policy amount paid to Wal-Mart. By 2000, as the result of new regulations, Wal-Mart had discontinued the COLI program.
Rita Atkinson and Karen Armatrout worked as a rank-and-file Wal-Mart employees paid hourly wages. Neither opted out of the COLI program and Wal-Mart obtained life insurance policies upon both. Atkinson died in 1996. After payment under her policy to her estate, Wal-Mart received the remainder of the benefits totaling $66,048.70. Armatrout died in 1997 and Wal-Mart received $72,820.30 in benefits under her policy.
Yeah you can imagine that the families of these folks were none too happy when all this information came to light.
Now buying insurance on employees is not an evil thing to do. In fact, many large corporations do it all the time. Banks are probably the most notorious for doing this as they use large cash value life insurance policies on their executives as a source of Tier One capital on their balance sheets.
It just so happens that life insurance cash values can be “counted” as a portion of Tier One capital.
But this post isn’t about banks and the life insurance they purchase on their executives; it’s all about Wal-Mart and/or other companies buying life insurance on their rank and file employees.
See, while it’s true the EOLI and COLI have been around for years and certainly have legitimate uses, purchasing life insurance on your rank and file employees is not so legitimate. Or so say the Federal Courts anyway.
It’s okay for a company to own insurance on an employee who is crucial to the operation of the company. In other words, if the CFO were to die suddenly, it would cause the company a considerable amount of hardship. They’d have to spend time and resources to replace the CFO.
Can the same be said of a cashier at Wal-Mart?
Please don’t misinterpret what I’m saying. I didn’t say the cashier’s life isn’t valuable but will it cost the company a considerable amount of money to replace them.
I would say no, and prevailing insurance law agrees with me. The 2006 Pension Protection Act sought to clarify when an employer has an insurable interest in an employee, and currently insurable interest is not easily applied to rank-and-file employees. We certainly appreciate the role a cashier plays in the daily operations at Wal-Mart, but that role is not one that, individually speaking, would put Wal-Mart at a significant financial loss if one were to pass away.
Human Life Value, the “Other” Consideration
It's also important to note that Employer Owned Life Insurance counts towards the insured's Human Life Value. Human Life Value is the net present value of the insured's future assumed earnings, ore more simply put: in the insurance world it's the the maximum amount of insurance one can buy.
This means when an employer buys life insurance on an employee, that death benefit will reduce the amount of individual life insurance the employee would be able to buy on him or herself. The notice that is required to keep employer owned life insurance tax compliant must disclose this fact to the insured.
This means the additional problem that Wal-Mart's “Dead Peasant Insurance” brings to the table is that it theoretically lowers their human life value. Now, one could argue that if Wal-Mart were surreptitiously buying life insurance on its employees no one but Wal-Mart and its insurer would know about this in force life insurance, and so technically the insured would be fine. This is technically true, it's also a huge violation of insurance law.
And this is yet one more reason why EOLI is not something easily placed on a lower salary non-executive employee. The loss of Human Life Value is much more dramatic to them (i.e. there are certain fixed expenses to life that everyone has to deal with, and these expenses take up a much larger portion of disposable income for a person who earns $50,000/year than for someone who earns $500,000/year).
If you’d like to learn more about EOLI, COLI or how if might affect you, your company or how much life insurance you can obtain, feel free to contact us, we’re always glad to help.