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.
Oops.
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.
Why place a limit on the amount of life insurance an individual can purchase? Why have a maximum human life value for insurance purposes?
And might not someone who had no intention of buying insurance on their own life choose to sell to someone else the permission to buy insurance on their life? And might not such an agreement be written into an employment contract?
-Jeff
Hi Jeff,
When we talk about life insurance in its purest form (indemnifying the loss associated by a death) insurance companies do not want to allow someone to purchase enough life insurance to essentially improve their economic situation at death. The notion is that you cannot “profit” from life insurance. And as such, a limit is placed on the amount of total coverage one may have so as to prevent one from acquiring more life insurance coverage than would make economic sense. To allow otherwise would create a circumstance where one could theoretically acquire life insurance in an amount that would result in an economic gain upon his or her passing. This could lead to a multitude of problems, the simplest example being an incentive to die–and the arbitrage would create significant risk for the insurer.
In many respects EOLI does what you ask in your second paragraph. Most circumstances that involve the purchase of life insurance on an insured include some degree of compensation to the insured (employee). Sometimes this can be an immediate benefit or a deferred benefit (e.g. additional retirement benefit). It can also be both. In other words, it rare to have a bona-fide EOLI situation where the employee is not compensated for allowing the coverage to exist.
As far as the employment contract goes. Conceivably, you could place anything into a contract (when its for employment, it cannot break labor laws). This being said, it’s not common to find imperatives within an employment contract for signing an EOLI disclosure and being insured. The required EOLI notice itself notes that the insured is relinquishing a portion of his or her human life value by the coverage amount. In addition to this. The contracts that are created to stipulate benefit to the employee, which are not (cannot be) tied to the life insurance contract but rather are funded by it, would force the hand of the employee and employer in certain respects.
Are the full details of the insurance policy they purchase on an individual required to be disclosed to that person, or just the amount they pay out to the family if said policy is collected on?
Now as a result of these types of deals happening within corporations, each employee must sign a document stating that they understand and agree to the arrangement. Which is how it should have always been done anyway. We see no problem with employee owned life insurance–just that all parties involved should have full knowledge and understanding of the transaction.
That lawsuit against Walmart always bothered me. If she paid for the life insurance policy, then OK, she has a case. But leave it to our entitlement society for her to expect to collect on a policy she never paid for.
I guess it’s okay for the BIG COMPANIES again to make money on the BACK’S of the POOR! In this case the DEAD POOR! Let’s say the DECEASED had to go to a NURSING HOME prior to their DEATH and receive MEDICAID. If their are any LIFE INSURANCE POLICIES on this person the FAMILY has to turn them over to MEDICAID. Why should BIG BUSINESS be allowed to keep the MONIES if the family can not keep their’s. Not FAIR.
On major difference between your example and what happens when a company owns a policy on an insured. The insured does not own the policy. In fact, if the insured didn’t own the policy, it would not be subject to Medicaid limitations. Doesn’t matter who owns it, just matters if the insured (who is applying for state assistance, e.g, Medicaid) owns it. Completely fair.
My dad is 96 and on disability thru Walmart The Drs say he cannot return to work. The life insurance he has paid on will drop. They said he’d have to pay A LOT of $ to continue. This seems wrong. No one purchases.life insurance and plan on working til they die working. I think Walmarts ins may only pay out until a person reaches50. Any info?
Hi Janna,
Unfortunately, we don’t have any specific expertise on Wal Mart’s employee benefits concerning life insurance. You might try to contact someone in the Human Resources department at Wal Mart to find out what options exist to your father. HR at Wal Mart might be able to assist, or might be able to refer you to whomever administers the benefits.
If this is a group plan that he is under, it could vary greatly in terms of what sort of coverage he has. Given his age, I’m going to guess that he was covered under a policy as an employee some time ago. What existed at the time and what Wal Mart opted for could be very different from what is available today to Wal Mart employees.