People who have life insurance understand that when they die, their loved ones will receive a cash payment from the insurance company. After all, this is the point of life insurance to begin with, and while the thought of their own demise is unsettling for most people, it is something that they can accept knowing that those they leave behind will be taken care of. However, what may surprise a lot of people is that in some cases life insurance money has been paid out to the deceased person’s employer instead.
What Are These Policies?
The good news is that in such instances when a company receives life insurance for an employee’s death, it is not actually taking any money from traditional loved ones. Instead these policies are actually owned and paid for by the person’s employer and they do not prevent the person or their family from also taking out traditional life insurance policies. These corporate life insurance policies are typically known as “corporate-owned life insurance” (COLI) policies or “dead peasant” policies and it is the company that receives the death benefit upon the employee’s passing.
Why Are They Controversial?
The reason that COLI policies are so controversial is because, depending on state law, they often do not require employee consent. Therefore, many employees may not even be aware that their employers have life insurance policies on them, and they may never find out at all, or may only find out as the result of some controversy or other unexpected disclosure. Despite the fact that these policies don’t actually cost the employee anything, many people still feel like it is a betrayal of their trust since they may not have been informed. Often people also feel like it is unethical for their employers to have life insurance policies on them.
Why Are They Done To Begin With?
Originally COLI policies were designed to protect companies from the financial loss that would be incurred as the result of high ranking individuals within the company. Typically that meant that people like CEOs, presidents, vice-presidents, and other senior personnel were the ones being insured. However, over time this practice gradually began to be expanded to many lower-ranking employees as well. This was because in addition to the potential death benefits, there were also tax benefits for the company and other deductions that they could claim.
What Is Being Done About Them?
Insurance laws vary from state to state and many states are now enacting new laws relating to COLI policies. In some states these policies are becoming banned altogether while in others they may start requiring express employee consent before the policy can go into effect. Finally, new tax laws are making the practice itself less desirable for all but the original key personnel that were intended.
Ultimately, you will need to check the insurance laws in your state to determine if the practice of companies purchasing COLI policies is legal there. Another simple but typically effective strategy is to outright ask your employer if your company has this practice. Remember that worst case scenario it isn’t actually hurting you financially, though it may come as an unpleasant surprise for some people.