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LIFE INSURANCE: Betting on the Death of Employees

Friday, Jun. 27, 2014

Souce: maorix

A controversial business practice is on the rise: employers are taking out insurance policies on the lives of their employees, and when they die, are keeping the payout for themselves. The premiums on the policies, along with the payouts, are tax free — giving corporations an incentive to park their money there. The practice, labeled “dead peasant insurance” by detractors, has been around for some time but is now going mainstream. Of the largest 1,000 companies, over one third have policies worth over $1 billion, and more are being added each year. In 2006, the Pension Protection Act limited the practice to only the highest-paid 35% of employees, and only with their consent, but critics think this isn’t enough. Defenders of the policy argue the practice allows them to cover long-term health care costs, deferred compensation, and pension obligations; although, there is no legal requirement to use the proceeds toward these programs. Are these insurance policies unethical? Is it ghoulish to give the company a stake in the early death of its own employees?

  Kirk: I believe this policy violates the rights of the individual. Not only is it bad to give the company a stake in an employee's early death, this is also a violation of the employee’s dignity as a human being. Traditional life insurance provides a valuable service: peace of mind and security for your loved ones. “Dead peasant insurance” does no such thing, and instead is driven purely by profit gains and tax breaks. Shame on the tax code for making this profitable.

  Patrick: Often when we deal with large numbers, we tend to dehumanize the individuals in the collective group. For good reason: we don’t have the bandwidth to empathize with large numbers of people. Often insurance policies, like a general’s battlefied calculations, fall into this category. Still there are some fundamental problems here. For one, corporations should be legally bound to directing proceeds to the employee programs mentioned (pension, health care, etc.) as a matter of distributive justice. Second, these policies shouldn’t be tax free. This would inevitably end the practice -- which says a lot.

An Employee Dies, and the Company Collects the Insurance (NY Times)

A Framework for Thinking Ethically (Markkula Center)


NEXT STORY: Wells Fargo's progress toward 2020 CSR goals

Comments Comments

Greg said on Jul 2, 2014
I completely agree with Kirk. The "dead peasant insurance" policy can't avoid sending the message to employees that their death means profit for the company. Even with the caveats that Patick mentions, it is still profit without a scintalla of empathy for the employee's family. Businesses are fundamentally a For Profit Organization, but all means of profit are not equal. I think a policy that had 100% of the premiums paid by the employer in return for a 50% share of the payout, would still be uncomfortably opportunistic and demeaning. - Like - 2 people like this.
Patrick said on Jul 2, 2014
Greg, I'm sympathetic to your point, but let me try push back a bit. Kirk makes a great point about the difference between traditional insurance and "dead peasant" insurance -- that the former provides an important function for the deceased person's family. To my point, I think that if the payout was legally required to go to employee programs and benefits it would tap into the same moral logic. Or would you draw a line between one's family and one's fellow coworkers? - Like - 1 person likes this.
Greg said on Jul 2, 2014
Patrick, I do draw a moral line between one's family and coworkers. The death benefit directly and more substantially benefits the family, who are probably more dependent on the employee's earned income. They suffer a greater loss, both emotionally and financially. The benift to coworkers is much less signficant. The Company increases their profit because the cost to provide benefits is being subsidized by employees death. The family is more of a stakeholder then the co-worker and Company when confronting the death of the insured worker. The Company/co-workers profit beyond the cost/loss of the deceased. The shareholders do not share equal loss and should not incur equal compensation for the death of a person. Shouldn't we have to acknowledge the implicit worth and dignity of a human and family relationships? - Like - 1 person likes this.
Patrick said on Jul 2, 2014
Greg, thanks for your thoughts on this. A couple responses. First, with your concern about this being purely a profit driver for corporations; I'd agree, this shouldn't be tax free (which would essentially undercut all profits because of the upfront cost). Second, I think your last question gets at where the tension between our viewpoints lies. It's not the case that if you acknowledge the moral value of a corporate community that you undermine the dignity of human and family relationships: they are not mutually exclusive. In fact, coworker relationships are by definition human relationships. I'd grant that one should probably weight family as a higher value, but I wouldn't discount the "moral community" that can and does arise when a group of people are working toward a common goal, even if it's profit motivated. Looking forward to your response! - Like - 2 people like this.
Greg said on Jul 2, 2014
Patrick, The benefit to the coworker community is too indirect and subject to the Company's "properly and fairly" managing the money to compensate for the weight given to the employee's family and direct dependents. It seems one has to diminish the value of the smaller social unit. A company is a for profit organization who's goal is to make profit. At one level, it is a win-win as it enables it's workers to contribute to the company and provide for themselves and family. There are two goals that are similar, but only marginally so. - Like - 1 person likes this.
Patrick said on Jul 2, 2014
Greg, I think one thing we should consider is that this isn't necessarily a zero sum game pitting the family vs. the employee pool (or even the company's bottom line). An individual can still have their own insurance policy, with the beneficiaries being their family, even if a corporation has a policy on the individual as well. Given this, it's no longer a crucial consideration that the per capita impact of the payout is lower for an individual coworker as opposed to a family member. - Like - 1 person likes this.
Greg said on Jul 2, 2014
Patrick, True, it's not a zero sum equation, but the death of the individual is so different for the two shareholders that that should not be in the same equation. Yes there is the human relationship loss in the work group, but that IS incomparable to human and financial loss to the family and dependents. We aren't discussing the loss to a high level executive who's absence is a tremendous blow. There are many other more suitable opportunities for the company to profit and share with the work group without involving itself to benefit in the death of the average worker. The equation gives too much value to the work group and minimizes the workers family. - Like
Patrick said on Jul 2, 2014
Greg, again I'm sympathetic to your point, but I disagree that this practice "minimizes the family" (with the caveats I've placed throughout my comments). With that being the case, it's not necessary to compare the hurt or potential gain of a family vs a coworker pool--I think you have to give my not a "zero sum game" argument more weight here. Moreover, the fact there are alternative measures does not on its face make this one condemnable either. And thanks for the conversation! - Like
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