Or, Drew Peterson engaged to 23 year-old woman.
Seriously, could I call my insurance agent and buy a policy on this woman? A million dollar policy for a 23 year-old probably wouldn’t cost that much.
If lots of people started doing this, would the cost of the insurance go up, like when you bet on a horse race?
You cannot buy a life insurance policy on someone who isn’t connected to you in any way. You can buy one for a spouse, a child, etc. but not some random stranger. Beyond that you can buy key employee insurance for a maid or gardener or employees in the company you own to make up for lost income or services they provide should they be injured or killed or something like that. No life insurance on strangers though, the same way you can’t add your neighbor’s porsche to your auto policy or your son’s best friend to your health plan.
But if you could buy insurance on strangers this would the the right stranger to try and insure!
It’s getting harder to justify key-employee life insurance for low-level employees who are easy to replace, such as retail clerks. Wal-Mart found this out when it was revealed that it had taken out life insurance policies on every one of its employees.
On the other hand, if you’ve got a household employee in a position of trust, like a nanny or a gardener, you’ve got a better argument. Someone like that would require a lengthy vetting process that can be quite costly, since you’ve got to arrange for interim services.
Robin
As I understand it, you must have an Insurable interest in the person being insured.
There are some things about insurance I will never understand.
The basic premise of insurance for an insurance company has to be:
premiums + investment returns - payout = profit
Assuming they want a profit > 0, this means the insurer has the odds working against them. So the only reason an insurer would take insurance is if risk of not having insurance is very severe. On an individual level, this probably makes sense for many in the case of medical, life, automobile, etc. insurance.
In the case of Walmart, though, I don’t see it. They aren’t going to be in dire straits if they lose a stocker, checker or greeter. Either the insurance company or Walmart is losing money on this deal. They can’t both come out ahead.
I’ve long thought the same thing about insurance on baseball contracts. The insurance company isn’t in that to lose money, so it must be the owners getting the short end of that deal. The odds are that an individual owner will come out ahead if they don’t get the insurance. On the other hand, even if they do end up having to eat a contract, I find it hard to believe they’d be in dire straights and therefore the motivation for having the insurance in the first place vanishes.
The reason insurance companies can take on that kind of risk is because they know what they’re getting into.
With most insurance, the only way you come out ahead is if you put in a claim. Otherwise, the insurance company gets and keeps the premiums.
Let me give you an example. I’ve got a 15-year term life policy with a face value of about 250K. I pay around $750 a year for this. Assuming I don’t die, the insurance company gets $11,250, and to me, that’s $11,250 down the drain. If I do die, my family gets the 250K. This is what’s called an aleatory contract; one side is going to profit handsomely, the other, not so much.
In the case of Wal-Mart, the relatively cheap cost of such term insurance would probably be offset by the claims it filed. I have no particular knowledge of this, however.
With respect to the contract performance, are you sure you’re not thinking of a bond, where a percentage of the bond amount is paid to the insurance company? In the event of non-performance, the bond is paid out. I know there is insurance available for something like that, but your description makes more sense if performance is guaranteed by a bond.
Robin
They can if the premiums are tax-deductible as a business expense, and the payouts aren’t taxable.
Example: Wal-Mart has 350,000 employees. On average 1 in 10,000 (35 total) die every year. The death benefit is $100k. The insurer charges $3.5 million to pay the expected benefits, plus 20% to cover expenses and profit = $4.2 million.
Wal-Mart writes off the $4.2 million as a business expense, which reduces its income taxes by $4.2M * 32% (marginal corporate tax rate) = $1.344M. They collect $3.5M in benefits, tax free. They lose $700,000 on the policies, but more than make it up with $1,344,000 saving in taxes.
Now, why would the payouts be tax-free? Because insurance payouts usually are, because insurance payouts usually represent indemnification. Your suffer a property loss, and get indemnified–no profit to tax.
In the case of life insurance, indemnification is more nebulous. If you lose your wife, or a corporation loses a bona fide key employee, the financial loss is hard to define. So the IRS and courts have historically been generous and accepted life insurance as a financial wash.
And here comes Wal-Mart, abusing that generosity–taking out life insurance where they will suffer no legitimate loss, but hoping that it’s close enough to legitimate insurance that they can get away with it.
My understanding is that Congress has since tightened this loophole, but I am no expert and will defer to anybody with more knowledge.
Freddy the Pig - That makes perfect sense. I hadn’t considered the deduction aspect of it.
On the other hand, you could loan her money and get some guys on Wall Street to insure against her inability to pay you back, for instance, if she died. Why, I bet with the help of some of the geniuses on Wall Street we could write up a good $60,000,000,000,000 - $80,000,000,000,000 in insurance on the girl. Let’s not call it insurance though, which is boring and lame. Let’s call it a swap. Yeah! That’s the ticket to financial security.
Insurance companies have a “special” underwriting category for women who are linked to Drew Peterson.
See also STOLI, a developing futures market in which individuals sell their insurability. Interesting stuff, if you’re in to that sort of thing.
As I’ve noted in a previous thread, it is not a requirement in every jurisdiction that the policyowner have an insurable interest in the life insured. Australia abolished this requirement in 1995.