I just read a story about Dead Peasant Life Insurance. This is where an employer takes out a life insurance policy on a low level employee, usually without their or their family’s knowledge. Said employee drops dead and the company collects (the family gets zero, most unaware there was an active policy), Step 3 PROFIT!
Now yes, I think it is immoral, but that isn’t the discussion I wish to get into. I have also learned that there has been laws passed in several States that only allow companies to purchase this insurance with the consent of the employee. What I didn’t know is that these polices still paid off even if the employee no longer works for the company. Meaning if the company took out a thirty year term policy on John in 1980 and John died in 2005, the company still gets paid the benefit even if John left the company in 1983. Very, very morbid and something that could be quite profitable.
So, here are the questions:
1: From what I have read, companies purchased thousands upon thousands of these policies. You could have one on your life right now and not have any clue. Being there are so many, how does a company know if you died if you have left the company? I am nor referring to employees who have retired and receiving benefits from the company, rather someone like John (not his real name) from my above example. He left the company prior to having enough time to vest any benefits, so the company(or the ex-employee) have no reason to keep in contact. Do companies keep tabs on their “investments” until the policies expire?
2: Playing the game, term insurance is very inexpensive. For myself, when I bought life insurance when my first child was born, I got $500,000 for $32 a month for thirty years. If I wanted to, could I buy life insurance policies on a couple of thousand random people picked from the phone book? If only 2 or 3% meet an early demise, I am in the money in a big way. (I don’t don’t know if that percentage is correct, I didn’t run the numbers, but you get the point) Logic says that a percent of those random people are going to get hit by a bus, have a piece of space junk land on them or something equally fatal. It could be very profitable. Is it legal?
Actuaries are the statistical business analysts with expertise in risk evaluation, and they say your logic is wrong. I can say this because actuaries work for the Insurance sector, and that sector collects more money in premiums and investment return than it pays out in claims. And it returns healthy dividends/profits.
Sure, you might get lucky. But the odds (statistics) are against you.
Insurance rules are tighter than they used to be, too. The Insured has to consent to the policy, and the screening is better - if you tried to select those with a higher risk of early death (based on factors you knew about), then the premiums would be higher, and your returns lower.
These sorts of policies still do happen (employment related life policy, critical employee cover, that sort of thing), and I think they can be traded after establishment. It has been a plot point in a few crime drama shows - a random assortment of people start dying and it turns out they all had employment related life policies taken out in the past and they have been eventually traded to a desperate and homicidal individual who benefits if they die in natural-looking ways just before the policy is due to expire.
Generally, companies purchased such policies only for a short period (like 1 year or so). At the end of the year, they renewed them only for people who were still employees. Sometimes the policies were for longer periods, but usually only on people who had been employees for a longer time.
No, you have to show ‘insurable interest’ in a person to take out a policy on them. So a relative, spouse, etc. For companies, they can claim that the loss of this person would be damaging to the company, so they have an ‘insurable interest’ in the person. Originally this was designed for so-called ‘key man’ employees; these companies just did it on normal, low-level employees.
You can only take out insurance on someone in which you have a quantifiable financial interest. Spouse: yes. Business Partner: yes. Children: iffier, but still (mostly) yes. Executive in your company: yes. Other employees: Depends how much financial interest you have in them; mostly no, might be yes. Random Joe from the street: no.
For a thirty-year life insurance plan, you’re basically loaning the insurance company your money, which they can then place in other dividend-yielding investments. So at the end of thirty years the insurance company can afford to pony up a modest yield on your investment, since they already got theirs.
Taxes. Insurance company makes a profit, company gets back slightly less than they paid to the insurance company on average, but makes back MORE money than that since they get back the payoff tax free. Win win except for Uncle Sam.
Frankly, it doesn’t sound outrageous to me. It an employee is productive, the company loses that income until a replacement is found, hired, trained, and brought to full productivity. That all adds up to a significant amount of money. It seems perfectly reasonable to insure against that loss.
Now, if the loss of the employee will cost the company $100K, and they have the employee insured for two million, that would be problematic, but insurance companies won’t sell a policy for more than the insurable interest. We had to renew my wife’s insurance policy after she retired, and the company wouldn’t sell us as large a policy as she had previously carried, because the amount of income the policy was designed to replace had declined.
I find the degree to which people get worked up over this, and their reasons, somewhat strange. While the practice can be seen as somewhat crass, it’s not HURTING the employee (nor is it benefiting them, of course). At the end of the day, it’s not really any skin off your butt if your employer wants to pay premiums on life insurance on you and name themselves as beneficiary, provided they aren’t intending to hasten your death to collect. And they aren’t. As noted above, it’s Uncle Sam that loses because this is done as a tax dodge - they write off the premiums, then don’t pay taxes on the benefits. Which means it’s still attractive to the company even at premium rates which leave a nice fat profit for the insurance company. That, more than the possibility of some third party taking out insurance policies on people and hastening their demise, is a reason to enact “insurable interest” legislation.
To my mind, viatical settlements as an investment vehicle are scummier. But I don’t really see a way to prevent people from making profit from them.
Mind you if you were allowed to do it and insure anyone you like, it would be a great opportunity. You’d have to turn the odds in your favor - look for drug users, drunks, risk takers, the obese, kids with new driving licences. The last thing you’d want is policies on young, healthy clean living types. Could live for ever.
But, statistically - the premium charged on average covers the risk, so at very best you should almost break even.
Most group polices might forgo the medical, since if everyone is signed up, the odds are that there is not a bias toward “ready to die”. Especially this is true if they are in the workforce, which tends to rule out a lot of “almost deathbed” types. Also, your hiring medical might also double as an insurance medical.
Those policies on TV (“no medical, everyone qualifies”) have a list of questions, and IIRC they will exclude or reduce payout the first year on certain conditions. Of course, if you lied on the application questions, no payout.
Otherwise, if you cherrypick certain people and insure them, they need to have a medical. If the insurance company accepts a medical saying “this guy is high risk” then they deserve to lose money.
The usual trick on TV, of course, is to then help the insuree towards a payoff. I think it was Law and Order had an episode like this - the front company would pretend to hire skid row types as executives, they’d get a medical with a cooperative doctor, then mysteriously die a few months later.
This logic assumes that you are better at judging the risks than the insurance company is. Potentially you have more information available about a specific individual than the insurance company, but if you want to do this for a large number of people you start to get back into judging risk based on actuarial data. The company is going to win that fight.
As said above, this is strictly a tax dodge. Walmart is guaranteed to pay more in premiums than they net in payoffs. However, those payoffs are tax free.
The insurance policy is not a tax-deductible expense if the company is the beneficiary. This is a general rule in US taxes: expenses for non-taxable income are non-deductible. So taxes are not the explanation.
(Now, don’t confuse this with term life for which the employee or their family receives the benefits. These are deductible expenses as part of employee compensation.)
So, if it isn’t a tax dodge, why do companies do it? For a huge company like WalMart, they will obviously have to pay out more in premiums than they would gain in death benefits. What is the point?
If I were the star of a hit TV series, I can see the value in the production company taking out a rather large life policy. If I were hit by a bus, lots of people are going to be out real money. But a WalMart cashier? I just don’t see it. Unless all of the cashiers at a particular location were all hit by a bus, I don’t see the loss of just one being a huge hit to the company. So why go to the expense of a policy?
Related - there is a variable annuities loophole. It works like this - An annuity is similar to any mutual fund, but with a guaranteed outcome if the person dies. But the person whose death triggers this does not have to have any relation with the person who takes out the policy or the beneficiary.
step 1: Find a terminally ill person and pay them $2k for their signature
step 2: Take out a $1M and then make very high risk investments
step 3a: If the risk pays off - profit
step 3b: if it fails, get the guaranteed result (way more than $2k) when the person dies.
