On the way to work today just before I had to get out of my car I heard part of a story concerning the so-called Dead Peasants Life insurance. From what I gather, basically what is involved is that companies (like Wal-Mart) have been taking out life insurance policies on their low wage workers.
Leaving aside the moral implications of this ghoulish practice, I got to thinking; Am I overlooking a potential revenue stream? Could I just start taking out policies on prominent public figures without their consent, or is this just something that corporations can do?
If this is something that I can do, think of the spice that this would add to the Celebrity Death Pools!
IANAIA, but I’ve always understood that you can’t have an insurance policy on anyone or anything unless you can show “insurable interest”. IOW, the person or thing has to have some relationship to you - you have to be able to show that damage or loss would affect you.
As has been pointed out, in order to take out an insurance policy on anything (person, building, boat, whatever) you need to demonstrate that you have an insurable interest. In other words, you have to show that if the thing is damaged (injured, killed, whatever) that you would suffer a financial burden.
Employers are allowed to take out insurance policies on their employees because a suddenly dead employee places a significant financial burden on the company. (And many employers do this; it is not at all unique to Wal-Mart.) In some states it is necessary to get the employee’s permission to take out the policy, in other it isn’t.
I’m sure WalMart’s not looking at the “loss” side of a deceased employee, but rather the splendid payout when the person dies. Multiply whatever payout by a couple hundred thousand employees (how many thousands of people “churn” through WalMart in a year?) and they’re sitting on an investment that’ll eventually be a rather large revenue stream.
Why would they be? Assuming Wal-Mart’s employees don’t have a death rate higher than their actuarial statistics think they should be, the company is making enough in premium to cover the payouts.
I’ve heard of something called key-person insurance which companies buy to protect themselves against the upheaval caused by a key person leaving the company (or dying as well, presumably). The upheaval is that usually a replacement must be found, other execs usually have to take over the absent person’s responsibilities, and so on. Efficiency and perhaps profit suffers until the substitutes, and/or the new hire, become comfortable and competent in the position.
Could WalMart and similar companies assert that they need the dead peasant insurance for similar reasons? What is the cost of hiring and training a WalMart worker?
If the insurance company is making enough money on it, then how is Walmart making any money on it? I’m guessing that the answer comes through some tricky high finance and tax deductions. In which case, the taxpayers are eventually paying for it.
Sounds like a loophole in tax law that needs to be closed, but I don’t see a moral problem with it.
WalMart pays premiums of probably just a buck or two per person per month for a basic policy. (I’m sure they’ve got a very favorable bulk rate)
Insurance companies make money in two basic ways (of course, there are others, but these are the two biggies) -
The insurance company takes money (premiums) from its customers and invests them.
All the people that buy policies and drop coverage for whatever reason without ever making a claim? The premiums they’ve paid are not refunded.
It’s a valid proposition for WalMart to take out a policy on a healthy teenager - statistically, the kid’s got another 50+ years to live. Assuming the peasant policy is for $25,000 and they get a discount rate of around two bucks a month per person: 50 years * 12 months * $2 = $1200 paid out in premiums to insure the kid. $1200 for a guaranteed $25,000 payment (but at an uncertain date) is a pretty sound investment.
Taxpayers have nothing to do with this and I don’t see this as a loophole. Just a creative investment tool.
I assume that the employer gets to write off the premium payments as business expenses. Do they then get taxed at a similar rate on any payouts they collect?
It’s basically impossible for both WalMart and the insurance companies to be making a sensible business choice here unless some third party is involved. Using your own figures, if the insurer expects to earns $25,000 or less on the investments it will make from this transaction, it doesn’t expect to make any profit. If the insurer does expect to make more than $25,000 from the $1200 it’s going to receive, than why should WalMart give them the money? WalMart should be investing the $1200 itself and collecting the additional money.
The likeliest explanation around this is the tax loophole others have mentioned. Suppose WalMart can write off its $1200 payment as a business expense. Now assume the value of the investment comes out to $26,000. The insurer makes a $1000 profit. But WalMart made a better profit - it collected $25,000 and was able to lower its taxes by $1200, thereby coming out $200 ahead of where it would have been with just the direct investment.
What I don’t see mentioned is that once an employee leaves (and for most Wal-Mart employees, that’s probably not long) the company no longer has an insurable interest in that employee. I’m sure the premiums for that employee are terminated and premiums beging for the next poor schlub that takes her place.So they aren’t going to reap huge future benefits for every person who ever punched their timeclock.
At a tangent from the OP, but One legit use of insurance is with partnerships and closely held corporations. Partners A and B own a business together, whether as a straight partnership or a small corporation. If Partner B dies, then Partner A now has a new business partner - the heirs of Partner B. They may be incompetent or uninterested in operating the business. They just want their money out of the deal. As is often the case with small businesses, capital is largely reinvested in equipment or inventory. Generating cash would mean selling the same, probably at a loss - or crippling the company’s cash flow by taking on a multi-year payout to the heirs.
Simpler solution is to cross-insure the two partners. When Partner B dies, Partner A gets the payout, and uses it to buy out the heirs or their stock, without damaging the company or digging into Partner A’s own pocket. If Partner A dies first, the reverse takes place.
Of course, there have to be legal agreements that the money will be used in this manner, and the amount of insurance sufficient to do the buyout, etc. Still, it seems a fairly neat solution to the problem.
Absolutely, I can see where there’s a clear need for insurance to deal with a catastrophic loss of a major employee - WalMart may have had a policy like that for Sam Walton. But I don’t think anyone at WalMart is seriously going to argue that they need policies on all of the cashiers and stockboys to enable the company to stay in business if one of them dies suddenly. WalMart is obviously doing this as a source of profit.
