Banks Use Life Insurance Policies To Fund Executive Bonuses

Here’s a morbid bit of creative accounting, courtesy of the Wall Street Journal: if you work for Bank of America, J.P. Morgan Chase, or Wells Fargo, your employer may have taken out a life insurance policy on you.

The insurance policies essentially are informal pension funds for executives: Companies deposit money into the contracts, which are like big, nondeductible IRAs, and allocate the cash among investments that grow tax-free. Over time, employers receive tax-free death benefits when employees, former employees and retirees die.

Update: Here’s a bit more information on the practice, since (as Esquire99 points out below) any policies taken out since 2006 require employee consent.

Efforts to rein in the practice largely have been unsuccessful, including the most recent rules Congress enacted in 2006. The rules limit companies to buying life insurance to just the top third of earners, who must provide consent. But the rules don’t apply to life-insurance that employers bought before the August 2006 rules, which cover millions of current and former employees.

“WSJ: Banks Using Life Insurance Policies…” [Crooks and Liars] (Thanks to Greg!)

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  1. KingPsyz says:

    please tell me how that’s legal

    • Johnyq1982 says:

      @PSN: kingpsyz:

      Simple I guarantee that before they do this you have to sign something….maybe it’s hidden in a pile of paperwork but whatever it doesn’t really effect you.

      Your not paying a premium the company is. Its most likely in addition to the coverage they offer you as a benefit. Just read the paperwork before you sign it, it prevents this kind of surprise down the road (kind of like a mortgage contract)

    • ilves says:

      @sleze69:

      No scam here… whole life policies actually generate value (kind of like a house does after you pay into it enough). An employer takes a policy on an employee, pays the premiums, and there actual equity that starts building up in the life insurance contract. Upon the death of the employee the company can collect that money (as losing a high ranking employee can be very costly in terms of re-training, replacement, etc), or, if the employee doesn’t die, start taking the funds out of the policy to pay to them.

  2. youbastid says:

    Walmart’s been doing this for a while.
    [consumerist.com]

    • Julia789 says:

      @youbastid: That’s right. They are not the only ones, by far.

      • mianne prays her parents outlive the TSA says:

        @youbastid: @Julia789: Yes, google “Janitor Policies” and you’ll see this is quite common.

        A couple years ago, my own company’s HR dept. called me in and had me fill out a beneficiary designation form for a $5000 life insurance policy. I’m certain it’s related to such a policy. I believe I’ve also received similar free policies for $1000 or such from banks I’ve done business with.

        I’m speculating that they’d expect my beneficiaries to file a claim on these policies upon my death sometime long after I’m no longer employed or otherwise doing business with these firms, thus informing them of their own payday courtesy of my demise.

        Trouble is, I don’t happen to have any paperwork related to these small policies. I have to wonder how much of an effort they’ll make to track them down to give them each their share of $1-5K once my death is reported by other means?

    • fanboy.took.my.star says:

      @youbastid: so thats why theyre the #1 employer of seniors!!!…

  3. y2julio says:

    I was an intern at one point with JPMorgan Chase. Does that mean they have a life insurance policy in my name?

  4. menty666 says:

    Hmmmph, can you take a life policy out on anyone? I’m going to go shopping at the old folks home.

    I think this is SOP at a lot of companies, in fact, I recall seeing an article a ways back about how even the policy that your loved ones are named beneficiaries on might not do them any good. There’s some legal twist on par with binding arbitration that basically allows the company to not make good on it.

  5. ColoradoShark says:

    It sure seems like it should be required that you sign off whenever someone takes life insurance out on you.

    I’m thinking:
    -We need some cash.
    -Get a life insurance policy on the orphan that won’t be missed.
    -Hire a hit man.
    -Profit!

    • XTC46 says:

      @ColoradoShark: they did this on law and order with homeless people. Good times.

    • bohemian says:

      @ColoradoShark: It sure ads a whole new twist to some of the more abusive employer policies. I remember one in the last year where there was a building issue in NYC at one of the big buildings housing a major bank. The execs had fled the building and the “disaster plan” involved a number of mid and lower level employees being expected to stay in the building.

      Nobody should be allowed to take out a life insurance policy on you without you seeing the policy terms in writing yourself and signing to agree to it.

    • ouphie says:

      @ColoradoShark: What you need to do is be the hitman and take out a policy. Paid for the hit, and paid when they get buried…

    • Eyebrows McGee (now with double the baby!) says:

      @ColoradoShark: You ARE required to get consent today to take out a policy on anyone. These are called “servant policies” or something similar, and come from the days when a lord would take out insurance policies on servants, who had a real monetary value to him. (And those, in turn, rise out of various monetary guarantees/reparations you got if someone killed your serf.)

      Consent is required (in most states, anyway. I don’t know if it’s all of them) precisely for the reason you point out — it’s waaaaaaaaay too tempting an avenue for fraud. And crime. But the laws actually passed when a company like Wal-Mart would be collection millions on a janitor whose wife and six kids were left destitute. That provided the emotional spur to get politicians willing to vote to limit the policies.

      It isn’t unusual for companies to take out policies on their top-tier executives, because the sudden death of one of those employees does involve a large cost to the employer. But, again, today those employees have to sign off on the policies.

  6. dlynch says:

    this is pretty standard at all levels of smart business planning, especially in closely held corporations.

    • Ahoatam says:

      @dlynch: Agreed. I work in the industry and can attest that this is quite common. I bet 95% of the insureds know they are insured by their employer – because if the policy is any good and for any substantial amount, the insured had to go through medical underwriting.

  7. Con Seannery's Snuggie Lint says:

    I don’t see any problems here, really. The insurance companies get cash, it’s not like they’re plotting your death, and the company is about to hit a jackpot with the Baby Boomers.

    • Drew5764 says:

      @Con Seannery’s Snuggie Lint: They may not be plotting your death, but they’re certainly not hoping you live to a nice ripe old age, either.

    • Coles_Law says:

      @Con Seannery’s Snuggie Lint: So long as they don’t start blowing off the OSHA inspections…

      • Wombatish says:

        @Coles_Law: If you want to go down the slippery slope (not saying you should) it technically:

        -Demotivates your employer to care about healthcare (it’s better for them if you die)
        -Puts a dollar amount on your life (as opposed to your performance or output or even just your worth and presence as an employee)

        On more of a muddy hill:

        -It can mess with you getting private life insurance, if it’s mishandled in any way
        -It keeps you wrapped up with a company in a legal way even after you’ve left their employ
        -It’s done without your consent in some cases, and you have no way to “opt out”. While I don’t personally think they should, it would be one thing for them to insure you as an “asset”. But as a life? A person? That’s not the company’s to have, in my opinion, so they really shouldn’t be able to benefit from it’s loss.

    • menty666 says:

      @Con Seannery’s Snuggie Lint: Not everyone works in a safe environment. Say you work in a coal mine where it’s dangerous to begin with. If some greedy CEO’s bonus is (indirectly) tied to whether you make it out alive, you better hope those emergency oxygen canisters are filled on a regular basis, you may need them.

      Jeez, an you imagine if a company actually profited this way from the NYC towers falling? Bad news, we lost several hundred employees. Good news, we had policies on all of them that happened to cover buildings falling on them, banner quarter!

      Ugh.

  8. Esquire99 says:

    Chris fails to point out that the article explains that the rules regarding this were changed in 2006 and now companies have to get employee consent before they take out these kinds of policies.

  9. Segador says:

    Doesn’t it seem highly illegal/dangerous to allow a person, or a corporation, to purchase a life insurance policy on someone without that person’s knowledge? Or am I not reading this correctly?

    • XTC46 says:

      @Segador: they DO need their permission.

    • NeverLetMeDown says:

      @Segador:

      Well, if you really think that BoA is sitting there saying “hey, let’s bump off a few thousand folks,” then yes, it’s dangerous.

      This is kind of like casinos – sure, if you run a Vegas casino, you could cheat, but why? It’s a great business run according to the rules. Same for these insurance policies – they’re designed to generate the planned returns simply on the basis of normal actuarial tables.

    • Eyebrows McGee (now with double the baby!) says:

      @Segador: As Esquire99 pointed out, today you do need permission. But these policies originally come from the days when a lord was master of a large estate and the people subject to him and working his land had real monetary value to him and (key point) were SUBJECT to him. Those policies, in turn, arose from the days when the death of a serf (who actually belonged to you/the land as a non-chattel possession) came with monetary compensation if it was caused by someone else’s fault.

      It SHOULD feel ooky today, especially when done without permission, because it DOES arise from days when individuals held ownership/mastery of other people. It’s an icky concept unless one consents.

  10. XTC46 says:

    Sounds right to me, its insurance on their investment. Training people etc is expensive, why not get a return on that if the person dies? And it allows the company to recoup the cost of paying the employee’s benefits.

    The person doesnt pay anything, so what does it hurt?

    • Mecharine says:

      @xtc46 – thinksmarter on twitter: I think the problem people are having is that the life insurance accrues value even after the employee leaves the company. Consequently , the fear is that the life insurance policy will not benefit said employee, as it is used as a “tax deferred” investment for the executives.

      • XTC46 says:

        @Mecharine: I guess i just dont see that as a problem. If a company can make money off of their employee, and it doesnt cost me, or anyone else here anything, then why should I care?

        Hell, my company can take a policy out on me if they want to give me money now.

    • ehlaren says:

      @xtc46 – thinksmarter on twitter: Because there are tons of ways for companies to invest money that have nothing to do with our deaths.

      I think most people have a problem the same way I would. The problem is that I don’t want a company making money off something that I do without me getting a benefit from it or having my permission.

      I wouldn’t let a company make money off something I created when I didn’t work there and would most likely sue them for stealing an idea, product, or IP. Why should it be any different with my death.

  11. TheFlamingoKing says:

    People, taking out insurance on something is not the same as wishing that something bad happens so you can cash in on the policy. Unless there’s any implication that these corporations are doing anything shady to collect on life insurance policies, why is this even an issue?

    On a separate note, so much for those executive pay limits, huh?

  12. frodolives35 says:

    hmmm a way fat cat execs can get their bonuses and feed off each other and not the consumer or taxpayer. I like it.

  13. bricko says:

    A lot of companies buy what is called “dead peasant” or “janitor insurance” on employees. They get the money when you die to recover the benefits money expended earlier.

    Doesnt sound good and makes good fodder for Politicians but its a way to hedge for your business without getting into actual hedges etc.

    • NeverLetMeDown says:

      @bricko:

      The only real objection (other than the “ick” factor of having upside when someone dies) is that it does result in lower tax receipts (which is the reason companies do it).

      • Wombatish says:

        @NeverLetMeDown: Lower taxes for the companies who do this isn’t necessarily a good thing for you and me.

        It seems shady. Describing it as a way to avoid taxes only makes it seem shadier.

  14. H3ion says:

    This is just an expansion of what they used to call key man coverage, where a company would buy insurance so that if a key employee died, there would be money to hire a replacement. Now, as long as they get the employee’s consent, they can buy insurance on the life of any employee. It’s a corporate version of the dead pool.

  15. Anonymous says:

    I work for a *large* life insurer (um, no, not a problem one, thanks – we’re a mutual company and we are quite well run) and BOLI (Bank Owned Life Insurance) is one of our products.

    This is not unusual. The OWNER of a life insurance contract must have an “insurable interest” in the INSURED. In the case of BOLI, the bank is also the PAYER. Those are the big three roles on a life insurance policy – the owner, the payer, and the insured.

    This is completely legal is a a way that banks pay for the increasing cost of employee benefits, as the death proceeds are tax-free. The insurance proceeds are not a “profit center,” as they go directly back to the employees for benefits, etc., and BOLI on others.

    Corporate Owned Life Insurance also exists.

  16. starrion says:

    Haven’t you ever wondered why your company seemed not to care if they were stressing you out? Making you work lots of overtime on short notice… having “critical” projects popup at inconvenient times?

    And constantly making wellness a second tier priority?

    Have you noticed the free cigarette vending machines in the employee breakroom.. but the smoking shelters face into the wind?

    Yep, your company has dead peasants policies.

  17. fanboy.took.my.star says:

    so thats why walmart hires so many seniors!!!

    • starrion says:

      @urbanturban666:

      DING! DING! DING!

      And on their Birthdays, all the associates jump out from behind displays and yell “SURPRISE!”

      /bet you thought they were being nice…

  18. Anonymous says:

    There’s an obvious conflict of interest. Your company probably provides you with health insurance. So they get to determine what kind of health insurance you get and what will and will not be covered. If you let them take life insurance out on you as well you’re creating an incentive to not take care of you as well as they might. If a company is in a position to profit by your death there isn’t as much incentive to help you. See what I’m saying?

    Go ahead and trust the corporate machine with your life if you want, but I’m pretty sure the people at the very top didn’t get there by being kind and considerate… and I doubt that they see human beings instead of numbers on a page.

  19. Jeff Newman says:

    I worked for one of the mentioned banks and one of their benefits was a $35,000 life insurance policy. I’m sure this was going on behind the scenes.

    Honestly, I don’t care. It is $35,000 more in life insurance that I’m not paying for. If they have $400,000 in life insurance that they are paying for behind the scenes, why should I care?

    • Wombatish says:

      @Jeff Newman: The costs are being passed on to you, I promise you that.

      How are they going to pay the life insurance premiums of the guy they hire tomorrow?

      Yes, it may help them match the money going out with the money coming in, but honestly, maybe I’m old-fashioned, that’s what revenue is for.

      I would have (and do have) significantly less of an issue with it had it required employee permission.

      But at the same time… how often do you say no to your boss? Usually if they say jump, most people go “How high?”

      Insure them as an asset. Limit it to while they are in your employ, and have the benefits paid at the time of their (untimely) departure (be it death, disability, pretty much anything but quitting/firing)… something. But life insurance? I realize what they’re getting at, and I don’t disagree 100%, but there’s a reason that concept sounds so ridiculous and off-putting at first.

  20. JessicaJessica says:

    This is a great idea! I am going to take out policies on Dick Cheney and George Bush Sr. This will take care of my retirement!!

  21. PinkBox says:

    My problem with it is the idea of the company getting money from my death when they should have no right or claim to do so.

    Isn’t life insurance in place to help your family with burial, cost of living and other expenses? Why should a company I worked for (possibly a long time ago) get to benefit from this?

    It just seems all kinds of shady and unethical. I certainly can’t turn around and take out a policy on my CEO just because I’d hope to reap some cash when he died.

  22. alexw203 says:

    I havent read any of the other posts, but I believe you are also able to take money OUT of these life insurance plans before you die. Maybe someone who knows more about these instruments can speak to this better than I can, but some companies use these life insurance policies as a form of “golden handcuffs” to keep executives with the company in the form of “vesting.”

  23. NeverLetMeDown says:

    Here’s the tax situation with these policies. Generally, money invested in a life-insurance policy grows tax-free. So, I pay you $1000, and invest in into a life insurance policy on assembly worker Bob. The $1000 is taxable, so you pay $350 or whatever in taxes on it. Over the next 20 years, though, the interest that the $1000 earns isn’t taxable, whereas, if I’d just written you a $1000 check, and put it in the bank, it would have been taxable. So, the money grows faster, since the compounding interest works on the full value of the principal plus interest, rather than the principal plus interest less taxes. In other words, if you’re getting 10% a year (to make the math easy), after a year you’ll have $1100 ($1000 principal plus $100 in interest). In the life insurance policy, the 10% interest in year 2 will apply to the full $1100, and you’ll have $1100*1.1=$1210 after two years. If it’s just in your bank account, you’ll have to pay $35 in taxes on that $100 you earned in the first year, so the 10% growth in the second year will only apply to $1065. Over time, this differential can be huge.

  24. Anonymous says:

    Nothing new here. I’ve worked for several life insurance companies since the early 1990’s and this was always a standard practice. I was always amazed and shocked at how many different ways representatives would position and sell life insurance policies.

  25. mtaylor924 says:

    So I get how it’s possible for these companies to take out these policies on their employees, as the sudden loss of a valued employee would have a negative impact on their immediate bottom line.

    But shouldn’t it be limited to only current employees? The sudden death of a former employee (left voluntarily, fired, or retired – shouldn’t matter) would not impact the business in any way. Once a person leaves a company, the policy should be discontinued. It seems very shady that a company would make money off the death of someone that doesn’t impact their business anymore.

    • NeverLetMeDown says:

      @mtaylor924:

      Again, the company’s not really looking to make money on the policies themselves, they’re a vehicle to shield deferred compensation from taxation.

  26. Eoghann says:

    How good a deal can this be? AIG is probably the insurer!

  27. jesterthejedi says: