The Well Insured Employee

In 1984, I left the relative safety of working at a radio station in order to launch a video/marketing firm. It was my vision that I sold with great enthusiasm to others. Several people invested in my plan and off we went.

I had a few employees, but I was, in the board of director’s eyes, the “key man.” And in one of our early board meetings it was brought up that the company needed to buy “key man” insurance should something happen to me. It’s not uncommon to do that. In a small business, this kind of policy is taken out on the person or persons whose absence would likely sink the company.

This makes sense, right?

Apparently, there is another life insurance program on employees gaining in popularity. But in this case, it is not focused on key man thinking. This program is finding a way to capitalize off the passing of an employee.

The story came to light in the recent New York Times article, “An Employee Dies, and the Company Collects the Insurance.” Employees at a southern California newspaper received emails indicating the company wished to purchase life insurance on them. The employer, The Orange County Register, would pay the premiums. And they would become beneficiaries! http://dealbook.nytimes.com/2014/06/22/an-employee-dies-and-the-company-collects-the-insurance/?emc=edit_th_20140623&nl=todaysheadlines&nlid=68618012

I’d not heard of this. It’s reported, however, that this is “a common but little-known practice in corporate America.” From a company perspective, it does make sense!

Company held life insurance policies bring generous tax breaks. It’s one reason why hundreds of corporations do it. Banks in particular. The Times reports that “JP Morgan Chase and Wells Fargo hold billions of dollars of life insurance on their books, and count it as a measure of their ability to withstand financial shocks.”

Aside from tax breaks, companies believe this is shrewd financial management. Earnings are often used to cover the costs of long term health care and deferred compensation. Investment returns on the policies and the death benefits, once received, are also tax free!

The real payoff, however, may be in recouping pension expenses.Aaron Kushner is the CEO of Freedom Communications, the parent company of the Orange County newspaper. His spin on the legitimacy of these policies is very positive. “Life insurance is one of the ways of strengthening the long-term health of the pension plan and ensuring its ability to pay benefits,” claims Kushner. And what self respecting employee wants to see his or her pension go bust?

It’s noted that in many cases, companies can use the tax free gains for any purpose. There’s no restriction on this. You can see why companies are sold on the idea.

How big is this business? Here is what the Times reports: “Hundreds of billions of dollars of such policies are in place, providing companies with a steady stream of income as current and former employees die, even decades after they have retired or left the company. Aon Hewitt estimates that new policies worth at least $1 billion are being put in place annually, and that about one-third of the 1,000 largest companies in the country have such policies.”

So everyone wins, right? Of course not. Many skeptics feel the practice is somewhat immoral— profiting from the death of employees. Freedom Communications had to modify their plan and do a sales job to get employees on board.

There’s a particularly disturbing side to this for me. Many of these policies pay off years after an employee has left the company. You can see where tight financial conditions might make top executives “looking forward” to the days when these folks go to their eternal reward!

I’ve been told a similar situation happens in organizations that assist elderly people with estate planning. If said organizations benefit from the deaths of these seasoned citizens, well, you can see where human nature might take its course here. The longer one lives, the longer the wait for those resources.

Since this corporate life insurance program has been growing in popularity, so has the number of class action lawsuits. Walmart settled in one of those cases, “paying millions to low-ranking employees who had been covered.” Some companies, including Winn-Dixie and Camelot Music, went to court with the IRS nipping at their heels for “using policies as tax avoidance schemes.”

New laws have come into place regulating this activity. But even with the protection piece, there remains that uncomfortable idea of your employer profiting from your demise. No law resolves that.

Truth be told, many people die without personal life insurance! One estimate I saw claims around 6850 people die every day in our country. One chap did calculations showing that more than 1100 of those people who made between $50k and $250k died without life insurance. Zippo. http://www.hinermangroup.com/blog/insurance/how-many-die-every-day-without-life-insurance/.

Why is this? It’s uncomfortable to make wills. Buy life insurance. Discuss burial and cremation. It makes us seem so…fragile.

The Bible says we ARE fragile! James 4:14 reads, “Why, you do not even know what will happen tomorrow. What is your life? You are a mist that appears for a little while and then vanishes.” (NIV)

The best life assurance plan is the eternal one. John 3:16 states it clearly. God gave us His son. Whoever believes in him will have eternal life.

You invest the faith. God takes care of the rest. And you, my friend, are the beneficiary. It’s God’s “whole life plan.” Don’t ya love it?

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Let’s Talk with Mark Elfstrand can be heard weekdays from 4-6 PM Central. To listen outside the Chicago area, tune to www.1160hope.com for live streaming or podcasts, or download the AM1160 app.