Washington Post Staff Writers
Thursday, May 30, 2002; Page E01
For many years, employers have insisted that their workers are their most valuable asset. Recently the phrase has taken on new meaning.
Tax litigation and damage suits reveal that many corporations are taking out life insurance on their employees with the company as the beneficiary. In many cases, the workers do not know of these policies, and when some have died their families were shocked to discover that insurance companies were paying hundreds of thousands of dollars to the employer.
This kind of insurance is a new twist on what is called corporate-owned life insurance, or COLI.
Such policies have long been used to cover key executives, whose untimely death might cause a problem for a company. The newer kind of COLI, which covers the lives of rank-and-file workers and provides no direct benefit to them, has sometimes been dubbed "janitors insurance" or "dead peasants' insurance."
Some survivors and insurance experts are offended by the practice.
"It raises very serious public policy questions," said J. Robert Hunter, a former Texas insurance commissioner who is now with the Consumer Federation of America. "What is the purpose of this? If it's just to make money, I don't think that's sufficient" reason to allow it.
But many states, including Maryland and Virginia, specifically permit this kind of insurance, and insurers and employers argue that it enables companies to fund worker benefits, such as retiree health insurance, in the same tax-preferred way that they fund pensions.
And in fact it appears that the appeal of this broader COLI, like many forms of life insurance, is driven not by the need to provide survivors with income but by the generous tax benefits allowed life insurance generally.
Under current law, the investment gains within a life insurance policy are not taxed, which allows them to build up to fund the death benefit, which itself is free of income tax. This tax treatment allows employers to use life insurance policies, in effect, as tax-free investments. <snip>
http://www.washingtonpost.com/wp-dyn/articles/A30037-2002May29.html
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