
An Employee Dies, and the Company Collects the Insurance - jfc
http://dealbook.nytimes.com/2014/06/22/an-employee-dies-and-the-company-collects-the-insurance/
======
rayiner
Life insurance is just a tax-advantaged investment vehicle. The companies
aren't "profiting from your death." They pay the premiums, those premiums get
invested, and the company gets the proceeds when you die. It doesn't preclude
you from having your own life insurance. Your only involvement is as the hook
that enables the tax advantage.

~~~
tvladeck
Like you, I don't understand the ethical dilemma here. It's not like the
company is taking money that would otherwise go to the family, or is
misrepresenting the purpose of their taking out the policy. What's the big
deal? Perhaps there is an angle I'm missing.

~~~
sp332
The main problem is that the company stands to gain if the death rate among
their employees is higher than average, so they pay fewer premiums to get to
the payoff. That might incentivize them to reduce health benefits for
employees.

~~~
scrumper
But the actuaries at the insurance company price that added risk into the
premiums.

I can see there being a big difference in death rates between, say, an Alaskan
crab fishing operation and a suburban CPA firm, but 'job' is one of the
questions that's asked by life insurers so that's already accounted for.

How would a white collar office employer legally engineer a higher death rate
for their people than an equivalent company down the street? Providing only
fries and burgers in the canteen? Relocating to an office block near a
chemical waste plant? Nothing really seems feasible or effective enough to
make a measurable difference to the performance of the investment scheme. The
added investment return bought by shortening the lives of some percentage of
staff by a few years would be just noise compared to the tax savings this
vehicle provides.

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jeffdavis
Ordinarily, one wouldn't buy life insurance in aggregate as an investment. The
insurance company has done the calculations, and it would be a net loss to the
buyer. (The buyer is willing to take that loss for security, which is just
fine.)

The only reason it's happening here is that the government gives tax breaks,
and those tax breaks are higher than the insurance companies' profit margins,
so it actually turns out to be a net gain for _both the seller and buyer of
life insurance_.

Surely, this is the result of lobbying by life insurance companies. It doesn't
make any sense on its own.

Similarly, it makes no sense for companies to buy their employees health
insurance. The reason it started is because of the tax breaks which make it
cheaper for the company to buy you health insurance than for you to buy it on
your own. (Aside: I don't believe for a minute that it somehow results in some
magical savings from group bargaining.) Now that's a big part of the mess we
call our healthcare system.

Direct your criticism to these special carve-out laws that make a mess of
everything. Don't direct it towards the companies that rationally take a tax
break that is already on the table.

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coldcode
I'm not that concerned about the practice until companies start killing
employees in order to collect sooner. Unless the policies actually affect the
individuals thus covered, al they really amount to is a tax avoidance scheme.

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martin-adams
Naturally the film industry would be very keen to insure against their
cast[1], but I would feel a little uncomfortable if my employer were better
off if I had an 'unforeseen accident'.

[1] [http://www.insureme.com/health-insurance/hollywood-
insurance](http://www.insureme.com/health-insurance/hollywood-insurance)

~~~
eli
If it makes you feel any better, the insurance company is much better off if
you live a long life, and has a strong incentive to investigate suspicious
accidents.

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gdilla
Had no idea this was going on. I'm aware of life insurance offered through the
company for myself at very low premiums (and I guess google and the like are
no premiums for whatever-x your salary). First time I've heard of a completely
separate policy with the company as beneficiary. If the terms last even until
you leave the company, it's a no brainer for the employer. Everyone dies.

~~~
eli
Keep in mind the insurance companies have carefully calculated the premiums so
that, on average, the company pays more in premiums than it gets in payouts. I
think it's more about financial planning and tax avoidance.

~~~
gdilla
That makes sense. Everyone's a winner then.

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jfc
I get that the companies here are not trying to off employees and collect.

It does, however, sort of remind me of the Herbalife "investigations", where a
hedge fund bet $1 billion that Herbalife would fail and then began lobbying
politicians to bring it down. You look at the lengths these guys went to and
consider the potential impact of their efforts, and it's unsettling to say the
least -
[http://www.nytimes.com/2014/03/10/business/staking-1-billion...](http://www.nytimes.com/2014/03/10/business/staking-1-billion-
that-herbalife-will-fail-then-ackman-lobbying-to-bring-it-down.html)

For me, it calls into question what behaviors are incentivized by allowing
people to seek any sort of financial benefit from people/companies in which
they have no real property interest (for lack of a better term). I don't think
this is purely a financial/tax inquiry; it does seem to have some societal
ramifications that ought to be considered as well.

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ganeumann
Here's my attempt at running the numbers:

Scenario one: Company takes out an insurance policy for $1,000,000 on an
employee. The expected remaining life of the employee is 20 years. The
expected return on investment is 5%. The insurance company prices the contract
so they make 10% of the returns. The company pays $32,000 per year for 20
years, then gets the $1,000,000 payout.

In the insurance policy scenario, the company gets $1,000,000, with no taxes
owed, a gain of $360,000.

Scenario two: The company invests this $640,000 ($32,000/year * 20 years) on
its own on the same schedule and with the same expected return on investment.
They earn approx. $1,111,000 and owe capital gains tax on the $471,000 gain,
which at a rate of 15% is $71,000, for a net gain of $400,000.

Scenario two: investing the money themselves and paying cap gains, makes more
sense than scenario one: buying insurance. Unless the insurance company is
taking less than a 7% vig.

~~~
thedufer
I'm not saying your math is wrong, but I'm confused as to how the breakeven
can be a 7% cut when the capital gains rate is 15%. Can you explain why my
intuition is wrong here?

~~~
ganeumann
Because it's only 15% of the gain, whereas both investment gains and customer
payments are revenue to the insurance company and I've assumed the insurance
company needs to keep some percentage of their revenue to pay overhead
expenses, marketing, commissions, etc.

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cacainmycafe
Dead Peasants Insurance. The name says it all really. Banned in most
countries, for good reason.

Edit: The downvotes are interesting. People don't being reminded it is banned
for good reason, or object to the well-known industry-wide perjorative name
for the said insurance? Wikipedia covers the reason for the name well enough -
look it up!

~~~
rqebmm
It's even mentioned by that name in the article!

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pessimizer
Insurance is only an investment if it's used to hedge risk to some other asset
of value. Employees aren't your assets, unless you're participating in
indentured servitude. This is just gambling at best, hiding money at worst.

I get insuring your movie against the star dying. If someone wants to start a
business insuring the internal projects of companies against people crucial to
them either quitting or dying, that's fine with me. But with no asset at risk,
there's no difference between your company buying life insurance on you and me
buying life insurance on you.

Of course, CDSs are still legal to buy against companies who don't owe you
anything, so I should really just give up the idea that financial regulation
has an obligation to society in general rather than just in setting up a fair
playing field between speculators.

~~~
rqebmm
> Employees aren't your assets, unless you're participating in indentured
> servitude.

Employees are most assuredly assets in that they provide value to the company.

~~~
pessimizer
Your employee's life does not provide value to the company, their work does,
and they can end that work at any time that they (or you, in most states)
choose. You do not own your employees, or their future labor.

Being allowed to take out insurance on your employee's life makes about as
much sense as being able to take out insurance on a hotel that you're renting
a room in.

edit: clarity

~~~
thedufer
How is a company to insure against a disaster wiping out an entire branch's
worth of employees? That's certainly a low probability event, but many
companies with single-digit locations would be in big trouble if they lost
such a huge proportion of their workforce at once, which is pretty unlikely to
happen naturally.

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jpollock
I've also seen this done with founders where the policy is used to buy out a
founder's estate, as well as being used to cover the business risk presented
by that founder's (or senior staff member's) death.

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chiph
If the firm also took out a policy for the same amount and under the same
conditions, paid for it themselves, but named a beneficiary of my choice, I'd
be OK with this practice. Sure it doubles their premium costs (absent a
quantity discount), but in my mind it would resolve any ethical issues since
my heirs would also receive a benefit from my demise.

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6d0debc071
Am I the only one who thought the obvious thing to do if the company wanted to
make this problem go away is to give the employee's family a reasonably cut?

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pyb
"But critics say it is immoral for companies to profit from the death of
employees, while employees themselves do not directly benefit."

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personZ
>But absent meaningful regulation around the practice, it grew unchecked, and
soon companies were taking out policies on many poorly paid employees like
janitors, then reaping millions in profit when they died.

Most of the article is about Universal Life products, which is a product that
is generally considered an enormous scam (it is a really poor investment
vehicle), however this part really stood out.

Anyone planning on making money through insurance needs to understand that the
house odds are against you, at least unless you have insider knowledge or are
hiring hit men. Insurance companies are very very smart, and you won't profit
by trying to play the odds against them, _especially_ and most certainly in
the aggregate.

So you come to the reality that this is wholly a tax avoidance scheme
(sometimes legal, sometimes not). Not really about profiting from death, or
usurping someone's great insurance payout, but simply hiding money away for
some period of time.

This is a tax code discussion that has perilously little to do with life or
mortality. Just taxes and ways around them.

~~~
cacainmycafe
Yeah, morality has nothing to do with anything. Say, if all of your neighbours
bought insurance on your property, and the one day it collapsed, then there
would be nothing immoral about that, but I bet you would not feel to great
when they waved their piles of sweaty cash in your face over the rubble of
your home.

Now swap home for dead relative.

See?

Life is not black and white, but, it seems, is certainly good for payoff or
two.

~~~
nawitus
>Say, if all of your neighbours bought insurance on your property, and the one
day it collapsed, then there would be nothing immoral about that

I agree, if the neighbours had nothing to do with the collapse.

~~~
Crito
I can even think of situations where it would make sense to take out insurance
on your neighbors home. For example, if you observe that your neighbors are
hoarders, you might try to get insurance on their home in anticipation of the
home's eventual condemning (which would wreck your homes value through
geographical association).

The only problem there is that I suspect that the insurance company would not
be particularly keen on that.

~~~
secabeen
Yeah, that's why you generally need an Insurable Interest in someone to buy
life insurance on them:
[http://en.wikipedia.org/wiki/Insurable_interest](http://en.wikipedia.org/wiki/Insurable_interest)

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instaheat
I'm on other side of this. While I understand the need to keep pension plans
afloat, when my mother passed away in 2011 the value of her pension left to my
brother and I was ~$60,000. This was split between the two of us.

While no small sum, the mortgage was not paid off and I have been paying it
since. I have no idea if HP took out an insurance policy on her, but if they
did it was most certainly WAY MORE than $60,000.

This shouldn't be a vehicle for profit in my opinion. Unfortunately, she only
had an accidental death policy. So if her corporation had a general life
insurance policy in the $400-500k range - as her heirs, we should be entitled
to some of that money.

Yes, we as consumers/employees have to take responsibility for our choices. So
some might argue it was her fault she wasn't covered well. I would disagree.
There are a lot of companies that aren't honest about this practice. So, if
the company has you well covered, if they are a good company, shouldn't they
extend you the same courtesy and offer to let you buy in to the plan?

The point being, why are they only looking after their best interests? It's
bullshit to say they are just keeping their pension plans afloat because of
the payoff amounts.

There is an ethical dilemma because a lot of companies hide what they are
doing. That and the certain return when the employee dies.

It should not be an investment vehicle, period. It is profiting from death. Of
course you can have your own life insurance. Just because someone is my
employer, shouldn't give them any right to take out insurance on me.

~~~
rblatz
Not to be harsh, but why would HP owe you any of that money? This is a legal
way for them to avoid taxes, yes it sucks that your mother died, but HP payed
the premiums, they did not take them from your mom, and they didn't lead her
to believe the insurance would payout to her heirs, and they didn't prevent
her from taking out an insurance policy for herself. You have no claim or
right to that insurance money.

