[Wal-Mart] Profiting from Death?

Houston Chronicle ^ | April 16, 2002 | LM SIXEL

[JoeMomma]

Jane Sims always knew her husband was a valuable employee to Wal-Mart. She just didn't know how valuable.

Sims discovered recently that Wal-Mart, the company her husband, Douglas, worked for before he died, had taken out a life insurance policy in his name.

When Douglas Sims died in 1998 of a sudden heart attack, Wal-Mart received about $64,000. She got nothing from that policy.

"I never dreamed that they could profit from my husband's death," said Sims, whose husband worked in receiving at Wal-Mart's distribution center in Plainview for 11 years.

Companies routinely take out secret life insurance policies on the lives of their low-level employees and collect thousands of dollars when they die. The families never know the policies are in place and typically receive none of the money.

The policies are called corporate-owned life insurance policies or COLIs for short. But they're better known in the insurance industry as "dead peasant" and "dead janitor" policies.

While many companies buy life insurance on their key officers, so-called "dead peasant" policies are different because the deaths of low-level employees do not affect a company's financial health.

Those kinds of policies are not permitted in Texas anyway because the state Legislature did not want to create an incentive for murder or wagering on human life. But many employers continue to buy them, expecting no one will ever find out.

And they generally don't because there is no way to tell if an employer has taken out a policy on a worker's life.

That has caught the attention of U.S. Rep. Gene Green, D-Houston, who is looking into the federal jurisdiction of whether employers can be required to notify employees of such policies.

Green is also concerned that an employer may have a disincentive to provide a safe workplace because he would profit from the employee's death.

It is impossible to know how many companies purchased COLI policies on their employees because of secrecy surrounding the policies.

But an attorney for the Hartford Life Insurance Co. estimated that one-fourth of the Fortune 500 companies have them, which cover the lives of between 5 million and 6 million workers.

For example, Procter & Gamble and AT&T have them, but representatives of both companies would not comment on the details.

While COLIs are usually kept under wraps, they have suddenly become the focus in a lawsuit here against Wal-Mart, one of the city's largest employers, and Camelot Music.

Wal-Mart took out about 350,000 life insurance policies on the lives of its employees payable to the company, according to the lawsuit filed by Sims and other family members of deceased Wal-Mart employees. Hartford Life Insurance Co. and AIG Life Insurance Co. sold the policies to Wal-Mart.

Wal-Mart borrowed money from the insurers to pay the premiums, which the company was able to write off as a business expense on its federal taxes.

Scott Monroe Clearman, a Houston lawyer representing the workers, said those policies are used as an "elaborate tax dodge."

Clearman, who specializes in insurance law, is responsible for uncovering the "dead peasant" policies in Texas.

After reading in a magazine that Wal-Mart took out policies in other states, he began to wonder if any were on Texas employees.

Through obituary listings in Texas newspapers, Clearman tracked down surviving family members of Wal-Mart employees.

Linda Waller, whose husband, Craig, worked in the automotive department at Wal-Mart's Comanche store before he died, received a letter from Clearman about a $64,000 life insurance policy on her husband.

Waller took it to Wal-Mart's human resources representatives in Comanche. They researched it and assured her that Wal-Mart did not carry insurance that names the company.

A Wal-Mart representative dismissed Waller's suspicions and said they were being stoked by "ambulance chasers."

But Waller discovered that her husband was covered, and she and other relatives of deceased Wal-Mart employees are suing the retailer.

Clearman has proved to U.S. District Judge Nancy Atlas that the retailer has no "insurable interest," that Wal-Mart is not entitled to insurance money and that death benefits should go to the deceased workers' estates.

But he must determine just how many employees are due the benefit.

That could amount to millions of dollars of liability for Wal-Mart, Clearman said. He could not be more specific because he did not know how many Texas employees died or how much each policy was worth.

The way the companies find out is that the firms who manage the insurance policies for them run sweeps of Social Security numbers or "death runs" to uncover who has died every quarter. The death certificates are located and forwarded to the insurance company.

In Texas, only those with an "insurable interest" can take a life insurance policy out on someone. That would include a spouse or child, a creditor or "one having a reasonable expectation of pecuniary benefit or advantage from the continued life of another."

Texas is unusual, said Barry Chasnoff, a lawyer with Akin Gump in San Antonio who is representing the Hartford Life Insurance Co. In most states, companies have an insurable interest in every employee. (Rules allow an employer to take out a life insurance policy on a key officer. When an executive leaves a company, the insurance lapses.)

When a company well-versed in insurance codes comes to Hartford to buy COLI policies, Hartford does not pay attention to whether "insurable interest" needs to apply, Chasnoff said.

Camelot Music was also sued in the same case after former employees, including many part-time workers making close to mimumum wage, discovered they were insured for between $273,000 and $368,000 each. All are former employees, who left the company by 1998, and say they are rightful owners of the policies.

Atlas said that even though Camelot did not have an insurable interest in their lives, she did not have the power to convert the ownership to the individual employees. But if the policies were still in effect when the former employees died, the estates would be owed the money.

The Camelot case came to light after it sued the Internal Revenue Service after it disallowed the company's tax deductions on the insurance premiums.

Though Texas law does not permit "dead peasant" insurance, Wal-Mart and Camelot thought they could still insure their Texas employees if the policies were created out of state.

In the Wal-Mart case, the insurance policies were signed in Georgia and the company managing its insurance is in Georgia. But Atlas ruled that the policies are governed by Texas law because the workers lived in Texas, worked in Texas and the death certificates are in Texas.

It's not just a Wal-Mart issue, said Bill Wertz, a spokesman at the company's headquarters in Bentonville, Ark. The company, like many in the Fortune 500, availed itself of the insurance policies because of the tax benefits.

"The company feels it acted properly and legally in doing this," he said. Georgia law, not Texas law, should govern, he said.

Wertz said Wal-Mart acted aboveboard with its employees, that no harm was caused and that employees were notified of the policies through a special "death benefit" offer.

Initially, Wal-Mart gave its employees a special $5,000 death benefit when it launched the program in 1994 through 1996.

But Clearman contended there was no mention that the underlying policy was worth far more. And it appeared that if an employee turned down the "special" death benefit, that worker also must forfeit health insurance, Clearman said.

Wal-Mart contended that the money from the insurance policies went to pay other employee benefits. Clearman said he has no evidence to support that claim.

Meanwhile, National Convenience Stores also has bought accidental death policies on its employees. When an employee died at work, such as in a robbery, NCS received $250,000, Clearman said.

The insurance came to light after an NCS manager died in a car wreck going to get change for the store, said Clearman, who represented the estate of the deceased employee, Ramon Pamez. The case is set for trial beginning Monday in state district court here.

Because it had insurance, NCS did not have incentive to provide security at the convenience stores, Clearman said.

At the same time, Diamond Shamrock was installing bulletproof glass and putting in two employees at night, Clearman said.

Between 1991 to 1995, Diamond Shamrock had one on-the-job death in Texas while NCS had nine, Clearman said.

Camelot Music earned $1.3 million in insurance proceeds from its employees who died, Clearman said. The firm insured 1,400 people, and it had more deaths than mortality tables suggest, he said. "What's the incentive to provide good security?" he asked.

Though Wal-Mart canceled its policies in January, Camelot's policies remain in effect.

An attorney for Camelot did not return phone calls for comment.

[JoeMomma]

Whenever your employer tells you that employees are their "most valuable assets", perhaps they are right -- provided they have a hefty insurance policy on you on which they can profit in the event of your death.

It is sick for companies to profit from the death of an employee like this.

[JoeMomma]

A bump to the Employment List, for all of us "valuable" employees.

[JoeMomma]

I think this qualifies for the Weasels List, too.

[DainBramage]

This could explain all the old greeters at the front door pushing around the long string of carts.

"Gramps, you don't look well,....maybe you should go to the front and push heavy carts today".

[Phantom Lord]

I may be in a minority here, but I see no problem with employers taking out policies on their employees.

My employer provides me with a life insurance policy valued at X times my annual salary with my wife as a beneficary (sp?). Whats wrong with them having one with the company as a beneficary as well? Even if they didn't provide me with one I wouldnt have a problem with it.

[blackdog]

COLI policies are just a tax dodge. Another product of our tax code.

People, corporations, wallstreet, profit from death every day. If Bill Gates contracted cancer today, I am sure all you peons, or peasants who own stock in Microsoft would be calling your broker to cash out right now. How is that any different? Now if your employer sent you out to paint lines on the interstate with a toothbrush while wearing asphalt colored clothes, I would take a closer look.

[TheCPA]

Premiums on life insurance policies are NOT a deductible expense for the company in computing taxbale income (Code Sec. 264). Hopwever, the proceeds are excluded from gross income (Code Sec. 101(a)(1)). The company has an insurable interest in the lives of the employees because the employees make valuable contributions to the company's business, and the company incurs costs to replace them and train the replacments.

[JoeMomma]

I guess what I'm seeing here is a perverse application of the "profit motive". In convenience stores, particularly, its more profitable for an employee to get killed rather than have the company provide adequate security.

It's one thing for the corporation to have an insurance policy on a high-level employee pivotal to the company. It's another thing for the company to profit off the death of low-level employee. However, there is no loss to a company if a low-level employee dies -- they simply hire another one. That employee's death is a loss to the family, not the company.

[JoeMomma]

The company has an insurable interest in the lives of the employees because the employees make valuable contributions to the company's business, and the company incurs costs to replace them and train the replacments.

What about $250,000 life insurance policies on convenience store clerks? Last time I checked, there's not a labor shortage in that area, and it does NOT cost $250,000 replace a cashier at the corner 7-11.

I'm sure the executives are truly grieving for their lost employee. Grieving all the way to the bank ... /sarcasm

[verity]

So?

[Cicero]

I find this disturbing. I understand that it's a tax dodge, and I don't fault that. Anyone who manages not to pay taxes through legal methods is perfectly entitled to do so. But it is disturbing that a company should put itself in a position where it profits from the deaths of low-level employees.

Key employees, sure. If Bill Gates died it would have a huge impact on Microsoft. But there should be no financial impact of an ordinary worker dies. If anything, it gives them an opportunity to hire a younger worker at lower pay. There is, however, a clear moral problem if the more low-level employees die, the more money they stand to make.

[nothingnew]

paint lines on the interstate with a toothbrush while wearing asphalt colored clothes, I would take a closer look.

Hey!...the pay is excellent...I make $10.00 an hour!

BWAHAHAHAHAHA!!!

FMCDH!

[Koblenz]

This doesn't really make much sense from an economic perspective. The reason you buy insurance is because the loss would be too much to bear versus the relative cost. But if you take out 30,000 life insurance policies, you are almost guaranteed to lose money. Because the insurance company selling the premiums is going to price these premiums correctly, and make a little profit on each one overall. When you have such a large sample size, some people are surely going to die, but the insurance company is going to make a profit because not all 30,000 are going to die. Only a small percentage of the people will die.

Look at a big insurance company. They sell life insurance. Most people won't collect, but they don't care, because they lived and it was worth the peace of mind. The people that collected get financial security. But overall the insurance company makes money because the amount they collect exceeds the amount they pay. I cannot imagine that WalMart would make a profit on buying 30,000 policies, unles the insurance company selling these policies priced them incorrectly.

[JoeMomma]

So? Since when did it require $250,000 to replace and train a convenience store clerk? Do the suits really hang their heads and shed tears at the demise of their cashiers killed in robberies? Do they help the grieving widow(er)s and their families.

Or do they figure that collecting life insurance on a cashier is more profitable than providing adequate security for their employees?

I know .. the corporate lurkers here on FR will come out rattling off their "Corporate America can do no wrong" mantra.

[Aquinasfan]

The way the companies find out is that the firms who manage the insurance policies for them run sweeps of Social Security numbers or "death runs" to uncover who has died every quarter. The death certificates are located and forwarded to the insurance company.

Lovely.

We certainly live in a "culture of death."

[steve-b]

The problem is that it creates perverse and morally hazardous incentives. That's why the police will raise an eyebrow if they find out that you've taken out a big life insurance policy on some random person.

In the case of an employer (as noted in the article), the concern is that the "dead janitor" policy creates an incentive for hazardous working conditions. (Another problem is that the screwed-up tax code turns it into a shelter, thus diverting funds from productive business activities.)

[Aquinasfan]

"Gramps, you don't look well,....maybe you should go to the front and push heavy carts today".

I guess you can't be cynical enough.

[steve-b]

In convenience stores, particularly, its more profitable for an employee to get killed rather than have the company provide adequate security.

Hmmmm... wonder how many of the companies that won't let their employees arm themselves have "dead janitor" policies on them...?

[monday]

"It is sick for companies to profit from the death of an employee like this"

Unless you can prove that the companies in question mean for their employees to die so they can collect, you are just whining for no reason. You sound pretty stupid while doing so too, I might add.

[Aquinasfan]

But if you take out 30,000 life insurance policies, you are almost guaranteed to lose money. Because the insurance company selling the premiums is going to price these premiums correctly, and make a little profit on each one overall.

Not if the company is also getting some kind of tax break. That might throw it over the top.

Then it's a win for Wal-Mart and a win for the insurance company.

No one else has to know.

[JoeMomma]

In the case of an employer (as noted in the article), the concern is that the "dead janitor" policy creates an incentive for hazardous working conditions. (Another problem is that the screwed-up tax code turns it into a shelter, thus diverting funds from productive business activities.)

This was my point. These 'janitor policies' create an incentive for hazardous working conditions. Again, the convenience store clerk killed in a robbery attempt is more profitable to the corporation than providing security for their stores.

I'm not condemning such policies for executives who are valuable and would be hard to replace and affects the continuation of the company. I'm talking about these 'janitor policies' that provide windfalls of cash to the corporation for low-level employees that didn't make much money nor are difficult to replace.

I don't care what any suit says, it does NOT take $250,000 to train and replace a convenience store clerk.

[Mind-numbed Robot]

IMHO, this is a bigger indictment of the tax code than of the companies. Whenever a tax becomes so onerous, as our corporate and individual income taxes are, the incentive to avoid, not evade, them is increased. What these companies are doing is perfectly legal, apparently, and is a method for avoiding taxes.

Wal-Mart borrowed money from the insurers to pay the premiums, which the company was able to write off as a business expense on its federal taxes.

This is the mysterious part to me. Normally, an insurance company makes money by figuring the odds, the actuarial tables, of an event, death, happening, and places its bet accordingly, just like a casino. It also invests the premiums as they are paid and makes money from the investments, just as a bank does. Now if they take in no premiums but instead pay money out, a "loan", it seems at best a break even deal over the long haul. I suppose it increases a company's net worth in the manner of policies in force but ,otherwise, how do the insurance companies benefit? Does the buyer, Wal-Mart i.e., take the money from a policy that paid off and use it to pay the premiums, "loans", on hundreds of others? Regardless, blame the tax code for providing the wrong incentive.

As far as the morality goes, I see no harm done to the survivors. They could have taken out life insurance on the worker themselves rather than wait for someone else to do it for them had they cared to. It is just another emotion-building attempt by leftists and their handmaidens, the trial lawyers, to milk "big business" and the press and posters like you are abetting them.

[Aquinasfan]

The stockholders (fools) and taxpayers (peasants) are the ONLY "payees".

It's the perfect scam. Well, up until now. Maybe.

[monday]

"However, there is no loss to a company if a low-level employee dies -- they simply hire another one. "

Wrong. Hiring and training a new employee costs alot. I think you have never done it or you wouldn't say this.

[conserve-it]

And the whoring of American dignity continues unabated.

[JoeMomma]

As far as the morality goes, I see no harm done to the survivors.

That's not the only measure of the morality. The morality involved is the perverse nature of the profit motive in this case -- the incentive for hazardous working conditions.

[TheCPA]

The premiums cost more than the expected value of the insurance policy: premiums > (amount of policy x probability of dying). And the premiums are not tax deductible. Therefore, purchasing more life insurance than the company really needs to (1) replace the worker,(2) train the replacement, (3) make up for the difference in contribution to profits from the decedent compared to the replacement, is not wise from a business standpoint. Purchasing such excess insurance could create a moral hazard problem. If management engages in criminal behavior such as causing the employee's death, they should be prosecuted. Otherwise, I see nothing wrong with the company buying such policies. If the insurance is excessive, the shareholders might be upset for all the unncessary, nondeductible life insurance premiums.

[JoeMomma]

I would bet the insurance policy for $250K on a convenience store clerk is a way for the company to self-insure. They are likely going to be sued by the family of the dead (murdered) clerk and perhaps purchasing insurance is not as cost effective as insuring through traditional insurance. Also, if the clerk dies of natural causes, they get a windfall.

Corporations aleady have insurance of that nature without resorting to 'janitor policies'.

[TheCPA]

Life insurance premiums are NOT tax deductible if the proceeds go to the company paying the premiums(Code Sec. 264).

[TheCPA]

Excellent analysis.

[ValerieUSA]

Posted yesterday
Profiting from death? Lawsuit filed in Wal-Mart life insurance case

[TheCPA]

The premiums are not tax deductible (Code Sec. 264).

[jim997]

I disagree, if the company paid the perimum, they took the risk, they should reap the profits. The employees estate didn't take any risk, why should they profit by the insurance. It does cost to replace workers. If an insurance company is willing to cover the employee, that should be betweent the Employer and the insurance company. Capitolisum works, leave the emotion out of it.

[Aquinasfan]

Life insurance premiums are NOT tax deductible if the proceeds go to the company paying the premiums(Code Sec. 264).

What about 'semper libertas' analysis?

There's gotta be some kind of tax benefit or scam going on here somewhere. Why else would they do it?

I have the feeling Walmart squeezes its vendors mercilessly in order to keep its prices low. Would the same organization buy 30,000 insurance policies that are a sure financial loser? It doesn't make sense. Something smells.

[TheCPA]

Very good point.

[syriacus]

I hope Cynthia McKidney (sic) investigates this case of profitting off of death.

It might keep her warped mind busy.

[montag813]

It is sick for companies to profit from the death of an employee like this.

No it isn't. It was damn smart of them. Corporations routinely take out insurance on top management, typically $1 million or more for an average CEO.

The question is: why didn't this guy have a policy himself? A man his age could have had a $250,000 policy payable to his wife for only $500-750 per year premium. Walmart's $64k policy cost them pennies. What a dunce.

[Aquinasfan]

Maybe this is it:

"Wal-Mart borrowed money from the insurers to pay the premiums, which the company was able to write off as a business expense on its federal taxes."

Maybe Wal-Mart writes off the loan.

[TheCPA]

The premiums are not tax deductible, but the proceeds are tax free. Companies insure the lives of employees to recoup the costs of replacing the employee, trainng the replacements, and to make up for the contribution to profits of the decedent. They might also need the money to pay any claims against the company for liability if the employee dies on the job.

[Gaston]

May be if we called it death insurance people could understand.

[monday]

"-- the incentive for hazardous working conditions."

Are you smart enough to recognize hazardous conditions? Do you think other people might be smart enough to recognize them too? If so why are you asking this question? People will weigh the risks, and if they are to great they will not work there. Do you need the government to hold your hand? Grow up!

[GovernmentShrinker]

Any company which normally spends over a quarter of a million dollars to hire and train a replacement for a part time, minimum wage employee wouldn't stay in business long. It does sound as though there is some tax-related motivation for the widespread use of these policies. The insurance companies wouldn't be providing such policies if companies were arranging to have workers knocked off or ignoring dangerous work conditions in order to collect on them -- insurance companies catch on quickly to schemes like that, since they lose money on them.

As for "no incentive to provide security" for employees. I can't buy that argument. An insurance policy cannot insure against negligence. If an employee is killed in a hold-up, or in an on-the-job accident, his estate and survivors can sue the company and win huge sums as compensation. These sizeable policies on low wage employees may be, at least in part, intended to offset the cost to the companies of such awards, and of out of court settlements often arranged in order to avoid expensive litigation (and often enough, the employee may really be the one at fault). Even though the companies might benefit in some cases where an employee died and there was no court award or settlement paid, this would average out with other cases where an employee died and a large settlement or court award was the result.

Unless somebody can show clearly that these policies are are part of a scheme involving illegal activities, I say just let the private sector handle it. Insurance companies and their corporate clients are both in business to make money, and neither group has any significant responsibility for the insanity of the Internal Revenue Code.

[Mind-numbed Robot]

The morality involved is the perverse nature of the profit motive in this case -- the incentive for hazardous working conditions.

You are making an unwarranted assumption, IMO. Hazardous working conditions can be a much greater expense to an employer than any gamble on profiting from an accident or other unforseen event. Not only are there a myriad of government agencies monitoring such things but the trial lawyers are sitting on every branch and wire waiting to swoop down on the carcuss.

No matter your distaste for "big business" you will someday learn that sweet talking politicians promising the moon are the biggest crooks and threat to our society. They just try to deflect the blame to big corporations so that you won't notice what they are really doing to you. Most of them are liberal Democrats. Live with it!

[GovernmentShrinker]

I think you're probably right -- the companies are arbitraging the prices of liability insurance vs. life insurance.

[TheGrimReaper]

This type of "financing" has been going on for at least the past 15 years (when I first encountered it), and it is probably way more commonplace than anyone realizes.
A "Fortune 100" company with which I am intimately familiar uses COLI's to fund its executive incentive compensation program.
It may be gruesome as hell, but apparently quite effective.

[TheCPA]

Generally, interest incurred to carry a life insurance policy is not deductible (Code Sec. 264(a)(4)). However, a corporation may deduct interest on total loans up to $50,000 with respect to life insurance carried on key persons (Code Sec. 264(e)(1)). A key person is an officer or someone who owns at least 20 percent of the company. The company may have no more than five key persons for this purpose (Code Sec. 264(e)(3)). Thus, the interest on money borrowed to pay insurance premiums on employees other than key persons is not deductible either. The only tax advantage for insuring the lives of the employees is that the proceeds in the event of the employee's death are tax free (Code Sec. 101(a)(1)).