Most people have heard of standard life insurance, which provides financial support after the death of a loved one. However, you may not be familiar with corporate-owned life insurance, also called deceased farmer insurance. This somewhat controversial product is designed to protect a company’s finances after the death of a high-value employee such as the CEO or COO. Businesses with deceased peasant insurance can use the funds to hire and train a new employee or take advantage of tax benefits.
What is corporate owned life insurance?
Business-owned life insurance is a type of life insurance that employers may be able to obtain for their employees. The employer acts as the beneficiary of the policy, and when the employee dies, the employer receives the death benefit. Company-owned life insurance can be written to a single employee or an entire workforce.
Company-owned life insurance was originally designed to help companies stay financially afloat after the death of key executives. Today, companies will typically purchase corporate-owned life insurance to fund employee benefit plans, such as nonqualified executive health plans and deferred compensation plans. There are several tax advantages because cash value growth and death benefit payments are not counted toward annual income.
There are two different types of corporate-owned life insurance – principal person and split dollar:
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Key person life insurance: Key life insurance specifically protects executives and decision-makers if their death would cause financial problems for the employer. This type of coverage is available in a term or permanent life insurance policy.
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Dollar split life insurance: Split dollar life insurance allows the employer and employee to share the cash value of the policy. Unlike key person insurance, the employer typically pays premiums in dollars and splits the death benefit with the employee’s loved ones after they die.
Company-owned life insurance is not the same as group life insurance, which may be offered to employees as part of their employment benefits. In most group life insurance policies, the employee pays the premiums and chooses the beneficiaries to receive the full death benefit.
Why is it called dead farmer’s life insurance?
Company-owned life insurance is commonly referred to as dead peasant life insurance because of its historical use. In the 1980s, many large corporations began purchasing company-owned life insurance for low-wage workers without telling them.
Not only was their intention to profit from the deaths of employees, the move was seen as controversial because companies could secretly make millions from employee death benefits and the growth of the cash value of the policies.
As a result, corporate-owned life insurance was given the name “dead peasants’ insurance” in reference to a novel called dead Souls By Nikolai Gogol. The main character buys dead serfs from the landowner in the book and uses them to obtain a high-value loan.
Why do companies buy life insurance for deceased peasants?
A dead peasant policy may have many benefits for a company. Hiring and training high-level employees who bring experience and value to the company once they join the company can be expensive. When they die, the company loses that value and has nothing to prove for the costs it incurred in training them. If they are the founder or CEO of the company, their value to the company may be significant. A corporate-owned policy may help companies recoup some of this loss.
At the same time, a dollar-splitting policy could be added to the compensation package to help convince a desired job candidate to take the position because the employee’s potential beneficiaries would receive the money if they died. Death benefits can also be used by a company to fund benefit plans or retirement plans, and tax advantages can also be favorable because death benefit payments are not taxable in most cases.
Is insurance for deceased farmers legal?
Despite the controversy, life insurance for deceased peasants is legal but highly regulated. In 2006, the Internal Revenue Service (IRS) created the Pension Protection Act, which created a strict set of guidelines that made it more difficult for companies to exploit their employees with company-owned life insurance policies.
IRS guidelines make it illegal for companies to issue life insurance policies to their employees without their consent, regardless of how many employees the company has. In order for a company to obtain a company-owned life insurance policy, the following rules apply:
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The company must notify the employee of its intention to purchase the policy and obtain his written consent.
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Employees are allowed to refuse to participate in the policy and employers cannot take any action against them.
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Businesses cannot deduct certain policy-related expenses from taxable income unless the covered employee worked there during the 12 months prior to his or her death. Before 2006, employers could purchase policies that allowed death benefits to be collected long after a person’s employment ended.
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Companies must track and report the number of company-owned life insurance policies they hold to the IRS.
Frequently asked questions
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What is key person life insurance?
Key person life insurance, sometimes called key man life insurance, is one of two types of deceased farmer insurance available. A company may take this type of policy regarding key, high-level employees whose loss may cause financial difficulties for the company. This may be the case if the insured person is a founder of a company or brings a unique skill to the company. Insurance may help compensate for some of the company’s lost financial value in the event of the death of this employee. These policies may be term or permanent life insurance with the company itself usually listed as the beneficiary.
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Do family members of employees receive any death benefits under a company-owned policy?
It depends on the type of company-owned policy written. With split-dollar life insurance, the employer usually splits the death benefit with the employees’ family members. However, the split may not be equal 50/50. With a principal-person life insurance policy, the employer typically retains the full death benefit.
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Do employees have to pay for company-owned life insurance?
When the IRS created the Pension Protection Act in 2006, it allowed employees the right to refuse to pay for company-owned life insurance. With deceased farmers’ insurance, the employer pays the monthly premiums and has full control of the policy. If an employee chooses not to participate in the program, the employer is not permitted to take any action against the employee.
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What companies use dead peasant insurance?
Many companies have policies put in place before 2006 legislation requiring transparency about opening company-owned life insurance accounts. Companies with insurance for deceased farmers include Walmart, Dow Chemical, American Electric Power, Winn-Dixies and others.
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