This gives a new meaning to
emplyee benefit. In this case though,
employees don't get any benefit. Corporate-owned life insurance, C.O.L.I., is a type of
insurance a
company takes out for it's
employees. When, not if, in most cases, the employee
kicks the bucket, the company that holds the
policy on the person gets to make a claim for the
death benefit. This might end up being anywhere from $30,ooo to $US 5 million. And the employee
gets nothing most of the time.
How did this come about? I don't know the date exactly, but companies at one point decided that executives were very valuable to a company's wellbeing and hence, decided if they should lose an executive, they should get money for it, since the company might suffer management problems. This is called insurable interest. It could be defined as having a significant financial or emotional stake in a person. Then, in the 1980's, insurance companies lobbied state regulatory bodies to let companies buy insurance for all employees.
Since then, many companies have started buying "janitors insurance" as it is known in the industry. These policies will cover employees even when they leave the company, whether it is for retirement or any other reason. So you could work for a company, like Trans World Entertainment Corp.'s subsidiary Camelot Music, and quit and die 40 years later and they would get money for your death. Just them, not you or your spouse or estate or anyone else. This is the somewhat infuriating part, IMHO. The company doesn't have to give you anything.
Until 1996, another benefit for a COLI plan holder, was a tax deduction they could take. The companies were allowed to borrow cash against the policies. The interest that these companies paid on the loan could be written down as a tax deduction. Then the IRS said that these deductions can't be allowed because the plans aren't really justified as legitimate business practice. Since 1996, the IRS has started pursuing companies that use these plans for the tax deduction. Currently the number of companies under investigation for the tactic is around 90, to the tune of US$6 billion.
Another benefit on the balance sheet is that the company has the tax deferred gain from the investment. The money invested in the policy grows over time, and they can use this growth on the balance sheet to boost figures. Sounds a little tricky to me, but then, I don't work at Arthur Andersen, so I don't know all the ins and outs of accounting chicanery.
A number of companies that buy these plans say that they use the money for employee benefits. Sure they do. Actually I can't say what they do, but there is no regulation of what they do with the money, so it could be used for anything. In some cases it is used for executive compensation or to pay for non-business related bills.
Why do the employees take part in the plan? They don't even know about it. In most states the company can take out the policy to include everyone hired between _date_ and _date_ and the employee doesn't sign a thing. Sometimes, if the state requires employee knowledge of the policy, what the company does is offer the employee the opportunity to participate in an insurance plan that will give them $5,ooo for nothing really. The employee has no idea the company stands to make a huge amount more than that, even when that employee no longer works there. Just a little deceptive, if you ask me. It will depend on state laws whether or not the company has to reveal the existence of such a plan to an employee and even then, they don't have to tell what it is worth. Even if you know about a plan, you can't get anything out of it anyway.
Some courts have said that the plans aren't appropriate at all, such as in the case of Winn-Dixie, a supermarket chain in the southeast U.S. Since supermarkets have such high turnover and a lot of time don't provide much in the way of benefits, especially to retirees, there is no employee benefit that the money from the policy will go to, so the plan isn't legitimate.
How does a company know when a former employee dies? The Social Security Administration keeps tabs of everyone that dies and apparently makes a database available. So the companies do a periodic sweep of the database and then collect their checks
There is currently legislation in Congress to force some disclosure of these polices to employees of companies that use such plans. But it still won't give the employee's relative any money in the event of the employee's death.
Information used in this w-u came from WSJ.
April 19,2002 pg A1 When a Worker Dies, Should the Company Profit?
April 24,2002 pg C1 Why are Workers in Dark?