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October 06, 2009


Lawrence Kramer

Well, the ABC story would be disturbing if it were true.

As anyone who actually knows enough about janitor COLI to write (or make a movie) about it should know, the companies that bought these policies were betting that their employees would live, not that they would die. The policies provided tax benefits that grew exponentially as the employees aged. Each dead employee was one fewer tree in the tax-avoidance orchard. (All of the "gains" from early deaths were offset by premium adjustments intended to insulate both the buyer and the insurance company from any interest in the mortality experience in the pool.)

Scott Paeth

Well, there are more ethical issues than just if they were "betting" on him living or dying. The underlying moral question is whether the insurance company should be the beneficiary of a life insurance policy taken out in the name of its employee, without hte employees knowledge, and with no benefit to the employee. It really doesn't make a difference, it seems to me, whether the company was expecting the employee to live for a long time or not. The basic moral question remains.

Lawrence Kramer

Why do you say that "the underlying moral question is whether the insurance company should be the beneficiary of a life insurance policy taken out in the name of its employee, without hte employees knowledge, and with no benefit to the employee?" If the employer got no benefit from employees' death, where is the ethical issue? Where's the harm for there to be a foul?

Scott Paeth

The question you raise has to do with agency and consent. The employer gets no benefit from the employees death, but neither does the employee or his/her heirs. Meanwhile, the employer DOES get a benefit from the life insurance policy, about which the employee doesnt know, and from which the employee does not benefit, and to which the employee does not consent. So the question is, should the employer gain benefits from the mere presence of the employee on the payroll, to which the employee does not consent and from which the employee does not benefit.

Its not clear to me that the employer even has the right to do things that are transparently beneficial to the employee without the employees consent, let alone things that dont benefit the employee.

My guess is that, if you explained the whole thing to your employees, with full transparency, most employees would not consent to having these policies taken out on them, from which they do not benefit. And its for this reason that the employers dont tell the employees. If you actually offered some benefit to the employees, they might consent. And, to be clear, as youve stated well, the employer does in fact accrue a benefit from the policy in the form of a tax break.

But this is all good food for thought, and I think I now have a paper topic for next falls Vincentian Business Ethics conference!

Lawrence Kramer

Scott -

If the government gave employers a tax credit for hiring new employees, would the employer really have a moral obligation to tell the employer that he was being hired for the tax credit or give him an identifiable piece of the credit?

There is no "agency" issue as the employee is not being committed to anything, and no "consent" issue because the plan has no effect on the employee. It is exactly the same thing as a tax credit for hiring the guy. There just is no there there.

If you can really come to grips with the fact that there WAS NO INSURANCE in any material meaning of the term, you will understand that you are grasping at ethical phantoms.

Meanwhile, your view of tax benefits is also naive. Most employers compete for customers and employees. What they pay in taxes is simply part of the budget. The idea that all tax savings somehow disappear into the owners' maw, and are not redeployed to enhance the company's competitive advantages, including paying more and/or charging less, is just plain wrong.

How employees would respond to having this thing explained to them depends on whether they understood the explanation. Experience suggests that they would not understand it. Does that mean its wrong to try to strengthen the company they work for by buying the policies?

Scott Paeth


You and I clearly have a difference of opinion on the implications of these kinds of policies.

There is a difference between offering a tax credit to an employer for hiring new employees and taking advantage of provisions in the tax code that allow you to get a tax break from holding these life insurance policies. Even if the end result were the same, on a dollar-per-dollar basis, how you get there is not irrelevant.

A couple of questions occur to me at this point:

1) What was the original intention of the tax code provision that these employers are taking advantage of?
2) If it was simply to give a tax break to employers for taking out life insurance policies on their employees, of which the employees werent the beneficiaries, that seems awfully cumbersome. Why not just offer the direct tax break, as you suggest?
3) If these insurance policies existed just for the sake of the tax breaks, why not make the employees beneficiaries, thus offering them a benefit in exchange for the tax break?
4) Furthermore, why not make the whole process transparent from the get go, telling the employees about the policies? As I suggested earlier, my guess is that, absent a benefit, the employees wouldnt consent.
5) In any event, why not seek the employees consent? Why do the whole thing without the employees knowledge?
6) If this is in some way preferable as a means of giving companies tax breaks, how is it so? Why does it work better as a means of giving companies tax breaks?
7) Furthermore, why do companies deserve tax breaks for taking out this kind of insurance in the first place?
8) If, as your hypothetical suggests, the goal of the tax break is to increase employment, Id like to know if in fact companies increase employment as a result of these tax breaks, or simply take out policies on existing employees?
9) Presumably the difference between dead peasant policies and a direct tax-break for employment is that the latter is intended to be a direct stimulus to the economy, by virtue of encouraging the hiring of employees. If thats the case, what incentives do dead peasant policies give employers?

As I say, you clearly see this differently than I do. But my suspicion of these policies is rooted in these kinds of questions.


Dave Dulebohn

DEAD PEASANT PROFITS: I see MBA's and actuarial consultants analyzing downloads of confidential employee health and lifestyle data supplied by the human resource departments of their multinational employers/clients in order to identify employees with high mortality propensities. Life insurance policies are purchased on these higher-risk employees. Such a program enables these companies to turn personnel departments from cost centers into profit centers. Taxes are secondary to profits.

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Scott Paeth teaches Religious Studies at DePaul University