Thursday, June 26, 2014

Does Your Employer Have Life Insurance on You?

Chief executives are always going on about how employees are their companies’ most valuable assets. They say it even as wages stagnate and executive pay skyrockets. They say it amid layoffs and as non-executive jobs are shifted overseas along with company profits.
And they say it even though it is wrong in a technical, yet important way. For all the talk about what valuable assets employees are, employees do not show up as assets on the company’s balance sheet, for good reason. Because the company does not and cannot own its employees, they are not and cannot be assets of the company.
Yet your employer can put a value on your head.

The NY Times’s David Gelles wrote recently about banks and other companies that buy life insurance on their employees, naming the company as beneficiary. In the process, the company reaps tax-free windfalls:  The company-paid premiums are tax free; the investment returns on the policies are tax free; and the death benefits eventually received by the company, sometimes decades after employees have left the company or retired, are also tax free. To sum up: By purchasing a financial product (life insurance) the company has turned you (your life and your death) into an income generating asset  for the company, and a tax free one  at that.

It’s not illegal, but it’s dubious in the extreme.

One thing is sure: COLI is popular. A federal law from 2006 says that companies can insure only the highest paid 35 percent of employees, who must give their consent. That law slowed the practice, which was growing unchecked before, but companies still go beyond insuring key executives whose deaths might cause economic disruption.
About one third of the largest 1,000 corporations have COLI policies and an estimated $1 billion worth of new policies are put in place every year. As much as 20 percent of all new life insurance is taken out by companies on their employees.

What do the employees get? Banks and companies say the earnings from the policies are used to cover long term health care, pension obligations and deferred compensation. But in many cases they can use the tax free-gains however they want.

Banks, for instance, max out on life insurance for employees because the policies can be redeemed for cash on a moment’s notice, if needed, and are thus counted by regulators as top quality bank capital. Non-bank corporations don’t have to report their insurance holdings so there’s no reliable way to track who is buying the insurance or how it’s used.
At the very least, there needs to be better disclosure; after all, the public subsidizes COLI through generous tax breaks on the policies and so deserves to know what’s going on.

More also needs to be done to thwart the potential for unjust corporate enrichment. The law requires employees to consent to an employer buying life insurance on his or her life. But why doesn’t that consent come with strings attached? Say, that investment profits from the policies are split with employees, and death benefits shared with the employees’ families?

That arrangement would still have a queasy feel to it, but at least employees would be getting some direct benefits, rather than simply serving — alive and dead — as insurable assets of corporate owners.

(This article is excerpt from a NY Times article entitled "What Are You Really Worth to Your Employer - Teresa Tritch).


No comments:

Post a Comment