COLIs revisted

Fritz Schranck writes about taxation terminology, and points to this article at More Than Zero about "dead peasant" insurance, also known as Corporate Owned Life Insurance, or COLIs. He talks about their tax benefits for corporations, then tackles the "insurable interest" question.

State laws often require an "insurable interest" in the individual covered by the policy. I can't just look through the comments on this site and buy life insurance on the commenters. Likewise, a corporation can't just buy life insurance on anybody's life. Since the corporation has an interest in its employees well-being, the law has allowed companies to insure employees. In fact, banks often require that key employees have substantial life insurance (with the bank as loss payee) as part of a loan agreement.

First of all, companies need their employees alive, for obvious reasons. In fact, the law governing "insurable interest" actually recognizes that interest in allowing these transactions. Second, companies benefit from "COLI" or "BOLI" regardless of how fast or slow their employees die. The scope of a company's COLI program makes almost no difference to the company's interest in the employees well-being.

I dispute the notion that an employer has an insurable interest in all its employees. For one thing, as this Chron story says, COLIs continue to cover ex-employees. How can Three Initial Corporation have an insurable interest in someone who's left for greener pastures?

Further, most employees make zero direct difference to a company's bottom line. According to the now-archived Chron article I initially referenced, Wal-Mart had COLIs on employees who worked in the distribution center and the automotive center. Camelot Music had COLIs on part-time minimum wage workers. There's no way that the departure of these employees, whether from the company or from this vale of tears, had any effect on its day-to-day operations, let alone its stock price.

I don't have any problem accepting that companies have an insurable interest in top executives, inventers, critical people like that. But ordinary wage slaves? C'mon.

MTZ has one more nit to pick:

Finally, if this is so outrageous, why don't we mind that the government has a stake in rich people dying? In that case the state's interest is crystal clear - the faster rich folks die, the more government benefits through the estate tax. The government suffers no identifiable loss to offset, unlike those who must make due without an income producer.

It's a valid point. I think the main difference is that we've always known about the estate tax, and besides, very few of us are affected by it. COLIs have been a well-kept secret. I think that offends people nearly as much as the idea that some executive will prosper from Joe Sixpack's untimely demise. I can't help but feel that the companies themselves realize that there's something squirrely about COLIs, which is why their "revelation" comes as a bit of a shock to us.

BTW, to answer MTZ's question about why these stories suddenly started appearing, I daresay it's because of the lawsuit over COLIs in Texas, where state law requires insurable interest. I know it's hard to believe that Texas is more proletariat-friendly than Oregon on any issue, but there you go.

Posted by Charles Kuffner on May 03, 2002 to Bidness