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janitor's insurnace
i'm ready for my close up mr demille
Damnit, I did it again. Why is it that it takes someone's interesting or provocative thought for me to get all wordy?

This comes out of esquemeauxpi's journal. He brought up the subject of corporate life insurance policies on its employees and the fact that 1) they can do it without the employee's knowledge, 2) they can maintain this policy even after the employee leaves the company, and 3) that the deceased's family receive no portion of the benefits. The common term for this type of insurance is "janitor's insurance" or "dead peasant's insurance".

My recent foray into Ayn Rand's Capitalism probably influenced my comment quite a bit, but the fundamental aspects of insurance and its practice seems very basic to me, so I dissented with the reaction of most of the commenters.

I first read about it in Moore's book as well. And I've heard it mentioned a time or two, but I really don't understand what the big deal is. I guess it may seem a little callous for an employer to view its employees as an asset, but in reality, this is exactly what an employee is. Companies have to fund benefits programs, pay wages, foot the bill of education and training, and provide government regulated work environments that meet a certain criteria of safety and health for their employees. At what levels an employer provides these things will determine its relative strength in attracting, developing, and maintaining a productive work force. It seems reasonable to me to insure one's assets and/or investments.

Insurance is nothing more than a sophisticated form of gambling. One party bets the other that something will or will not occur at or within a given time. Every time you pay your personal life insurance policy you are basically betting the holder of your policy that you will die between this payment and the next one. The policy holder, however, is willing to accept this risk, since, based largely on your age and sometimes medical exams, that will not likely happen for some time and they can take your payment and invest it, and grow capital beyond what they have agreed to pay you when you do kick off. I don't personally have a philosphical problem with two consenting parties willing to gamble on the outcome of some event, whether it be a football game or when a third party will shed their mortal coil. I don't see how the third party being aware of this practice affects anyone involved nor do I see any reason why anyone affiliated with the third party should be entitled to any proceeds gained from the endeavor. They were not involved with the financial risk.

That, anyway, is the underlying philosophy. Which I have no qualms with. The bigger picture, however, is whether people who already have disposable income, whether it be an individual or large corporations should be entitled to tax benefits on insurnace investment income. Basically, this is an advantage for the rich/middle-class AND the insurance companies because, what incentive do the rich have in taking out life insurance? Couldn't their money make them more money under conventional investments rather than in gambling on an insurance premium? And, if the rich aren't taking out life insurance, how much money is to be made off of the working-class, which, typically, is a shadier proposition for a life insurance company when comparing life expectancies and class. Naturally, the argument can be made that this very system is what allows life insurance companies to provide reasonable insurance premiums to everyone, by covering losses incurred in some places from gains made in another.

Hence the tax breaks for insurance investment income. It, basically serves two purposes - to prop up a particular sector of industry (insurance companies) and provide tax breaks for people who need it least (the rich and middle-class) - and begs the larger question: should the individual and corporate tax codes be used to interfere with the consensual, economic undertakings of people in a market economy?

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As much as I hate to admit it, I'm pretty well versed in life insurance laws in the US.

Companies can only insure employees for an amount up to what they forsee they will lose in the process of replacing the employee if s/he were to die. Also, once the employee is no longer employed, the insurable interest no longer exists, and the employer cannot continue coverage. If they do, and the insurer finds out the employer no longer has an insurable interest in the person's continued health, they can deny the claim, return all premiums collected from the date of termination of employment til the death of the former employee, and declare the contract for insurance null and void. If the company is found to have over-insured the employee, they can refund a portion of the premiums and only honor part of the claim.

Also, the insurable interest is usually limited to actual damages suffered if the person were to die. This is not including any life insurance policies the employee may have purchased through his employer (ie, if you have a million dollar policy through your employer, they can't buy a million dollar policy to cover what they'd have to pay there if you died).

This sort of thing wouldn't "prop up" the insurance industry if abused like that. Over-insuring is one of the biggest drains on the industry that there is.

So it's really more of a gamble than most of them are willing to take. Mostly policies are only taken out on Officers and Executives, those people being considered "vital" to the organization's continued existence. Occasionally key employees are insured as well.

Personally, I agree that it's not ethical to be able to take a policy out on someone and not have to tell them you have it. Also, the ethical implications of treating an employee like an asset are a grey area. Yes, it costs money to have to interview, hire and train a new employee to replace a deceased employee, but there is no such insurance to guard against that employee resigning or retiring.

If you're particularly interested, I can find a source on this. NAIC regulations read like Engrish stereo instructions, though. Most of it comes from my LOMA (Life Office Management Association) books.

Are you bored off your ass yet?

Not really. Although, it is probably more expertise than I am capable of fathoming. From what I understand, companies which have purchased COLI can borrow money against the policy, giving them operating capital and the interest payments can be deducted from their taxes. Also, the investment gains made by the policy are tax-free, eseentially, making it a tax-free investment. It seems to me that the companies are betting on your living rather than dying. Dying would only interrupt a steady stream of revenue and tax deductions, not to mention the loan being called-in.

I don't see why people have an ethical issue with life insurance policies being taken out on them without their knowledge? I mean, what do I care if someone gambles on whether I live or die? It has no affect on me whatsoever, there is no invasion of my privacy or individual rights? I guess I only view non-disclosure of information harmful if it is relevant to anything. It's not like the information is completely unattainable or a lie is being constructed, its simply the non-disclosure of reaonsbly available information which isn't relevant on the bearing of a person's life.

The only thing is, life insurance policies are a notoriously bad investment. Even WITH taxes, it would behoove them better to just stick the money in a normal savings account. Cash values are a fraction of the investment amount. I could have a $10,000 policy, pay over $6,000 into it, and it would only have a cash-out value of around $1,000.

So if companies ARE doing this, either they're getting a better deal on insurance than what is available to the public, or what we should really be outraged at is their inability to do basic accounting.

Um... this has nothing to do with life insurance, but I read your Waffle House piece in the southernwriters community and I really enjoyed it. :) Your writing style reminds me a lot of my friend Jay (http://www.rubbermice.com, check him out). You're both very observant of other human beings.

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