An Employee Dies, and the Company Collects the Insurance | Hacker News Reader

An Employee Dies, and the Company Collects the Insurance

dealbook.nytimes.com

48 pointsjfc50 comments

Life insurance is just a tax-advantaged investment vehicle. The companies aren't "profiting from your death." They pay the premiums, those premiums get invested, and the company gets the proceeds when you die. It doesn't preclude you from having your own life insurance. Your only involvement is as the hook that enables the tax advantage.

Like you, I don't understand the ethical dilemma here. It's not like the company is taking money that would otherwise go to the family, or is misrepresenting the purpose of their taking out the policy. What's the big deal? Perhaps there is an angle I'm missing.

The main problem is that the company stands to gain if the death rate among their employees is higher than average, so they pay fewer premiums to get to the payoff. That might incentivize them to reduce health benefits for employees.

But the actuaries at the insurance company price that added risk into the premiums.

I can see there being a big difference in death rates between, say, an Alaskan crab fishing operation and a suburban CPA firm, but 'job' is one of the questions that's asked by life insurers so that's already accounted for.

How would a white collar office employer legally engineer a higher death rate for their people than an equivalent company down the street? Providing only fries and burgers in the canteen? Relocating to an office block near a chemical waste plant? Nothing really seems feasible or effective enough to make a measurable difference to the performance of the investment scheme. The added investment return bought by shortening the lives of some percentage of staff by a few years would be just noise compared to the tax savings this vehicle provides.

The ethical dilemma is whether you should be able to buy insurance against events where you have no direct stake.

Should my employer be insured against my death? What about customers deaths? What about _potential_ customers deaths? What about events other than death?

Or to put it another way, in what way is insurance different than gambling?

In some or perhaps most of these cases this is probably more about managing finances than anything else, but a company has at least a theoretical direct stake in its employees. At the risk of sounding blunt, they incur the cost of having to replace them and the lost productivity in the mean time. If the employee is, say, the lead developer at a startup then having insurance on them might be the difference between the company being able to hire a replacement or having to fold.

I agree, and want to do "Captain Hindsight" here: if you wanted to get a payout on event X, you should have bought a policy on X (not complain about the person who did).

The problem with this is the fact it further incentives them to do the bare minimum for OSHA & work safety in general. Numerous employers do the minimum already because it costs them money.

If the employer is responsible for providing safety equipment, they shouldn't receive a payout from a failure of said safety equipment.

I disagree. If the death is in any way related to work, they will get sued or fined and lose a lot more money that way.

The company is just playing the odds. If they have thousands of employees, some of them will die naturally every year. The entire scheme is just to gain the tax advantages of life insurance from those natural deaths.

Actually, no. They have different insurance to cover that. That would be General Liability, Worker Comp, etc.

Even if it works the way you suggest, it is just a wealth transfer from the Federal Government to Life Insurance. That is almost as bad since it means its ultimately a transfer of tax burden from Capital to Labor.

Did I miss something in this article that presented evidence that companies were neglecting work safety so as to earn returns from life insurance policies on the top 35% of earners in companies?

It wasn't in response to the OP, it was in response to the parent comment.

A financial incentive [payout] from employee deaths is the opposite incentive you'd want for any business that is paying for any kind of safety equipment. You'd want an incentive for the opposite behavior which no one really offers.

https://www.osha.gov/pls/oshaweb/owasrch_news_releases.searc...

You can regularly see companies being cited so "numerous" is reasonable.

The OSHA violations you're citing have nothing to do with life insurance. Has anyone reported on a company that got cited for OSHA violations and had life insurance policies on their employees? Also: wouldn't this be a pretty straightforward basis for the insurers not to pay out claims?

I find this argument approximately as credible as the one that says that, having taken out a life insurance policy on employees, the company now has an incentive to have those employees murdered.

And again: aren't they disallowed from taking out policies on anyone outside the top 35% best paid employees? What are the OSHA concerns for office workers?

Okay let me try explaining this in a different way since you seem to be materially misrepresenting what I’m saying:

1) A significant number of employers pay the bare minimum for worker safety [hence OSHA violations being relevant, such companies clearly exist and some miscalculate. I doubt these people are malicious, merely misjudged the minimum]

2) Life insurance policies being paid out on employees creates further incentive to do the bare minimum to comply with OSHA. In addition to not having to spend additional $$s on safety training & equipment, you now also have an investment vehicle to reinforce this behavior.

3) Many companies have more than 65% of their workforce [construction for instance] doing work in situations that require safety training & equipment. The limitation is based on a payroll %.

I'm confused why this requires spelling out this verbosely, but there it is.

Notice how at no point am I saying any of the stuff you are claiming I am?

I think the misunderstanding is that you're trying to say "hey, this bad thing is possible" but you're wording it in such a way that it sounds like you're saying "hey, this bad thing is happening" and tptacek is taking offense to that claim not coming with any evidence.

I was talking about incentives and I provided evidence for the one claim I made [that numerous companies already do the bare minimum].

So I'm just confused how he could read it that way. But alright, I guess it is on me to be clearer then. :P

> Your only involvement is as the hook that enables the tax advantage.

Agreed. I think what a lot of people are uncomfortable about is that an employee's life is now a "tax-advantaged investment vehicle" for a company.

Anybody other than me commoditizing my life (and death) seems to lack human dignity.

Ordinarily, one wouldn't buy life insurance in aggregate as an investment. The insurance company has done the calculations, and it would be a net loss to the buyer. (The buyer is willing to take that loss for security, which is just fine.)

The only reason it's happening here is that the government gives tax breaks, and those tax breaks are higher than the insurance companies' profit margins, so it actually turns out to be a net gain for both the seller and buyer of life insurance.

Surely, this is the result of lobbying by life insurance companies. It doesn't make any sense on its own.

Similarly, it makes no sense for companies to buy their employees health insurance. The reason it started is because of the tax breaks which make it cheaper for the company to buy you health insurance than for you to buy it on your own. (Aside: I don't believe for a minute that it somehow results in some magical savings from group bargaining.) Now that's a big part of the mess we call our healthcare system.

Direct your criticism to these special carve-out laws that make a mess of everything. Don't direct it towards the companies that rationally take a tax break that is already on the table.

I'm not that concerned about the practice until companies start killing employees in order to collect sooner. Unless the policies actually affect the individuals thus covered, al they really amount to is a tax avoidance scheme.

Naturally the film industry would be very keen to insure against their cast[1], but I would feel a little uncomfortable if my employer were better off if I had an 'unforeseen accident'.

[1] http://www.insureme.com/health-insurance/hollywood-insurance

If it makes you feel any better, the insurance company is much better off if you live a long life, and has a strong incentive to investigate suspicious accidents.

Had no idea this was going on. I'm aware of life insurance offered through the company for myself at very low premiums (and I guess google and the like are no premiums for whatever-x your salary). First time I've heard of a completely separate policy with the company as beneficiary. If the terms last even until you leave the company, it's a no brainer for the employer. Everyone dies.

Keep in mind the insurance companies have carefully calculated the premiums so that, on average, the company pays more in premiums than it gets in payouts. I think it's more about financial planning and tax avoidance.

That makes sense. Everyone's a winner then.

I get that the companies here are not trying to off employees and collect.

It does, however, sort of remind me of the Herbalife "investigations", where a hedge fund bet $1 billion that Herbalife would fail and then began lobbying politicians to bring it down. You look at the lengths these guys went to and consider the potential impact of their efforts, and it's unsettling to say the least - http://www.nytimes.com/2014/03/10/business/staking-1-billion...

For me, it calls into question what behaviors are incentivized by allowing people to seek any sort of financial benefit from people/companies in which they have no real property interest (for lack of a better term). I don't think this is purely a financial/tax inquiry; it does seem to have some societal ramifications that ought to be considered as well.

Here's my attempt at running the numbers:

Scenario one: Company takes out an insurance policy for $1,000,000 on an employee. The expected remaining life of the employee is 20 years. The expected return on investment is 5%. The insurance company prices the contract so they make 10% of the returns. The company pays $32,000 per year for 20 years, then gets the $1,000,000 payout.

In the insurance policy scenario, the company gets $1,000,000, with no taxes owed, a gain of $360,000.

Scenario two: The company invests this $640,000 ($32,000/year * 20 years) on its own on the same schedule and with the same expected return on investment. They earn approx. $1,111,000 and owe capital gains tax on the $471,000 gain, which at a rate of 15% is $71,000, for a net gain of $400,000.

Scenario two: investing the money themselves and paying cap gains, makes more sense than scenario one: buying insurance. Unless the insurance company is taking less than a 7% vig.

I'm not saying your math is wrong, but I'm confused as to how the breakeven can be a 7% cut when the capital gains rate is 15%. Can you explain why my intuition is wrong here?

Because it's only 15% of the gain, whereas both investment gains and customer payments are revenue to the insurance company and I've assumed the insurance company needs to keep some percentage of their revenue to pay overhead expenses, marketing, commissions, etc.

Dead Peasants Insurance. The name says it all really. Banned in most countries, for good reason.

Edit: The downvotes are interesting. People don't being reminded it is banned for good reason, or object to the well-known industry-wide perjorative name for the said insurance? Wikipedia covers the reason for the name well enough - look it up!

It's even mentioned by that name in the article!

Insurance is only an investment if it's used to hedge risk to some other asset of value. Employees aren't your assets, unless you're participating in indentured servitude. This is just gambling at best, hiding money at worst.

I get insuring your movie against the star dying. If someone wants to start a business insuring the internal projects of companies against people crucial to them either quitting or dying, that's fine with me. But with no asset at risk, there's no difference between your company buying life insurance on you and me buying life insurance on you.

Of course, CDSs are still legal to buy against companies who don't owe you anything, so I should really just give up the idea that financial regulation has an obligation to society in general rather than just in setting up a fair playing field between speculators.

> Employees aren't your assets, unless you're participating in indentured servitude.

Employees are most assuredly assets in that they provide value to the company.

Assets are things of value that are owned by the company. It is illegal in most countries to own human beings.

Your employee's life does not provide value to the company, their work does, and they can end that work at any time that they (or you, in most states) choose. You do not own your employees, or their future labor.

Being allowed to take out insurance on your employee's life makes about as much sense as being able to take out insurance on a hotel that you're renting a room in.

edit: clarity

How is a company to insure against a disaster wiping out an entire branch's worth of employees? That's certainly a low probability event, but many companies with single-digit locations would be in big trouble if they lost such a huge proportion of their workforce at once, which is pretty unlikely to happen naturally.

I've also seen this done with founders where the policy is used to buy out a founder's estate, as well as being used to cover the business risk presented by that founder's (or senior staff member's) death.

If the firm also took out a policy for the same amount and under the same conditions, paid for it themselves, but named a beneficiary of my choice, I'd be OK with this practice. Sure it doubles their premium costs (absent a quantity discount), but in my mind it would resolve any ethical issues since my heirs would also receive a benefit from my demise.

Am I the only one who thought the obvious thing to do if the company wanted to make this problem go away is to give the employee's family a reasonably cut?

"But critics say it is immoral for companies to profit from the death of employees, while employees themselves do not directly benefit."

>But absent meaningful regulation around the practice, it grew unchecked, and soon companies were taking out policies on many poorly paid employees like janitors, then reaping millions in profit when they died.

Most of the article is about Universal Life products, which is a product that is generally considered an enormous scam (it is a really poor investment vehicle), however this part really stood out.

Anyone planning on making money through insurance needs to understand that the house odds are against you, at least unless you have insider knowledge or are hiring hit men. Insurance companies are very very smart, and you won't profit by trying to play the odds against them, especially and most certainly in the aggregate.

So you come to the reality that this is wholly a tax avoidance scheme (sometimes legal, sometimes not). Not really about profiting from death, or usurping someone's great insurance payout, but simply hiding money away for some period of time.

This is a tax code discussion that has perilously little to do with life or mortality. Just taxes and ways around them.

Yeah, morality has nothing to do with anything. Say, if all of your neighbours bought insurance on your property, and the one day it collapsed, then there would be nothing immoral about that, but I bet you would not feel to great when they waved their piles of sweaty cash in your face over the rubble of your home.

Now swap home for dead relative.

See?

Life is not black and white, but, it seems, is certainly good for payoff or two.

Giving your neighbours a solid incentive to see your house collapse is immoral. Their lives are not affected if your house is destroyed, but they gain financially. Cue shenanigans.

>Say, if all of your neighbours bought insurance on your property, and the one day it collapsed, then there would be nothing immoral about that

I agree, if the neighbours had nothing to do with the collapse.

I can even think of situations where it would make sense to take out insurance on your neighbors home. For example, if you observe that your neighbors are hoarders, you might try to get insurance on their home in anticipation of the home's eventual condemning (which would wreck your homes value through geographical association).

The only problem there is that I suspect that the insurance company would not be particularly keen on that.

Yeah, that's why you generally need an Insurable Interest in someone to buy life insurance on them: http://en.wikipedia.org/wiki/Insurable_interest

>This is a tax code discussion that has perilously little to do with life or mortality. Just taxes and ways around them..

I'm not sure that this is just about taxes. Walmart, for example, made headlines for taking what the industry affectionately calls "dead peasants insurance" on many workers. They realized that low wage workers, unlikely to be able to afford routine doctor's appointments, maintain health and dental insurance, etc. would have a lower average age of death than other workers even if they were currently in good health and easily insurable. Walmart knew answers to questions the insurance companies weren't asking, and made this bet.

As morbid as it sounds, this is nothing more than a numbers game, like the stock market or daily fantasy sports. Better information equals better results. Smart companies only do this when they believe they have an edge (though if they are worried about PR, they won't do it at all).

Walmart's case was entirely an elaborate tax dodge. They had no inside information (insurance companies know far more about the probable lifespan of Walmart's employees than Walmart does), and the scheme was entirely predicated on avoiding taxes at every level.

Pay $75,000 per employee over the term of the policy to insure them, 100% of that being written off. Get paid out $60,000 per employee, 100% of that payout being tax free. In Walmart's case the insurer even loaned Walmart the entire cost of the policies, allowing Walmart to then write off the interest, never pay a penny until they had to close out the policy and pay out the difference.

Insurance companies are not in the business of losing money (they actually make a tonne of money, and are one of the most reliably profitable businesses operating), and they have a much better edge than Walmart or any other employer does.

Smart companies only do this when they believe they have an edge

And insurance companies only engage in clients or organizations when they know they have an edge -- a large part of the very sophisticated science of underwriting is ensuring that the insurance is highly probable to benefit the insurer, outside of very long odds. Any scheme that assumes otherwise has to involve egregious criminality (such as others are speculating throughout this thread, as if employers are then offing their employees, the dumb insurance companies none the wiser).

They aren't that smart, some little old ladies in my town made a couple of million dollars by buying multiple life insurance policies on bums, then running them over. They apparently got caught by cops for the hit-and-run, because nobody at the insurance companies even noticed what should have been an improbably suspicious pattern of policies and payouts.

I'm on other side of this. While I understand the need to keep pension plans afloat, when my mother passed away in 2011 the value of her pension left to my brother and I was ~$60,000. This was split between the two of us.

While no small sum, the mortgage was not paid off and I have been paying it since. I have no idea if HP took out an insurance policy on her, but if they did it was most certainly WAY MORE than $60,000.

This shouldn't be a vehicle for profit in my opinion. Unfortunately, she only had an accidental death policy. So if her corporation had a general life insurance policy in the $400-500k range - as her heirs, we should be entitled to some of that money.

Yes, we as consumers/employees have to take responsibility for our choices. So some might argue it was her fault she wasn't covered well. I would disagree. There are a lot of companies that aren't honest about this practice. So, if the company has you well covered, if they are a good company, shouldn't they extend you the same courtesy and offer to let you buy in to the plan?

The point being, why are they only looking after their best interests? It's bullshit to say they are just keeping their pension plans afloat because of the payoff amounts.

There is an ethical dilemma because a lot of companies hide what they are doing. That and the certain return when the employee dies.

It should not be an investment vehicle, period. It is profiting from death. Of course you can have your own life insurance. Just because someone is my employer, shouldn't give them any right to take out insurance on me.

Not to be harsh, but why would HP owe you any of that money? This is a legal way for them to avoid taxes, yes it sucks that your mother died, but HP payed the premiums, they did not take them from your mom, and they didn't lead her to believe the insurance would payout to her heirs, and they didn't prevent her from taking out an insurance policy for herself. You have no claim or right to that insurance money.

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