Dead Peasants Insurance

dead souls

Corporate-owned life insurance (COLI), also known as dead peasant life insurance, or janitors insurance, is life insurance on employees’ lives that is owned by the employer, with benefits payable to the employer. When the employer is a bank, it is known as a bank owned life insurance (BOLI).

COLI was originally purchased on the lives of key employees and executives by a company to hedge against the financial cost of losing key employees to unexpected death, the risk of recruiting and training replacements of necessary or highly-trained personnel, or to fund corporate obligations to redeem stock upon the death of an owner. This use is commonly known as ‘key man'” or ‘key person’ insurance.

Primarily in the 1990s, some companies began aggressively insuring a broader base of employees, sometimes without the employees’ knowledge and consent. Additionally, the premiums for this insurance are leveraged and deducted, in essence creating a transaction with little or no economic substance – the company essentially put up none of their own money, and received minimal death benefits long term, but gathered significant interest deductions over time – the only ‘real’ value to the transaction. In 2006, the U.S. Congress and the Internal Revenue Service (IRS) set some guidelines and limits on this practice.

COLI is sometimes referred to as ‘dead peasant’ life insurance, by reference to the 1842 novel ‘Dead Souls’ by the Nikolai Gogol. Before the emancipation of the serfs in Russia in 1861, they were regarded as chattel, and inventoried as ‘souls.’ These ‘souls’ could be bought, sold and used as collateral for loans and mortgages. In the novel, the protagonist Chichikov travels Russia seeking to purchase ‘dead peasants,’ ‘souls’ who had been reported in a previous census but who had since died. In purchasing the ‘dead souls,’ he will relieve the previous owner of the tax burden, while accumulating a number for himself that will allow him to obtain loans with them as collateral.

The term entered popular usage in America journalistic coverage of some court cases involving COLI in the mid- to late-1990s, and more prominently via Michael Moore’s 2009 movie ‘Capitalism: A Love Story,’ which had a segment criticizing COLI. In the court record of the IRS lawsuit decided in 1999 against Winn-Dixie for use of COLI for tax avoidance, several memos written by the insurance brokerage firm handling the policies between Winn-Dixie and AIG had described the practice under the title of ‘Dead peasants.’

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