How Life Insurance Morphed Into a Corporate Finance Tool [Janitors Insurance and Sept. 11]

The Wall Street Journal ^ | Monday, December 30, 2002 | ELLEN E. SCHULTZ and THEO FRANCIS

[TroutStalker]

After the Sept. 11 terror attacks, some of the first life-insurance payouts went not to the victims' families, but to their employers.

Unknown to most people outside the insurance world, corporations now are among the largest beneficiaries of life insurance, collecting on policies they purchased on the lives of employees.

[wideawake]

Depends on who is writing the policy. She could theoretically give them the paperwork from my annual checkup the day after my physical and submit it to the company.

Someone would be willing to write a policy - it would just be a question of the size of the premium.

[bvw]

What's to stop a CFO from waltzing into the local ICUs, and hiring on the ward and then taking out 1 mill a pop (I believe some corp general life policies allow that without medical pre-testing). Those closest to death have a lot of wisdom to offer, you know.

[eeman]

"I wager that any study would demonstrate that people are much safer from foul play when they have their employer as a policy holder rather than a close family member."

An associate of mine (not a friend) who was seemingly normal took out a 500,000 life insurance policy on his wife and bludgeoned her to death that evening.

This dirtbag got off on an insanity plea (the first succsessful insanity defense for murder in Washington state for 20 years). His argument was that he suffered from depression (which is probably true), was under a lot of stress at the time, and seeing the movie "Titanic" pushed him over the edge to a state of "temporary insanity."

[lelio]

my wife could take out a $1,000,000 policy on me tomorrow without telling me. Is that just wrong?
Yes, it is. According to the article in order to buy insurance you have to show that the person is worth 'money' to you alive, or else people could go out there and start buying insurance on gang-bangers.
If an insurance company let your wife buy insurance on your life they owe it to you to tell you about it as you're affected by the insurance.

[bvw]

I understand that dividends will be exempted from corporate tax, and honestly I wish all corporate "income" would be exempt. Taxing fictionalities like corporations creates corruption -- corporations don't vote, don't serve time and don't get drafted. A corporation has ONLY one direct way to secure indemnity from nefarious tax schemes -- bribery. (And I have yet to see a corporation serve on a jury.)

[Restorer]

seeing the movie "Titanic" pushed him over the edge to a state of "temporary insanity."

Sounds perfectly logical to me.

Inquiring minds want to know:

Did he plead for mercy on the grounds that he had recently lost his wife?

Did he collect on the insurance policy?

[SBprone]

I've been subscribing to the Journal for years and this is exactly the kind of story they like to run. There is something grotesque about private companies exploiting an insurable interest in employees' lives for financial gain. The Journal isn't trying to blame corporations for being motivated by a financial incentive provided by the tax code. They are merely pointing out a bizzare consequence of tax policy that would surprise and disgust most people.

[Romulus]

About this subject last spring, I wrote to a friend as follows:

"The industry refers to it as Janitor's Insurance (though at least one Winn-Dixie executive has referred to it as "dead peasants" insurance). As I understand it, these are whole life policies, which represent an investment opportunity for the company. Is it ethical? Does it shock the conscience, or should it? I'm not sure. Because low-level people are more easily replaced, this is very different from key man insurance. Companies are competing for labor in a free market, at least in theory, so I don't think you can say that the premiums paid for the insurance somehow belong to the employee as the just fruits of his labor. I know all about corporate exploitation of little people, but I don't think that's necessarily what's going on here. OTOH is there an actuarial advantage to owning insurance on poor people? Do they die sooner, and if so, can this be associated with their lower income? (If so, you'd expect the life companies to adjust premiums - but maybe they can't do this, for regulatory and/or PR reasons.) This is where it gets ethically trickier, since by offering an inadequate health plan or encouraging unhealthy habits a company acquires - literally! - a vested interest in an employee's death. Over the long run, this can't be good. Though we have lots of low-level people in our company, I'd hesitate to recommend it - not only for ethical reasons, but because I perceive a liability risk. It should give anyone a deeply uneasy feeling to know that his company has a serious financial interest in his early death. This seems to create terrific conflicts of interest in the area of employee health and safety, and is bound to result in some very interesting labor litigation."

[wideawake]

Yes, it is. According to the article in order to buy insurance you have to show that the person is worth 'money' to you alive, or else people could go out there and start buying insurance on gang-bangers.

In theory they could, but in reality they can't.

No insurance company would be willing to take on the risk of insuring a gangbanger unless they could charge a cripplingly high premium. I could get an underwriter to insure G-Thang Daddy from the Cold Crush Posse, but he would charge me a premium of $30,000 a month for a $300,000 policy.

The market solves the problem before it gets started. Until the government steps in and says it's racist to charge such high premiums for G-Thang.

If an insurance company let your wife buy insurance on your life they owe it to you to tell you about it as you're affected by the insurance.

I'm completely unaffected by the insurance - I'll never benefit from it and I'm not paying any premiums for it. It only becomes important if my wife intends to kill me, in which case I have bigger problems than not knowing if I'm the subject of third-party insurance.

[wideawake]

That is an amazing story. Am I to presume that he collected the insurance money, or did the insurer successfully contest it?

[wideawake]

Fascinating analysis, Romulus. I think SBprone has a point: it shows how big government creates upsetting and seductive incentives for otherwise decent people.

The potential litgation from this could be massive - what happens if there is a plant explosion and it can arguably be ascribed to negligent maintenance? Or if the insurance death benefit continually exceeds the benefits that company health and pension funds pay out?

They are playing with legal fire.

[TroutStalker]

Blame the tax code - not the company. They're just using every tool the government allows to minimize theft through taxation and maximize shareholder value. -- wideawake

The Journal isn't trying to blame corporations for being motivated by a financial incentive provided by the tax code. They are merely pointing out a bizzare consequence of tax policy that would surprise and disgust most people. -- SBprone

Why we must have tax reform.

[TopQuark]

They are merely pointing out a bizzare consequence of tax policy that would surprise and disgust most people. That is how I read it as well. I sensed, in addition, a touch of "those d-mned greedy b-----ds" in the article, so appealing to the current sentiment. Such as when they describe a banker VP that was "appalled" by the described. The writer says in the next sentence that that person has left shortly thereafter, as if in response to that insurance practice. The statement is strong and calls for a balancing opinion but none provided; instead, the reader is left with a feeling "this is so appalling that even those involved are disgusted."

Nevertheless, it well may be that I was overly sensitive here. I am only glad if that is the case: I would prefer having been wrong myself rather than seeing the deterioration of The Journal.

Thanks for your note.

[eeman]

Here is a story from the Seattle Times archive that concisely summarizes this saga. At the risk of getting in trouble, I am posting the whole story as I am too lazy to learn how to link.

"Port Angeles doctor fails to get medical license restored"

by Jack Broom Seattle Times staff reporter. January 29, 1999.

A Port Angeles doctor who bludgeoned his wife to death has lost a bid to keep his medical license from being revoked.

Bruce Rowan, 34, acquitted last year in the murder by reason of insanity, had appealed a judge's decision to revoke Rowan's medical license on procedural grounds.

Rowan, who has been committed for psychiatric treatment, had asked instead that the license be indefinitely suspended, which would make it easier for him to eventually reapply to practice medicine.

But Health Law Judge Arthur DeBusschere this week upheld his ruling that Rowan had failed to respond in time when the Medical Quality Assurance Commission charged Rowan with unprofessional conduct in connection with his wife's death.

His order bars Rowan from seeking reinstatement for at least 10 years. Rowan's attorney, Kathryn Barron, said today she'll confer with Rowan about a possible legal challenge to the order. Barron said Rowan was not properly notified of the action revoking his license, and that could be the basis of an appeal.

A former emergency-room physician, Rowan was charged with first-degree murder in the March 1998 slaying of his wife, Deborah, who was beaten with an ax and bat.

Prosecutors contended he planned the slaying and then staged a car crash to make it look as if she died in a traffic accident so he could collect on her new $500,000 life-insurance policy.

But Rowan's defense lawyer said the doctor had suffered a major psychotic episode the night his wife was killed.

The most recent update to this story is that the psychiatrists at the state hospital where he is residing believe he is no longer insane and recommend he be released. He has been transferred to a step down facility to facilitate this goal.

We all have bitter experiences in life but I cannot imagine how the family of this poor woman feel. I try to imagine what I would do in their position. I think I would try to find a real life Soprano character to visit this guy once he is released. I personally liked this guy before this happened. It is like the old cliche' about the culprit being the last person you would suspect.

[eeman]

PS,I do not now if this guy succsessfully collected the insurance money.

[wideawake]

Quite a story.

As for your not disliking the guy before the event, don't be surprised - these kinds of people are generally very good at putting up a sociable and amicable exterior.

[lepton]

What's to stop a CFO from waltzing into the local ICUs, and hiring on the ward and then taking out 1 mill a pop

The insurance companies issuing the policies. The money doesn't just appear out of nowhere.

[lepton]

An associate of mine (not a friend) who was seemingly normal took out a 500,000 life insurance policy on his wife and bludgeoned her to death that evening.

Did he get paid? I'd dopubt it.

[groanup]

"What's to stop a CFO from waltzing into the local ICUs, and hiring on the ward and then taking out 1 mill a pop"

ICU patients are uninsurable. Companies have an insurable interest in their employees. The use of COLI (corporate owned life insurance) is simply a way for companies (the owners of the policies) to shelter taxes both by letting the cash value accumulate tax-deferred and by not surrendering the policies (taxable) but borrowing the cash value out (tax-free). Also the companies receive the death benefits. THE WHOLE SCHEME IS A WAY TO MAKE MONEY AND AVOID CONFISCATORY TAXES. IT HURTS NO ONE.

[Reeses]

I wonder how Congressmen would feel if the Executive Branch took out $10 million dollar life insurance policy on everyone in Congress, to help the American People recover from any tragic loss. You'd see a law passed against this practice in 10 minutes.