6 ms·

An Employee Dies, and the Company Collects the Insurance

48 points by jfc 12y ago

martin-adams 12y ago
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 http://www.insureme.com/health-insurance/hollywood-insurance
- eli 12y ago
  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.
rayiner 12y ago
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.
- tvladeck 12y ago
  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.
  - nick2021 12y ago
    I agree.. if the company is paying the premium why would it matter? Only thing I would be scared of is someone wanted to put a hit on me to get the payout :(
  - sp332 12y ago
    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.
    - deleted 12y ago
      [deleted]
    - scrumper 12y ago
      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.
  - dockd 12y ago
    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?
    - eli 12y ago
      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.
    - deleted 12y ago
      [deleted]
- SilasX 12y ago
  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).
- opendais 12y ago
  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.
  - rverghes 12y ago
    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.
    - opendais 12y ago
      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.
  - tptacek 12y ago
    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?
    - opendais 12y ago
      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.search_form?p_doc_type=NEWS_RELEASES&p_toc_level=0&p_keyvalue=&p_status=CURRENT https://www.osha.gov/pls/oshaweb/owasrch_news_releases.searc... You can regularly see companies being cited so "numerous" is reasonable.
- terminus 12y ago
  > 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.
gdilla 12y ago
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.
- eli 12y ago
  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.
  - gdilla 12y ago
    That makes sense. Everyone's a winner then.
personZ 12y ago
>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.
- cacainmycafe 12y ago
  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.
  - vacri 12y ago
    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.
  - nawitus 12y ago
    >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.
instaheat 12y ago
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.
- rblatz 12y ago
  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.
jpollock 12y ago
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.
6d0debc071 12y ago
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?
chiph 12y ago
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.
pyb 12y ago
"But critics say it is immoral for companies to profit from the death of employees, while employees themselves do not directly benefit."
cacainmycafe 12y ago
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!
- rqebmm 12y ago
  It's even mentioned by that name in the article!
pessimizer 12y ago
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.
- rqebmm 12y ago
  > 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.
  - ganeumann 12y ago
    Assets are things of value that are owned by the company. It is illegal in most countries to own human beings.
  - pessimizer 12y ago
    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
    - thedufer 12y ago
      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.
coldcode 12y ago
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.
jfc 12y ago
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-that-herbalife-will-fail-then-ackman-lobbying-to-bring-it-down.html 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.
ganeumann 12y ago
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.
- thedufer 12y ago
  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?
  - ganeumann 12y ago
    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.
jeffdavis 12y ago
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.
deleted 12y ago
[deleted]
stefan_kendall 12y ago
I profit when I break my own leg and use my health insurance to go to the hospital. At least, the money I pay is far less than the value I get out of it. That doesn't mean I intentionally try to break my leg, or that it's unreasonable for me to insure myself against my leg breaking.

48 points by jfc 12y ago

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 http://www.insureme.com/health-insurance/hollywood-insurance

eli 12y ago
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.

rayiner 12y ago

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.

tvladeck 12y ago
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.
- nick2021 12y ago
  I agree.. if the company is paying the premium why would it matter? Only thing I would be scared of is someone wanted to put a hit on me to get the payout :(
- sp332 12y ago
  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.
  - deleted 12y ago
    [deleted]
  - scrumper 12y ago
    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.
- dockd 12y ago
  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?
  - eli 12y ago
    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.
  - deleted 12y ago
    [deleted]
SilasX 12y ago
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).
opendais 12y ago
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.
- rverghes 12y ago
  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.
  - opendais 12y ago
    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.
- tptacek 12y ago
  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?
  - opendais 12y ago
    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.search_form?p_doc_type=NEWS_RELEASES&p_toc_level=0&p_keyvalue=&p_status=CURRENT https://www.osha.gov/pls/oshaweb/owasrch_news_releases.searc... You can regularly see companies being cited so "numerous" is reasonable.
terminus 12y ago
> 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.

gdilla 12y ago

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.

eli 12y ago
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.
- gdilla 12y ago
  That makes sense. Everyone's a winner then.

personZ 12y ago

>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.

cacainmycafe 12y ago
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.
- vacri 12y ago
  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.
- nawitus 12y ago
  >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.

instaheat 12y ago

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.

rblatz 12y ago
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.

jpollock 12y ago

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.

6d0debc071 12y ago

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?

chiph 12y ago

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.

pyb 12y ago

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

cacainmycafe 12y ago

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!

rqebmm 12y ago
It's even mentioned by that name in the article!

pessimizer 12y ago

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.

rqebmm 12y ago
> 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.
- ganeumann 12y ago
  Assets are things of value that are owned by the company. It is illegal in most countries to own human beings.
- pessimizer 12y ago
  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
  - thedufer 12y ago
    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.

coldcode 12y ago

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.

jfc 12y ago

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-that-herbalife-will-fail-then-ackman-lobbying-to-bring-it-down.html 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.

ganeumann 12y ago

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.

thedufer 12y ago
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?
- ganeumann 12y ago
  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.

jeffdavis 12y ago

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.

deleted 12y ago

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stefan_kendall 12y ago

I profit when I break my own leg and use my health insurance to go to the hospital. At least, the money I pay is far less than the value I get out of it. That doesn't mean I intentionally try to break my leg, or that it's unreasonable for me to insure myself against my leg breaking.