Dead Peasant Insurance Policies

Dead peasant insurance, also known as corporate-owned life insurance, is a type of life insurance that employers purchase to cover their employees. Companies typically use these policies to reduce their tax liability or create an additional source of revenue that can be used to fund operations. Although dead peasant insurance is legal, employers are subject to strict regulations when purchasing this type of coverage.

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Types of Dead Peasant Insurance

Split-Dollar Life Insurance

Under a split-dollar life insurance policy, an employer and employee agree to share the costs and benefits of a life insurance policy. The arrangement is beneficial for employees because they don't have to pay the whole premium themselves, making life insurance more affordable. Split-dollar life insurance also gives employers more flexibility when determining how to reward key employees.

Key Person Life Insurance

Key person life insurance helps protect companies against financial losses associated with the death of a key staff member. A key employee is defined as someone who has the knowledge and skills needed to contribute "significantly" to a company's income. The employer typically owns the policy and pays the full premium; as a result, it's the employer who benefits financially from a covered individual's death.

What Companies Have Dead Peasant Insurance?

Dead peasant insurance isn't as common today as it was in the past due to regulatory changes. Under the Pension Protection Act enacted in 2006, it's illegal for companies to take out life insurance policies on their employees without the employees' consent. Consent must be obtained in writing from each employee who will be covered under this type of policy. 

If an employee refuses consent, the employer isn't allowed to fire the employee or take any other adverse action based on the refusal. Even if all employees consent, employers are only allowed to take out corporate-owned life insurance policies on the top 35% of their highest-paid workers. Before these regulations went into effect, many of the top companies in the United States had dead peasant policies on their employees, including Walmart, Winn-Dixie and Dow Chemical.

How Does Dead Peasant Insurance Work?

Dead peasant insurance works much like traditional life insurance, except the employer purchases the policy and pays the premiums. Corporate-owned life insurance policies are available in term and permanent policies, just like other types of life insurance. Term life insurance provides coverage for a set amount of time. If a covered employee dies during the coverage period, the company receives a lump sum of money. Unless the employer pays to renew the policy, it expires at the end of the term.

Corporate-owned life insurance may also be set up under a whole-life or universal life policy, which are both forms of permanent life insurance. Whole-life insurance is effective for as long as the employee is alive, provided the company continues to pay the premium and doesn't cash in the policy. Universal life remains in effect until it matures, as long as the cash value of the policy remains higher than $1. The maturity date is usually when the covered individual turns 95 or 100. 

Reasons to Buy Dead Peasant Insurance

Before the Pension Protection Act went into effect, many employers used corporate-owned life insurance policies to reduce their tax liability. They would purchase life insurance on employees and then deduct the premiums, reducing their taxable income. Under the Pension Protection Act, employers can no longer deduct certain expenses unless a covered employee worked for the company for the year prior to his or her death. 

Today, one of the main advantages of dead peasant insurance is that the proceeds can be used to hire and train new employees to replace key personnel who have passed away. Depending on the type of policy purchased, employers may also be able to borrow against the value of the insurance, bringing in funds needed to launch new projects.