To quickly recap, there is a difference between “Key Person” life insurance (that’s the type of policy that a company secures on a CEO, executives, or a highly-trained specialist) and “Dead Peasant” life insurance, which is the type of policy that a company secures on any non-executive and/or interchangeable employee.

Above, I mentioned that Dead Peasant policies are legal in some states, but they are illegal in most states for very good reason. Historically they were abused and encouraged employers to skimp on safety in high-risk occupations because many employees were worth far more dead than alive, particularly if they were unskilled and easily-replaceable laborers.

These days COLI, including dead peasant policies, are basically a tax shelter - although that may change if the IRS starts taxing the payouts. Under the Internal Revenue Code (”IRC”) dealing with life insurance benefits paid due to the death of the insured, the benefits are usually excluded from the taxable income of the beneficiary. Because of the tax-free nature of death benefits, the IRC prohibits the deduction of the premiums paid for life insurance when the premium payor is also the owner of the insurance.

Companies should have to disclose when they take out a policy on you as an employee - or, even better, obtain your permission to do so - And, a number of our lawmakers agreed. As it stands, most states have advise and consent laws (See 26 U.S.C. §101(j)(4) Notice and Consent requirements ) that technically require companies to get workers permission before buying life insurance on them, but many businesses circumvent these laws by purchasing the insurance in one of the states that do not require notice or consent, including Delaware, Georgia, New Jersey, North Carolina, Pennsylvania and Vermont.

Among the corporations that have bought such insurance on rank-and-file workers , nicknamed “janitors’ ” or “dead peasants’ ” insurance, are AT&T, Dow Chemical, Nestle USA, Procter & Gamble, Walt Disney, Winn-Dixie, Wal-Mart, American International Group Inc., Fannie Mae, Freddie Mac, Kimberly-Clark Corp. and Tyson Foods, Inc. Efforts to rein in the practice largely have been unsuccessful, including the most recent rules Congress enacted in 2006. The rules limit companies to buying life insurance to just the top third of earners, who must provide consent. But the rules don’t apply to life-insurance that employers bought before August 2006, which cover millions of current and former employees - including employees that have long since left the company.

The website http://deadpeasantinsurance.com/ provides a list of companies that have taken out policies on their employees. I was not surprised to find a number of well known companies on this list, in addition to those listed above. It turns out that this information is hard to obtain, so if the company that you work for is not listed, that doesn’t mean that they have not taken out insurance policies on their employees. You can find more generalized information on dead janitor and dead peasant insurance at: http://www.michaelmoore.com/words/mike-in-the-news/congressman-targets-dead-peasants-insurance .

For educational purposes, I’d like to point out another insurance policy known as STOLI (stranger-originated-life-insurance). These STOLI arrangements have gained attention because, generally, a party purchasing life insurance must have an “insurable interest” in the person being insured. For example, a person has an insurable interest in his or her spouse, or a company has an insurable interest in their executive or employee. In a STOLI transaction, however, a person with no insurable interest (a stranger) in another persuades the other person to obtain life insurance with the understanding that after a certain time (usually two years) the insured will sell the policy to the stranger. If you feel that you have been a victim of a STOLI arrangement, please contact your state’s Office of Insurance Regulation.

Again, I am sorry about your family member. And, I hope that you find this information useful.