Forget CDS; Corporations Are Now Taking Out Life Insurance Policies On Employees

Tyler Durden's picture

At the heart of the last financial crisis, some compared CDS to buying home insurance on a neighbor's home and burning it down; it appears the USA has come a long way in the last few years. As NDTV reports, employees at The Orange County Register received a rather unusual request from their employer - Freedom Communications - writing to request workers' consent to take out life insurance policies on them.... But the beneficiary of each policy would not be the survivors or estate of the insured employee, but the Freedom Communications pension plan. Because such life insurance policies receive generous tax breaks, they are ideal investment vehicles for companies looking to set aside money to pay for pension plans. But in many cases, companies and banks can use the tax-free gains for whatever they choose, "Companies don't promise regulators they will use it for any specific purpose." Of course, it is the banks that are the biggest utilizers of this. Forget buybacks, just unleash some anthrax to really juice EPS this quarter?

 

As NDTV reports,

Employees at The Orange County Register received an unsettling email from corporate headquarters this year. The owner of the newspaper, Freedom Communications, was writing to request workers' consent to take out life insurance policies on them.

 

But the beneficiary of each policy would not be the survivors or estate of the insured employee, but the Freedom Communications pension plan. Reporters and editors resisted, uncomfortable with the notion that the company might profit from their deaths.

 

After an intensive lobbying campaign by Freedom Communications management, a modified plan was ultimately put in place. Yet Register employees were left shaken.

This is not a one-off situation...

Because company-owned life insurance offers employers generous tax breaks, the market is enormous; hundreds of corporations have taken out policies on thousands of employees. Banks are especially fond of the practice.

 

"Companies are holding this humongous amount of coverage on the lives of human beings," said Michael D. Myers, a lawyer in Houston who has brought class-action lawsuits against several companies with such policies.

 

"Life insurance is one of the ways of strengthening the long-term health of the pension plan and ensuring its ability to pay benefits," Freedom Communications' chief executive, Aaron Kushner, said in an interview.

 

And because such life insurance policies receive generous tax breaks - the company-paid premiums are tax-free, as are any investment returns on the policies and the death benefits eventually received - they are ideal investment vehicles for companies looking to set aside money to pay for pension plans. Companies argue that if they had to finance such obligations with investments taxed at a normal rate, they would incur losses and would not be able to offer the benefits to employees.

 

But in many cases, companies and banks can use the tax-free gains for whatever they choose. "If you want to take that money and go build a new bank branch, fine," said Joseph E. Yesutis, a partner at the law firm Alston & Bird who specializes in banking regulation. "Companies don't promise regulators they will use it for any specific purpose."

 

Hundreds of billions of dollars of such policies are in place, providing companies with a steady stream of income as current and former employees die, even decades after they have retired or left the company.

And it's very unclear just how much of it is going on...

But determining the exact size of the market for corporate- and bank-owned life insurance is impossible. With the exception of banks, companies do not have to report their insurance holdings.

"There is no reliable reporting of the use of who's buying life insurance, of what they're buying it for," said Steven N. Weisbart, chief economist of the Insurance Information Institute.

But the banks are major players in this somewhat ethically challenged 'investment vehicle'...

Bank of America's policies have a cash surrender value of at least $17.6 billion.

 

If Wells Fargo had to redeem its policies tomorrow, it would reap at least $12.7 billion.

 

JPMorgan Chase would collect at least $5 billion, according to filings with the Federal Financial Institutions Examination Council.

Forget buybacks, just unleash some anthrax to really juice EPS this quarter? (or encourage a few more suicides?)