Dead Peasants Insurance and What This May Mean to You

Posted on Posted in Business Continuation, Insurance, Key Person Insurance

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For many years, companies have purchased and owned life insurance policies on key personnel considered essential to the business.  In the event of a key person’s death the Company-Owned-Life-Insurance (COLI) policy would pay a tax free benefit to the business – to help fund the business through the transition, recruit a replacement, buy out the deceased’s interest – and so on.

In 1986, following changes in the tax law, corporate employers could purchase policies on masses of lower-level employees, sometimes without the employees’ knowledge or consent. When an insured employee died, the company received the death benefit. A tax free windfall.  A consultant to grocer Winn Dixie  famously referred to these individuals in a 1996 memo as “dead peasants.” (Ref: Dead Souls by Nikolai Gogul)

Soon, media like Wall Street Journal and Good Morning America began reporting on the practice.

Eventually, within the Pension Protection Act of 2006,  those 1986 rules were updated stating the death benefit paid on company owned policies could remain tax free but with new requirements:

  • The employee must, prior to the issuance of the insurance contract, receive written notice of and provide written consent to, the employer’s intent to insure their life.
  • Meet one of the Specified Exceptions.  (Consult your legal and tax professional regarding the exceptions)

How the 2006 Rules May Affect Your Business

If you own your business with one or more partners, you likely have a Buy-Sell Agreement and the business may agreed to fund that agreement via life insurance policies it pays for and owns on each partner.

Q: Did each partner, at the time each policy was issued, receive written notice and sign a Notice and Consent Life Insurance Form?

Q: Does the business file annually with the IRS the Notice and Consent Life Insurance IRS Form 8925?

The answer to these questions will help determine whether a death benefit paid to the company is tax free or not.

Not sure?  A policy review or call to your insurer can confirm whether your policy paperwork is in order.

Disclaimer: I do not provide tax, legal or accounting advice. I recommend qualified attorneys, accounting and funding professionals to assist in the formation, valuation and funding of your buy-sell / business continuation arrangement. 

As an independent licensed Life Accident and Health Insurance professional, I represent several Life Insurance Companies authorized to conduct business in New York.  For more information about how affordable insurance can protect your assets and provide you greater control over your financial planning, please contact me at (518) 346-2115 for a confidential and complimentary consultation.

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