Corporate Owned Life Insurance Case Study

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The Expansion of Corporate-owned Life Insurance
What are they?
Corporate-owned life insurance (COLI) has been increasing common among companies, infamously earning the nickname “dead peasant insurance” along the way. In this case, employers, usually of large companies, take out life insurance policies on low-level employees and receive payments in the circumstance that the employee dies. They originated when companies engaged in insuring high-level employees. For such positions, turnover is lower and the cost of recruiting new employees and training them is higher. To safeguard against the untimely death of a senior executive, companies would purchase a life-insurance policy as means to hedge their investment in human capital.
In recent years,
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An old saying is that it is legal to avoid paying taxes, just not evade them. Companies are allowed to reduce the amount of taxes payable to the government through legal means by using the tax code. A plethora of firms use tax havens as a remedy to high taxes and in recent years have found that DPI’s are also useful. Currently, firms are allowed to deduct premiums they pay for life insurance policies from the profits they report. And when an employee dies, the payment they receive from the insurance company is not considered taxable income. Taxing benefits at the same rate as ordinary income would reduce the demand of policies, as they would be seen as less profitable ventures. In addition, I would require the employers to pay part of the money they receive to any spouse or dependent they employee may have. Insurance policies would also be limited to current employees in order to reduce …show more content…
Employees and employers contribute money towards the policies and in exchange, the employee receives health insurance. With DPI’s, the employee is not involved in any monetary transactions even though they are a vital part of the equation. COLI’s once served a purpose: they protected firms from any costs endured in the unforeseen loss of an employee. However, they now serve the purpose not to insure companies from potential losses, but to enrich them with little risk. If corporations had more skin in the game, one could make an argument that not only would corporate-owned insurance policies be justified, they would almost be an economic necessity. A firm who sells wheat may unable to pay off debts and be forced to go bankrupt if wheat prices fall below a certain level. In order to protect against the uncertainty and fluctuation of wheat prices, they may choose to hedge their investment by shorting wheat futures. A subsequent drop in prices would give them a return to help offset lower prices. In the case of DPI’s, companies face no significant financial risk if one lower level employee (or retiree) dies. Replacement costs are small and do not justify an insurance policy being taken out on

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