Now before you get too upset by the title to this article, let’s just clarify the terminology. A dead peasant life policy is a new variation on an old theme and the lawyers who have suddenly discovered the practice intended the description to disturb and distress the courts where the first cases have been heard. So what exactly are we talking about here? From the early days, it’s been considered entirely proper for a small business to insure the lives of key employees. These are people it’s going to be very difficult to replace so, while the business looks for a new person to take over, the insurance payout provides a cash sum that covers any loss of profit. This is usually the person with the best skills everyone else relies on but, as a means of ensuring a smooth business succession, the same type of policy has been applied to small companies where the lives of the two or three directors are insured. Should one die young, the payout buys that director’s shares. This gives a cash payment to the family and keeps control of the company in the hands of the remaining directors. So far, so good.

A number of large companies have been quietly expanding the insurance protection to hundreds and, in some cases, thousands of employees. So we have gone beyond the key people and now insure the lives of all the peasants. From the company’s point of view, this provides real tax benefits while the employees are alive and they get to collect a tax-free benefit when the employees die. If the company needs to borrow money, the cash value of the policies has been good security for the loan. In most cases, the companies have not informed their employees of this insurance.

To understand exactly what can happen, let’s travel to Texas and look in on the Amegy Bank. Here a young Mr Johnson was diagnosed with brain cancer. The bank told him he was eligible for life cover paying $150,000. Not surprisingly, he accepted the offer and began to pay the premiums (there was no medical examination, everything being organized by the bank). A few months later, the bank fired him. This also terminated the insurance cover so he had paid the premiums and got nothing. When he died shortly after, the insurance company mistaken sent his widow a check for $1.5 million. That’s when the family discovered they had a dead peasant in their family. Attorneys are now suing the Bank alleging fraud both in the bank’s failure to disclose the medical condition to the insurer, and in taking the premium payments before terminating the employment. This is a single case of an employee being insured without his knowledge. Winn-Dixie secretly got life insurance quotes for and insured 36,000 employees.

Apart from the fact it gives employers a motive for speeding the deaths of their employees, say by running the business with unsafe working practices, this is morally dubious. So much so that federal law now requires employers to get the consent of their employees in writing before getting life insurance quotes. Note this is not retrospective, i.e. it does not affect all the policies that may already have been bought. The other unknown is how strictly the law will be enforced.

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