Corporate owned life insurance (COLI) is taken out by a company for their employees; however the death benefit goes to the company instead of any relatives or family members of the insured. Many companies took advantage of such tax-free insurance policies in order to provide coverage to even those people who earned very low wages.

• The underlying implications of taking out such policies are controversial if not unethical since the company stands to benefit in the event of the death of an employee. This can be justified if the employee is highly skilled and will cause losses if he or she dies. However some companies have used such type of insurance solely for the purpose of evading taxes.
• In a usual broad-based leveraged COLI contract, a corporate company would buy policies on a lot of lower-level workers, sometimes without the employees’ knowledge or permission. When an insured employee passed away, the company received the death benefits, and the workers family usually received either a tiny fraction of the earnings or nothing.
• These policies might stay in place even after the employee leaves the job or stops working. This practice of taking out life insurance policies on great numbers of rank-and-file workers, with or without their awareness or permission, with the corporation making itself the recipient became known sarcastically as “janitor insurance” or “dead peasant insurance.”
• The most famous case was the Wal-Mart one in which the company took out thousands of life insurance policies on their employees to gain tax free benefits in the event of their death. However the legal decision went against Wal-Mart and it suffered a loss of almost $ 1.3 billion (US) because the court held the company responsible for taxes.
• Nowadays this type of insurance is only financially feasible if the employee is very valuable and generates a lot of revenue for the company. The partners and high ranking officers of a company can be insured using such type of insurance. However the tax loopholes have been plugged by the law making it impossible for companies to take undue advantage of such policies.
• On August 2006 the COLI best practices law was signed into the Pension Protection Act of 2006. This act was designed to avoid malpractices by companies and for the protection of the employee. It states that the employee must be notified in writing that the company plans to insure the employee’s life and the highest face amount for which the worker might be insured at the time the contract is issued, give written permission to be insured under the contract during and after active service, and be educated in writing that the company will be the recipient of any death benefits.
• Even though corporate owned life insurance has its drawbacks and appears fishy; it still helps many companies to secure their “knowledge” assets or expert personnel. According to some sources one fourth of all fortune 500 companies have insured their employees and the total number of employees that are insured in such a manner exceeds 5 million.

If you have any additional points then feel free to leave your comment/s.