National Conference of State Legislatures
Fall Forum 2005, Chicago Hilton, Chicago, Illinois
Financial Services Committee
December 7, 2005
“Dead-Peasant” Life Insurance: Should Companies Profit When Employees Die?
Uses and Abuses of COLI: Let’s Not Sacrifice Health Care Benefit Security On the Altar of “Dead-Peasant Life Insurance”
Charles C. Morgan
Partner, Spring Consulting Group, LLC, 84 State Street, Boston, MA 02109
We must not jeopardize health care benefit security inadvertently for broad groups of employees in our legitimate rush to condemn “dead-peasant life insurance.”
“Dead-peasant” life insurance is abhorrent. “Dead-peasant” life insurance is wrong and should not be tolerated. It is bad because it is done without either the knowledge or the permission of the employees who are being insured, regardless of whether the employer can profit from the employees’ deaths. And assuredly, companies should not profit when employees die.
Protecting broad groups of employees in the private sector. But, properly structured so that companies cannot profit from it, and with the full knowledge and consent of employees, life insurance can play a key role in enhancing health care benefit security for a wide range of employees.
Fixing government health care budgets. Indeed, as a local elected official who must deal with the tax implications of a growing health care budget problem, I see life insurance potentially playing a key role in addressing the retiree health care costs that are an increasing burden for local government (and perhaps even state government). Life insurance has a unique ability to solve the “current expense” versus “capital expense” riddle posed by the inherent character of a retiree health expense that is otherwise difficult to justify imposing on taxpayers today.
Cancer doesn’t care about pedigree. Health care costs do not discriminate between the lowest level employees and the CEO. Cancer strikes the average worker as often as, perhaps more often than, Presidents. Expenses incurred in a hospital are the same regardless of the pedigree of the patient who resides there.
We should not enact legislation that discriminates against any group of employees. We should not provide companies further incentives to terminate health care benefits rather than fund those benefits. When we encourage employer abandonment of health care subsidies, it transfers the financial burden to the employees and, ultimately, to all of us, the taxpayers.
Life insurance is a unique financial tool. As it turns out, life insurance is particularly well-suited to funding health care expenses and liabilities due to its unique ability to generate a large sum of cash when the hospital bills arrive from the catastrophic costs of a final illness. Life insurance operates as a financial hedge instrument that dampens the volatility of company earnings that otherwise would arise from those large periodic and unpredictable expenses. Instead of generating profits for employers, life insurance can prevent health care losses.
Last 6 months of life = a majority of lifetime health expenses. More than a decade ago, The Wall Street Journal noted that “one in every seven health-care dollars being spent each year is on the last six months of someone’s life.” (“The High Costs of Dying,” editorial page, February 26, 1992.) In fact, numerous studies, before and since, have established that the use of health care accelerates rapidly during the final months of life. See, for example, Garber, McCurdy, & McClellan, “Medical Care at the End of Life: Diseases, Treatment Patterns, and Costs,” Frontiers in Health Policy Research 2 (1999), pp 77-98.
Health care costs incurred by active employees, as well as retired employees (particularly those who retire early before they qualify for Medicare benefits), typically are a direct expense paid by the employer. This is because the standard health care plan provided by large employers does not use health insurance. Rather, the typical plan is self-insured by the employer, meaning that health care claims are a direct expense of the employer.
Life insurance held by an employer (or an employee benefits trust) can spread these costs over time and over a group. Life insurance is uniquely capable of providing a large, cash payment to the employer just as the catastrophic bills are coming due. Even in cases where an employer has obtained insured stop-loss coverage, life insurance provides a unique solution for catastrophic claims up to the stop-loss point.
Conclusion: We all agree that “dead-peasant” life insurance is abhorrent. But we need a full bag of tools in dealing with the health care cost problem that confronts all of us, and especially those of us who are elected officials.
Life insurance is an important tool that has significant potential in helping address the health care cost problem. Let’s not discard this valuable tool in our legitimate rush to exterminate the abuse called “dead-peasant” life insurance. We need to be careful that we preserve that tool, reshape it perhaps so it is even more effective in addressing the problem, and use it as part of the solution.
We can achieve that objective by requiring:
- No employer profiting: limiting the aggregate face amounts of the life insurance to no more than the value of the benefits being funded by the life insurance; and
- Employee protections:
Restrictions on who is insured: insuring only those employees who would be eligible to participate in the benefits being funded by the life insurance;
Disclosure: written communication about the insurance to the employees;
Consent: the consent of the employees; and
Hold harmless treatment: withholding of consent will have no adverse impact on the employees.
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