The term “dead peasant insurance” is a derogatory nickname for a specific type of Corporate-Owned Life Insurance (COLI). This practice involved companies purchasing life insurance policies on the lives of their rank-and-file employees, with the company acting as the sole beneficiary. The nickname arose from the perception that the practice dehumanized workers, treating them as simple financial assets whose death would generate corporate profit. These policies were often taken out without the employee’s knowledge or consent, allowing the corporation to gain financially from the passing of a non-key worker. Public backlash and legal challenges ultimately led to significant federal restrictions on this corporate behavior.
Corporate-Owned Life Insurance (COLI) Explained
Corporate-Owned Life Insurance (COLI) is a financial strategy where an employer purchases a policy on an employee, pays the premiums, and receives the death benefit payout. The company acts as both the policy owner and the beneficiary. For a COLI policy to be valid, the company must demonstrate an “insurable interest,” meaning it must be likely to suffer a financial loss upon the death of the insured individual.
Traditional COLI, known as “Key Person” insurance, is a standard practice used to protect against the loss of highly compensated executives or specialized individuals whose death would disrupt operations. The controversial form of COLI involved insuring thousands of rank-and-file employees, including hourly workers and clerks, who were not integral to the company’s financial stability. This expansion beyond key personnel generated the “dead peasant” label and the ensuing outrage.
Why Companies Used Broad COLI Policies
The primary motivation for companies adopting broad COLI policies was the unique tax treatment afforded to life insurance under the Internal Revenue Code. Companies used these policies as a tax-advantaged funding vehicle to build internal capital. The cash value accumulated within the policies grew on a tax-deferred basis, creating a corporate asset accessible via policy loans.
The death benefits received by the corporation were generally exempt from federal income tax, providing a substantial, non-taxable windfall upon the death of an insured employee. Companies argued this capital pool was necessary to offset the rising costs of employee benefit programs, such as healthcare or retirement plans. By insuring large groups of non-key employees, companies created a self-funding mechanism for corporate liabilities based on statistical mortality.
The Controversy Behind “Dead Peasant Insurance”
The public controversy erupted in the 1990s as lawsuits and investigative reports revealed the breadth of the policies and the lack of employee awareness. Critics argued the policies created a perverse financial incentive for employers to profit from the deaths of workers in non-essential positions. The discovery of internal company memos that used cynical terms like “dead peasant” or “dead janitor” further fueled the moral outrage.
Families of deceased employees, who often struggled financially, were shocked to learn their former employer received a tax-free payout while they received nothing. Legal challenges centered on whether a company had a legitimate “insurable interest” in the lives of thousands of low-wage workers whose contribution to corporate profit was negligible. This perception that corporations were commodifying human life for financial gain led to demands for legislative reform.
Companies That Have Used Rank-and-File COLI
The use of broad COLI policies was widespread among major US corporations in the 1980s and 1990s, before legislative action curtailed the practice. One publicized example involved Walmart, which held policies on hundreds of thousands of employees during the mid-1990s. The retail giant faced several high-profile lawsuits from the families of deceased workers who were unaware they had been insured.
Winn-Dixie Stores was also associated with the controversy, as the term “dead peasant insurance” originated in an internal company memo that became public during litigation. Dow Chemical and American Electric Power were among other companies identified in lawsuits for acquiring large COLI portfolios on general employees. Legal and public pressure led many corporations to discontinue the practice and sell off their broad COLI policies.
Legislative Action Restricting Broad COLI
Widespread public opposition to rank-and-file COLI resulted in federal legislative action designed to curb the practice. While the Health Insurance Portability and Accountability Act of 1996 (HIPAA) raised initial concerns, the most impactful change came a decade later. The Pension Protection Act (PPA) of 2006 introduced strict new requirements for COLI policies issued after August 17, 2006, targeting the tax-free status of death benefits.
Under the PPA, the death benefit from a COLI policy is generally no longer tax-free unless the employer satisfies notice and consent requirements before the policy is issued. The insured employee must be informed in writing that the employer intends to insure their life and must provide written consent. Furthermore, to retain the tax-free status, the insured must be a “key employee” or highly compensated individual. This effectively removed the tax incentive for insuring rank-and-file workers.
The Current Use of COLI in Business
Corporate-Owned Life Insurance remains a common and legal practice in modern business, but its application is significantly narrower and more regulated. The practice has returned to its original purpose of protecting against the financial loss caused by the death of an essential individual. Key-Person Insurance on highly compensated executives, directors, or specialized staff is a standard risk management tool.
COLI is also widely used today as a funding mechanism for non-qualified deferred compensation plans offered to executives. The policy’s cash value is used to informally fund the company’s future liability to the executive, who has explicitly consented to the arrangement. Due to federal tax changes and increased regulatory oversight, the controversial practice of insuring non-consenting, non-key employees for a corporate windfall is now largely defunct.