Company owned life insurance

The Grauniad is telling us all how vile this can be. My response there:

Umm, can I try and get this straight in my mind?

OK, the US tax system is strange but I think we\’d agree that we want life insurance payouts to be tax free, yes? Which is what the company here is exploiting.

And the end result of this particular case is that Mr. and Mrs. Johnson got $150,000 worth of life insurance, at no cost to themselves at all, on someone who was clearly dying of brain cancer?

You know, someone else paid the premium, they didn\’t pay a penny from their own pockets, yet at his death she gets a cheque for $150,000.

And you all seem to think there\’s something wrong with this?

Eh?

Shouldn\’t we be looking at this the other way around? Mr. and Mrs. Johnson have just received a huge benefit from the self interested greed of the corporation. As Adam Smith pointed out 237 years ago, it\’s not from the benevolence that we get our daily bread, but the self interest of the supplier.

You know, sometimes the effects of greed really are good?

8 thoughts on “Company owned life insurance”

  1. I don’t understand how they got the insurance policy, and to pay out so much money? Is there something I’m missing?

    Tim adds: It’s a bit like key man insurance here.

    The company paid a whacking great premium for life insurance on the bloke. This premium is tax deductible. The payout on the life insurance is not taxable. So the company washed the money from being taxable income to being non taxable. As part of that process, the dead man’s wife got $150,000 and the company $1.6 million.

  2. Unlike Matthew, I understand this very well. Debt recycling is one of my favourite topics. But is it really economical? Do they pay 1.6 million or so for the premium? Tim, do you have a rough idea of the amounts involved?

    A little difficult to put this strategy into practice in the family home of course, but if you have any similar ideas I’m more than willing to listen.

  3. “The Grauniad”: Tim, Tim, you really must set an example here. It’s The tax-dodging Grauniad, innit?

  4. Judging by her response to one comment the article is basically….

    ….Its not fair, I have to fill out lots of paper work, stamp feet, sulk, sulk, and those nasty capitalists don’t…stamp feet, sulk sulk – oh and they can also make money out of someone dying so it must be wrong…

  5. So the company pays insurance premiums of something over $1.6m + $150K, say $1.8m. I’m assuming the premiums might just have been more than the payout because of the terminal illness. The tax on $1.8m might be something like $300K.

    So instead of paying $300K tax the company paid $150K and made a loss of $50K, total cost $200K.

    They’re up $100K, instead of down $300K.

    Even better if the premiums were actually less than the payout. In which case the problem is with the insurance company.

  6. Er, ahem, cough, they did fire him, you know. After he got sick. And claimed a payout at least 11 times more than his WIFE got.

    Does this not not have the merest whiff of a dirty nappy about it?

  7. “And claimed a payout at least 11 times more than his WIFE got. ”

    Well no, they probably paid as much as they were paid, as outlined above. The only loser here is the tax office (and fellow taxpayers if you want to look at it like that). The employee wasn’t really involved in the transaction. As for firing him, that sounds bad but seems to be a separate topic.

  8. There is something even fisiher going on. The journalist talks about the annual form-filling process involved in renewing their life insurance. Individual market life insurance is either term (needs renewing every 20 years or so) or whole-life (which never needs renewing).

    There are other places where the article clearly fails to understand the nature of term insurance as well.

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