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human capital, “Matrix” style

The metaphor that labels education as an “investment in human capital” and friendship as an “investment in social capital” has gone from an academic provocation to a corrosive b-school cliche. But there is one case where “human capital” is exactly the right term: corporate-owned life insurance, a.k.a. “dead peasants insurance” or “dead janitors insurance.” “Through so-called janitors insurance, hundreds of companies have taken out life-insurance policies on millions of workers of all kinds — with the companies as the beneficiaries. Employers take out the coverage because the policies provide tax-free investment buildup for the companies and provide tax-free death benefits when the workers, former employees and retirees die.”

Wal-Mart was the biggest user of COLI in the 1990s, taking out insurance on 350,000 of its workers, and received some negative attention for it a few years ago. But bankers now appear to have taken the lead in perfecting this innovation, using death benefits on current and former workers as a tax-free means to fund executive bonuses and retirement income. “The insurance policies essentially are informal pension funds for executives: Companies deposit money into the contracts, which are like big, nondeductible IRAs, and allocate the cash among investments that grow tax-free. Over time, employers receive tax-free death benefits when employees, former employees and retirees die.”

Insurers had a strong interest in building this business, of course, and those interested in “institutional entrepreneurship” might find a great tale in how insurance companies managed to persuade state regulators that companies had an “insurable interest” not only in current employees but in those they had fired years ago. (The Wall Street Journal describes one bank that bought life insurance on a credit risk manager who had already survived two brain surgeries; fired him four months later; and subsequently collected $1.6 million when he died.)

The financial services industry is regarded as a wellspring of American innovation. Many of the fruits of this innovation have been enjoyed around the world in the past two years. But insurance rarely gets its due. Yet from Charles Ives and Wallace Stevens to AIG’s Hank Greenberg, the insurance business has nurtured artistic genius, in music, poetry, and legal legerdemain.

Written by Jerry Davis

September 4, 2009 at 2:37 pm

Posted in uncategorized

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