Thursday, July 03, 2014

Hmmmm. Isn’t this what we used to call “moral hazard”?

Years ago, when the cranky and smarter-than-thou John Silber was the president of Boston University, he proposed that BU take out life insurance on all of its students so that if, as has been known to happen, one of those students fell off a flat-roofed apartment building during a party, or stumbled in front of a trolley on Commonwealth Ave. that they hadn’t noticed was moving, or got crushed by a toppling library shelf, well, BU would realize a tidy little profit for itself.

As I recall, the outrage was sufficiently sufficient that Silber had to back off.

Still, there are apparently some folks out there that think that taking out a life insurance policy on someone who’s not a family member, while it may not help make you a killing, might just help alleviate the pain if something untoward were to happen to that certain someone.

Employees of The Orange County Register recently learned that their owner, Freedom Communications, was interested in taking out life insurance policies on them. And these weren’t just key employees – a lot of companies take out what used to be called “key man insurance”, which was typically for the most senior executives or irreplaceable expert employees – it apparently went down into the ranks of those who wouldn’t necessarily considered themselves (or been considered) “key persons.” (Companies are legally limited to their highest-paid 35% when it comes to taking out such policies.  This is a relatively recent limitation. It used to be everyone in your employ. Before the limitation went into effect, these policies were sometimes called “dead peasant” insurance. Obviously not by the companies taking out the policies, or issuing them. )

… the beneficiary of each policy would not be the survivors or estate of the insured employee, but the Freedom Communications pension plan. Reporters and editors resisted, uncomfortable with the notion that the company might profit from their deaths. (Source:

And it’s not just Freedom Communications:

Because company-owned life insurance offers employers generous tax breaks, the market is enormous; hundreds of corporations have taken out policies on thousands of employees. Banks are especially fond of the practice. JPMorgan Chase and Wells Fargo hold billions of dollars of life insurance on their books, and count it as a measure of their ability to withstand financial shocks.

But doesn’t this seem to open up the potential for a company-in-trouble to hasten an employee on his or her way to the Big Cubicle in the Sky?

Not that this would happen, but, but, but…. Maybe I watch too much 20/20 and 48 Hours.

‘Say, Don, I’d like to see you expensing a few more of those three-martini lunches.”

“Alice, we’re thinking of doing an off-beat travel feature. We’d like you to head out to Mosul and Tikrit.”

“We’re trying to save a bit on snow-removal expenses this year, and will be asking all our employees to grab a shovel. We thought we’d start with you, Bob, now that you’re back from your quadruple by-pass.”

Is this not a variant on what we used to call “moral hazard”?


Responding to attacks on the Freedom Communications plan, [CEO Aaron] Kushner defended himself in a letter to employees. “Life insurance is not ghoulish, nor are the people who sell it, nor are those who buy it,” he wrote. “Life insurance, by its very nature, was created to benefit the people we love and care about most.”

This is all true.

And, I guess, in the case of Freedom Communications, the people that the execs love and care about most are themselves.

1 comment:

Rick said...

Similarly, have you noticed how many charities have campaigns for people to write a big donation to them in their wills? In some respects that isn't a bad idea, but the last thing you would want to do is let the charity know you have done so. Life is uncertain enough as is; why give anyone an incentive to make yours shorter?