Rick Perry’s ‘dead peasant’ insurance flap: How employers profit from employees’ deaths

Kevin Lyons

Republican presidential hopeful Rick Perry may not be a gambling man, but he was once willing to bet on the lives of thousands of Texas teacher retirees to make a buck for the state.

On Aug. 25, The Huffington Post added a new layer of reporting to Perry’s 2003 plan to team up with former U.S. Sen. Phil Gramm, a Texas Republican, and encourage banking giant UBS to create a scheme that would take out life insurance policies on retired Texas teachers and earmark some of the death benefits for the Teacher Retirement System of Texas’ health fund.

When the retirees died, Wall Street would collect the death benefits and the State of Texas would get paid for setting up the deal. The families of the deceased retirees would not get paid. As the plan was being put together, Perry was in his second term as Texas governor. Gramm became a major player in the would-be deal when he joined UBS in 2002 after deciding not to seek re-election.

Texas Gov. Rick Perry, a Republican presidential candidate, once wanted to take out “dead peasants” life insurance policies on Texas teachers.

According to notes taken about the plan and provided to The Huffington Post, the Perry administration was prepared to offer retirees between $50 and $100 each to let the state profit from their deaths. The plan fell apart after it was leaked to the press in December 2003.

‘Dead peasants insurance’

Although the scheme was controversial and sounds macabre, the practice was perfectly legal.

Some people call it corporate-owned life insurance. Others call it “dead peasants insurance” or “janitor insurance,” because the policies cover everyone from the CEO to the janitor.

Whatever the case, the benefit to the employer taking out these life insurance policies was that the premiums could be deducted from an employer’s tax liability because the life insurance proceeds were tax-exempt. The company holding the policy also could do anything it wanted with the proceeds.

For example, in 1992, after a 29-year-old Camelot Music store employee died of complications from AIDS, Camelot Music’s parent company collected a $339,302 death benefit and used $168,875 for executive compensation, according to a 2002 Wall Street Journal story. Court documents cited by the Journal also show that $280 went to cover child support payments for a nephew of one of Camelot Music’s founders.

The family members of the deceased employee didn’t know about the life insurance policy. Why? Before 2006, there was no federal law that required employers to disclose the policies to insured employees.

Walmart settles lawsuit

Many companies, including Walmart, AT&T, Dow Chemical, Procter & Gamble and Winn-Dixie, used this practice in the 1990s. But the policies triggered dozens of lawsuits from the estates of the deceased.

On Aug. 8, 2001, Walmart agreed to pay more than $2 million to settle a lawsuit that alleged it secretly took out life insurance policies on its workers in the 1990s.

Walmart said it received more than $9 million in payouts and maintained that it informed employees it was taking out the policies in their names. Walmart stopped buying the policies in 1995 but continued receiving benefits on employees who had died, even after they left the retail giant. But the lawsuit alleged that Walmart told its employees it would not collect any benefits.

Federal law sheds light on ‘janitor insurance’

In 2006, as part of the federal Pension Protection Act, the law changed. Now, employers must notify employees and obtain written consent before such a policy is issued. Any employee can be covered, although the policies usually are limited to corporate officers, corporate directors and highly paid employees, says Linda Lankowski, vice chair of the American Academy of Actuaries Life Products Committee.

The law did not contain formal language requiring companies to reveal the policies to the employees whose lives they covered prior before 2006. But Lankowski believes that many responsible employers did tell their insured workers about the policies after details of this practice began receiving news coverage.

“I think that some of those old practices are not happening right now,” Lankowski tells InsuranceQuotes.com. “And reputable insurance agents are not suggesting that those old practices happen. Today, those policies are really used (on the lives of) executives, and those executives know what they are getting into.”

Policy considerations

It’s not clear how many employers hold insurance policies on their employees’ lives. Lankowski says a highly paid employee whose life is insured by his company may find it more difficult to take out life insurance on his own because insurers want to assume only a certain amount of risk for a person.

Lower-paid, rank-and-file employees also have considerations.

“If someone is taking out a policy, you need to ask: Does this (company) really have your best interest at heart?” Lankowski says. “You don’t want to be worth more dead than you are alive.”

In the case of Perry, his administration had a hard time finding public support for the life insurance plan.

“It was just pretty morbid, and I don’t think it convinced anybody it was gonna enrich anybody except Phil Gramm and UBS,” Clay Robison, a spokesman for the Texas State Teachers Association, told The Huffington Post. “Our members were pretty much appalled by it.”

Robinson added: “No one wants to think there are people out there hoping you’ll die soon.”