Retirement Heist: how companies plunder and profit from the nest eggs of American workers

One of these workers was Felipe M. Tillman. Born in 1963, Tillman was an unlikely source of revenue for CM Holdings. A music lover whose taste ran from opera to jazz and even country music, he played keyboards and drums, sang, and was choral director at his Tulsa, Oklahoma, church. To make ends meet, he took part-time jobs in record stores, including a brief stint at a Camelot Music outlet owned by CM Holdings. As a minimum-wage, part-time employee, he didn’t have health coverage or other benefits. But CM Holdings nonetheless took out a policy on his life. It didn’t have to wait long for a payoff. Tillman died in 1992, of complications from AIDS. He was twenty-nine years old.

CM Holdings used the $168,875 death benefit it received when Tillman died to pay for executive compensation, among other things. Company documents also show that $280 went to Star County Children’s Services to help cover child support payments owed by a nephew of Camelot Music’s founder, who was working at the company at the time.

Another name on the company’s “Death Run” was Margaret Reynolds, of Uniontown, Ohio, born in 1936. Margaret was an administrative assistant and buyer for CM Holdings, making $21,000 a year. In the 1990s, she began deteriorating from the effects of amyotrophic lateral sclerosis, or Lou Gehrig’s disease. In her final years, her adult children, who took turns caring for her, begged the company to provide $5,000 to pay for a special wheelchair so they could take their mother to church. “They said it wasn’t covered,” her son John Reynolds recalled bitterly. His mother died in 1998 at age sixty-two. Her family received a $21,000 benefit from a life insurance policy provided to employees by the company; CM Holdings received a death benefit payout of $180,000.

AN INSURABLE INTEREST

Over time, life insurance began morphing from a tax shelter into a finance tool for executive pay. For decades, if an individual or company wanted to buy life insurance on someone, they had to have an “insurable interest in the person,” that is, the beneficiary of the policy would be directly affected by the insured’s death. This rule existed for obvious reasons: Without it, a person could buy life insurance on a stranger—say, a skydiver, race car driver, or coal miner—and profit from his demise. And if he didn’t die soon enough, the policyholder would have an incentive to push him over a cliff.

Initially, companies bought policies to protect them from the deaths of certain executives, or “key” employees. It made sense for partners in law and accounting firms to buy life insurance on each other. But, encouraged by insurance brokers, companies began buying it on broad swaths of their employees, because by insuring thousands of employees, not just “key men,” the companies can place greater sums in life insurance contracts.

Dow Chemical, the Midland, Michigan, company known for its manufacturing of napalm, breast implants, and Agent Orange, was initially skeptical. An internal memo noted that, except for top-paid executives, it was “doubtful that Dow has an insurable interest in any of its employees.” But it overcame its qualms and by 1992 had purchased life insurance policies on more than 20,000 employees.

Congress had no idea how widespread this practice had become until someone ratted on them. In 1995, a brown envelope was left on the desk of Ken Kies, chief of staff at the Joint Tax Committee. The envelope contained a list of companies that had bought life insurance on employees—along with calculations showing that a company might take in $1.2 billion over ten years by insuring 50,000 of its employees. It also noted that from 1993 to 1995, Wal-Mart had taken out insurance on 350,000 workers.

Lawmakers did the math and were appalled. They weren’t concerned about whether Wal-Mart had an insurable interest in its stock clerks and store greeters, but they did care a lot about the loss of tax revenue. Companies were borrowing money from the policies and deducting the interest. The IRS deemed that the leveraged COLI taken out by seven hundred companies were sham transactions with no business purpose other than to score tax breaks. It filed a flurry of tax court cases, and companies subsequently took big charges for the disallowed deductions for interest on policy loans; among them were American Greetings, the Brooklyn, Ohio, maker of Tender Thoughts brand greeting cards and owner of Holly Hobbie and Care Bears licenses, and W.R. Grace, the Columbia, Maryland, manufacturer of building materials, which took out life insurance on its workers while defending thousands of asbestos-related lawsuits.