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

A Texas jury was also unimpressed with an employer’s claim that it had an insurable interest in a part-time employee. Peggy Stillwagoner was a temporary employee who had been at her job only two months when she died in 1994. A nurse, she had been on her way to a home-care appointment when another driver slammed into her Geo Metro. She underwent emergency surgery, but died soon after. She was fifty-one.

Facing tens of thousands of dollars in medical bills, Stillwagoner’s family asked her employer, Advantage Medical Services, if it provided any life insurance or other benefits. The owner of the company said it didn’t. But a few months after the accident, when an insurance company investigator contacted Peggy’s husband, Kenneth, asking him to sign papers releasing her medical records, he learned by chance that AMS held a $200,000 insurance policy on his wife’s life.

The family sued in state court, arguing that the company had no insurable interest in Peggy’s life, since she’d been replaced the day after her death. The family was seeking the benefit the company had collected upon her death. The company insisted that it did have an insurable interest, because the field nurse had the “opportunity to attract or create new business and was therefore a valuable employee.” The family lost in the lower court, but in late 1998 the appeals court reversed the lower court’s ruling and found that Kenneth Stillwagoner had a right to challenge the insurance payment to AMS. Subsequently, the company and Travelers Insurance Co., a unit of Citigroup Inc. that sold AMS the coverage, settled with the family for $395,000.

HOLY BOLI

The bad publicity that lawsuits like these generated spurred lawmakers to draft fresh proposals to rein in the practice. In 2003, Congressman Gene Green, a Texas Democrat, proposed requiring employers to tell all employees, past and present, about any coverage bought on their lives since 1985. Once again, insurance lobbyists fought back. COLI provider Clark/Bardes and insurance-industry groups led the opposition, aided by Ken Kies’s lobbying practice, which Clark/Bardes had acquired. The industry took out radio ads in the Washington area attacking proposals to curb what it called “business insurance.” The proposals went nowhere.

But lawmakers continued to press for more restrictions on COLI, and in 2006 it appeared they had succeeded. Congress enacted new rules that limit companies to buying life insurance on just the top one-third of earners, who must provide consent.

But the rules turned out to be a boon to insurers and employers. For one thing, they specifically permit employers to buy life insurance on the top third of earners—those most likely to participate in deferred-compensation programs. This was the first time the law deemed the practice legal. (Insurance lobbyists aren’t paid top dollar for nothing.) And though the new rules require employers to obtain employees’ consent, the rules weren’t retroactive. Thus, companies still hold old policies covering millions of employees, including lower-level workers and former employees who aren’t entitled to benefits of any kind, as well as retirees. The rules don’t require employers to notify people covered prior to August 2006.

In fact, these “restrictions” fueled the sale of billions of dollars more in COLI. Banks led the way, not only because of the new rules but because banking regulators in the Bush administration specifically affirmed the use of life insurance to finance deferred compensation.

Banks took out billions of dollars’ worth of this life insurance during the mortgage bubble, when executive pay—and the IOUs for their deferred compensation—surged. By the end of 2008, banks had a total of $122.3 billion in life insurance on employees, nearly double the $65.8 billion they held at the end of 2004. (Unlike other companies, banks are required to disclose their total life insurance holdings in regulatory filings.)

At the end of the first quarter in 2009, Bank of America had the most life insurance on employees: $17.3 billion. The bank won’t disclose how much it owes executives and insists that “Bank of America uses this insurance to help defray the cost of employee benefits.” But filings show that the bank had an unfunded obligation of only $1.3 billion for retiree health benefits; it also owes $2.6 billion for supplemental executive pensions. This suggests that at least $15 billion of the BOLI is intended to back the deferred-compensation obligations. JPMorgan Chase had $11 billion in BOLI and, coincidentally, $10 billion in deferred-compensation obligations. The size of its retiree health obligations? Only $1 billion.