Published May 20, 2009
Banks are using a little-known tactic to help pay bonuses, deferred pay and pensions they owe executives: They're holding life-insurance policies on hundreds of thousands of their workers, with themselves as the beneficiaries, the Wall Street Journal reported.
Banks took out much of this life insurance during the mortgage bubble, when executives' pay -- and the IOUs for their deferred compensation -- surged, and banking regulators affirmed the use of life insurance as a way to finance executive pay and benefits.
Bank of America Corp. has the most life insurance on employees: $17.3 billion at the end of the first quarter, according to bank filings. Wachovia Corp. has $12 billion, J.P. Morgan Chase & Co. has $11.1 billion and Wells Fargo & Co. has $5.7 billion. (Wells Fargo acquired Wachovia at the end of last year.)
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.
Though not improper, the practice is similar to what is known as "janitors insurance," an insurance-on-employees technique that has long been controversial. Critics say the banks' insurance contracts are a way for companies to create tax breaks for funding executive pensions. And some families have complained that employers shouldn't profit from the deaths of their loved ones.
Efforts to rein in the practice largely have been unsuccessful, including the most recent rules Congress enacted in 2006. The rules limit companies to buying life insurance to just the top third of earners, who must provide consent. But the rules don't apply to life-insurance that employers bought before the August 2006 rules, which cover millions of current and former employees.
Banks are far from alone in buying such company-owned life insurance, or COLI. Thousands of companies do it, including American International Group Inc., Fannie Mae, Freddie Mac, Kimberly-Clark Corp. and Tyson Foods, Inc. But banks have been among the largest players, pumping billions more into new policies since the 2006 rules were put in place.