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Home Publications Blogs Beat the Press Insurance Policies for Profit: Will Wall Street Boys Ever Be Able to Survive Without Taxpayer Handouts

Insurance Policies for Profit: Will Wall Street Boys Ever Be Able to Survive Without Taxpayer Handouts

Monday, 23 June 2014 09:45

We all know how hard it is for Wall Streeters to get by in a market economy, but can't we try a little bit of tough love to see if we can't wean them away from the public trough. The newest absurdity is the insurance policies that many large companies take out on their employees in order to game the tax system.

Many of us might have been led to believe that these "dead peasant" policies had been eliminated with a 2006 change in the tax law. But no, the NYT tells us that they are still there. Remarkably, the paper doesn't understand the issues involved at all. It tells readers:

"But critics say it is immoral for companies to profit from the death of employees, while employees themselves do not directly benefit."

Well some critics might be concerned about the morality of this practice, but the more obvious complaint is its economic absurdity. The article goes on:

"Companies and banks say earnings from the insurance policies are used to cover long-term health care, deferred compensation and pension obligations."

Okay, that's it -- everything we need to know is right there. Insurance companies don't give away money. Why are there "earnings" from these insurances policies that are available to "cover long-term health care, deferred compensation and pension obligations." The answer is that these policies are tax subsidized.

The question then is why are taxpayers subsidizing such absurd insurance policies? If we want to subsidize "long-term health care, deferred compensation and pension obligations," there is a very simple way to do it, subsidize long-term health care, deferred compensation and pension obligations. That way we would not waste money supporting the intermediaries who undoubtedly collect high fees and make high salaries and bonuses in the process.

Yes, but that would meet cutting out the insurance industry and we know the boys and girls in the industry can't be expected to make their way in a market economy without a big helping hand from the government. At least they aren't getting food stamps.

Comments (5)Add Comment
How to Control Risk with Insurance
written by Last Mover, June 23, 2014 12:49

Oh my, Dean Baker takes the gloves off on this one.

Get 'em tiger. Everyone knows insurance is already a ripoff by nature, heavily loaded with incoming cash on the front end with benefits paid out on the back end so tightly restricted with fine print exceptions it looks like a shredder eating the claims before anyone sees them.

In the middle is the pile of cash collecting investment returns. Insurers get all excited at the slightest blip of disturbance on both ends of the scam as well as the middle.

Gee boys and girls, why not take a few risks these days like the economic predators preach for everyone but themselves? Earn money the old fashion way.

Take out some high value life insurance policies on some easy targets with yourselves as the beneficiary, then have them wacked for enough to get a real nest egg going after 5 or 10 hits or so.
written by medgeek, June 23, 2014 2:22
Our entire tax system is a scam. Don't even get me started about "carried interest.
written by Benedict@Large, June 23, 2014 5:31
I'm inclined to agree that there's something going on here, and that it has something to do with tax sheltering. Figure this. Neither company (the policyholder or the insurer) is losing money in this. If they were, the policies would stop being written. Which means that Paid In - Paid Out < Avoided Tax Liability. But just what liability is it that's being avoided? And how can it be avoided unless its classified as employee compensation? Which it obviously is not. Sorry, but this has tax scam written all over it.
Funding executive benefits
written by Peter, June 23, 2014 5:57
To be clear - there already are tax-favored vehicles for funding pension benefits - up to a certain limit. The pension obligations being funded by corporate owned life insurance are for benefits due to executives which are over the qualified limit. Life insurance, here, is being used to fund benefits, which legally cannot be funded in a tax-advantaged way. This is the immorality of it - that it is being used to cheat the tax system.
Super sized benefits on Wall Street
written by Nancy cadet, June 23, 2014 8:09
My friend , an economist, started her career at Lehman Brothers. Now, after many ups and downs , she's an economist at the IRS, and she loves it. "Working for the good guys, " she says. She was surprised that the insurance benefits at the IRS are so limited compared to her wall st jobs, where she got all kinds of insurance: long term care , etc.,

Now we know why.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.