New York — When Florestella Torres died suddenly at 58, she left behind three daughters, two sons and eight years as a clerk in the cosmetics department at the local Wal-Mart.
Torres' family inherited the memories. Her employer got a check for $72,321.
"It doesn't matter what they (Wal-Mart) were doing, they did it without her permission. It wasn't right," said Torres' eldest son, Orlando Gaitan of Pasadena, Tex. "They shouldn't have been profiting from my mother's death."
Gaitan's anger is aimed at a financial practice used until recently by Wal-Mart and, increasingly by many other employers, of taking out life insurance policies on thousands of their rank-and-file workers.
Those policies entirely separate from the life insurance Wal-Mart and many other employers provide to workers as part of their benefits list the company as beneficiary, often without the knowledge of the workers or their families. Companies use the policies to earn tax-free investment income.
The policies, known as corporate-owned life insurance (COLI), have been the focus of considerable attention in recent weeks, following reports in The Wall Street Journal and other media. That has led to talk by two members of Congress about the need to reform the business.
But perspectives vary about the severity of the problem and what steps should be taken.
COLI is portrayed as "either the best thing since sliced bread or the source of incomparable evil. Of course, it's neither," said Harold D. Skipper, a professor of insurance at Georgia State University in Atlanta.
Reasoning behind policies
Companies have been taking out life insurance policies on top executives for years. But broader COLI policies were not marketed until the 1980s, when the industry successfully lobbied many states to allow employers to claim an "insurable interest" in the lives of rank-and-file workers.
Many employers seized on the practice early on because they could borrow against the policies, and the interest paid was tax deductible. Congress closed that loophole in 1996, but COLI remains a popular corporate investment strategy.
The chief appeal is that, over time, interest accrues on the money invested in such policies. When a worker dies, the employer collects on the policy without paying taxes on the gain. Last year, total premiums on such policies swelled to $2.8 billion from $1.5 billion in 2000, according to a recent report by CAST Management Consultants Inc. of Los Angeles.
"Clearly the Fortune 500 has fueled the bulk of the premium growth in the COLI market," the report's author, George Braunegg, said in a written release. "But the small/medium case segment is getting considerable attention from life companies and distributors alike."
The American Council of Life Insurers says such policies are embraced by companies because they offer a structured, affordable means of assuring they have the money to meet future costs.
COLI "is not an employee benefit. This is a funding mechanism for meeting future liabilities that the company has, usually some type of retiree benefit," said Herb Perone, a spokesman for the insurers' group.
Georgia State's Skipper has his doubts. While some companies use the policies to fund retiree benefits, others appear to have seized on that to explain their usage of COLI as an investment vehicle unrelated to benefits, he said. Mike Myers, a Houston attorney for Gaitan and other families and workers who have sued employers, is even more convinced.
"We have seen absolutely no evidence of that (COLI being used to cover retiree benefits) in any case none," Myers said. "This is just an income source, pure and simple."
Workers seek consent
Most of the recent attention focused on COLI, however, have been the charges made in the lawsuits filed by Gaitan and others that companies do not secure employees' consent when including them in such policies.
"They were basically doing it for their own benefit," said Tom Pena of Harlingen, Tex., a former store manager for Camelot Music who is suing the chain's owner, CM Holdings, for taking out a $307,788 policy on his life.
Trans World Entertainment Corp., which bought Camelot's parent company in 1999, said that's not the case.
"Those policies were put in place back in the early '90s as a mechanism, in a period when medical costs were rising dramatically, to reduce that cost and exposure and enable them to continue giving the benefits they were giving to employees," said John Sullivan, Trans World's chief financial officer.
Wal-Mart, which said it canceled its COLI policies in early 2000 because it was losing money on the arrangement, says the program was intended to reduce its income taxes to help pay rising employee health care costs. Workers were notified and given the chance to opt out, the company says.
"While we did communicate with our people about COLI, in retrospect, we could have done more communication with our associates about this program," a Wal-Mart spokesman, Tom Williams, said.
Concerns about COLI have led a pair of federal legislators to examine reform.
Rep. Gene Greene, D-Tex., introduced a bill in mid-April that would require companies taking out such policies to notify workers when doing so, and to inform current and former workers of any policy dating back to 1985.
A number of states already require either notification or consent in some form, although enforcement of such provisions is sometimes limited. The ACLI insurance industry group says it backs efforts to require notification and consent.
Meanwhile, Sen. Jeff Bingaman, D-N.M., said recently he is working on a bill that would go further than requiring disclosure.
"The problem is to ensure that if a policy is taken out on a worker that the worker somehow benefits," said Jude McCartin, a spokeswoman for Bingaman.