It isn't often that the Wall Street Journal manages to outdo such as author as Nikolay Gogol, save that he was a satirist, while they are simply reporting the news. In Gogol's novel Dead Soul's, the protagonist, Chichikov, sets out to acquire dead souls. He is sure that dead souls, serfs who have died since the last tsarist tax census, are his key to great wealth. Such a scheme, one might think, could only work in 19th century Russia. Surely, it could not work in modern America. But, as the Wall Street Journal reveals, it can, and quite well.
Chichikov's plan was simple. He would buy serfs who had died since the last census. He knew he could buy them cheaply. After all, their owners had to pay tax on them, and dead serfs don't provide much in the way of income. In fact, he does manage to acquire a good number of dead souls. But, how could such ownership lead to great wealth? Chichikov may have been many things, but he was no necromancer. Here his plan seems surprisingly modern. His plan is to use his ownership of the dead as collateral on a loan, a loan large enough to place him in the lap of luxury.
His plan unravels. Gogol meant his novel as a critique of tsarist Russia with its corruption and paranoia. His plan is destroyed by the very forces it sought to exploit.
Eventually, serfdom was abolished in Russia, and the Tsar bought all of the serfs from the nobility and freed them in 1861. The cost to the central government was roughly six million dollars, so the Tsar sold Alaska to cover the cost. One might suppose that money making scheme based on dead serfs were now a thing of the past, but you would be wrong.
According to the Wall Street Journal, banks are using a similar scheme today. The headline is simple, "Banks Use Life Insurance to Fund Bonuses". The explanation is something out of Gogol.
Much like aristocrats in tsarist Russia, the executives who run banks try to squeeze as much as they can from their customers, their employees, the government and their owners. One trick they use allows them to fund their tax exempt pensions by buying life insurance on their employees.
One of the perks of being a senior executive at a bank is a good, well funded pension. Unfortunately, these cost money. It would be possible to fund an executive pension from the bank's earnings, but these expenses would hurt the bottom line and so decrease bonuses. Worse, these pensions would not be tax exempt, since ERISA limits how much money can be set aside for highly paid workers as opposed to less well paid workers.
To get around this, the bank takes out life insurance policies on all of its employees with the company as a beneficiary. This type of policy is usually used to compensate the company for the untimely loss of a valuable employee, but it has other uses as well.
One of the classic distinctions between insurance and gambling is whether the beneficiary of the contract had anything at risk. Since most employees are considered completely fungible and can be easily replaced, the bank actually has little interest in being compensated for the death of the typical employee. To qualify, the employee has to receive some benefit, at least so long as he or she is an employee, and the employee has to consent to being insured. So, the bank offers the employee a small life insurance benefit for the duration of their employment, but takes a larger policy to benefit the bank.
Since this life insurance policy is now considered an employee benefit, the premiums are tax deductible. The insurance policy itself is also a corporate asset since everyone is going to die eventually, and when that happens the company will collect from the insurer. If the employee is still working for the bank, he or she, or at least his or her estate, may even get a little piece of the action.
The bank can now consider the face value of the policy as income and adjust bonuses accordingly. While most of us labor under the accounting rules that say a gain is not a gain until we sell and take the profit, banks are allowed to treat any gain in value as income. While most of us are warned against the illusion of wealth, even after we sell an appreciated asset, banks are allowed to count their chickens when the bird settles on the nest. They don't even have to wait for the egg to be laid. Basically, they are betting that insurance companies are better run than banks, or that the government will bail out the insurers.
The bank can also consider the face value of the policy as an asset which can be used to offset a liability. With so many loans going bad, you might think they'd apply this asset against defaulting loans, but that doesn't help the folks in the executive suite. It makes more sense to establish a fat executive pension plan, but instead of funding the plan, applying the value of the life insurance policy to cover it. Bank executives can sleep well at night, not worrying about their retirement. Their path to great wealth is as simple as Chichikov's and insured by dead souls.
Much like Chichikov's scheme, this scheme is likely to unravel, but for different reasons. I'm anticipating a life insurance industry collapse around 2025, and the taxpayers to be called on once again to make good on the failures of free enterprise. Who knows, I may even live to see it.