Summary:
Janitor life insurance isn't for janitors and isn't insurance. It's bought as an investment by large companies because it saves taxes.

Some companies buy "janitor" life insurance. But it's not for janitors, and it's not insurance. It's an investment. The company pays premiums and gets the policy proceeds tax-free.

The precursor to janitor insurance was policies to protect the company from financial loss if an important executive dies. Businesses have extended this beyond valuable employees by buying insurance covering rank-and-file people. The policies are called janitor insurance, though they don't usually include custodial staff, to show they cover nearly anyone in the company.

Why do companies insure low-level employees? To save taxes. If the company invested the premiums instead of buying insurance, the proceeds would be taxable.

But not all businesses look at the tax angle alone. Some companies use the proceeds to pay the cost of hiring and retraining replacement workers or to pay some part to the employee's heirs.

Insuring someone's life other than a relative or close friend or an important business associate isn't new. In 1933, we had a weak stock market and a strong President. Jacquelin & DeCoppet knew if President Franklin Roosevelt died, stock prices would drop sharply, as they had after the deaths of Presidents McKinley and Garfield. The firm could lose heavily because of its large stock inventory. So the New York Stock Exchange firm paid a $23,103 premium to a company in England for a one-year policy on FDR's life. The President apparently knew nothing about the policy.

The Internal Revenue Service said the firm didn't have an insurable interest in the president, so it disallowed the premium deduction. Under current law, the premium would not be deductible, even with an insurable interest.

A judge agreed with the IRS that the firm had no relationship, financial or otherwise, with the president; thus, the insurance was like gambling. So the insurance was illegal in New York, and as a matter of public policy, a company can't get a tax advantage from something illegal.

Today, some members of Congress think insurance on low-level employees stretches the insurable interest requirement. They've discussed legislation prohibiting janitor insurance, but passed no laws.

More at Business.

THE MORAL: You can bet the bankroll or bet your life, but you can't bet the bankroll on the President's life.