October 31, 2018
A corporate-owned life insurance policy, sometimes called “key man insurance” or “key person insurance”, is a life insurance policy purchased by an employer, which designates that employer as the beneficiary of the policy and insures the life of a California resident who is a current or former employee of that employer. The purpose of these policies is to provide the employer, if a key employee dies, with money to replace the revenue it will lose due to the death of the key employee and to recruit a replacement. There are also similar policies that ensure corporations against the disability of key employees.
There is a sinister side to corporate-owned life insurance, especially in states (not California) where the employer need not inform the employee of the policy or obtain his/her prior consent. In 2011, police in Ohio arrested an employer for trying to hire a hit man to kill a former employee in order to collect on a $250,000 “key man” policy.
California employers are barred from taking out corporate-owned life insurance policies, with some exceptions. The law does not affect the validity of employer-purchased life insurance that is provided by the employer as an employee benefit; it only affects life insurance policies where the employer is the beneficiary.
Ever since January 1, 2004, any life insurance policy purchased by a California employer to insure the life of a current or former non-exempt employee who is a California resident is prohibited if the employer is the designated beneficiary. Any such policy purchased on or after January 1, 2004 is void as a matter of law. The prohibition does not apply to policies insuring the life of an exempt employee, i.e. an employee who qualifies as an executive, administrator, or professional who is exempt (not entitled to overtime under the laws governing overtime).
The employer who seeks to insure the life of an exempt employee must also have an “insurable interest” in order to obtain a life or disability insurance policy, and the employer must also obtain the prior written consent of the person who is to be insured. An “insurable interest” means that the employee’s death or physical or mental disability might cause the employer a financial loss.
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This article is based on the law as of the date posted at the top of the article. This article does not constitute the provision of legal advice, and does not by itself create an attorney-client relationship with Eskridge Law.