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Attorney Sues Bank Over "Dead Peasant Policy"

It was a mistake that Irma Johnson even discovered that her late husband’s former employer, Amegy Bank, had taken out a $4.7 million dollar insurance policy against his life.

Johnson’s husband, Dan, had been terminated in 2001 from his position as project manager more than seven years before his death. The Christmas after her husband died of brain cancer in 2008, Irma found a check in the mail for almost $1.6 million that had been erroneously mailed to her address because Dan Johnson’s name was on the check.

Amegy said it bought policies on Dan Johnson and several other employees to make up for the money the bank spent on employee benefits. Now Irma Johnson is enraged that the bank that fired her husband in part due to his diminished productivity after he underwent treatment for brain cancer is benefiting from his death. She is suing the bank for $3.8 million, the net proceeds received by Amegy from the policy, plus the amount the bank paid in premiums.

These policies are not unusual in the banking industry, and are referred to by the macabre term “dead peasant policies.” It’s also typical for these policies to stay in place for a significant period of time after an employee has left the company. In Dan Johnson’s case, he was covered indefinitely.

Dead peasant policies are no stranger to litigation: Wal-Mart was sued over these life insurance policies and settled for $15.4 million. There are ongoing lawsuits in other states as well.

Companies purchase dead peasant policies for tax advantages. Not only is the death benefit tax-free, but taxes are deferred on money invested in the policy. When banks use loans to purchase the policy, they are permitted to write off the interest. There has been some Congressional activity to force disclosure of these policies, but no action has been taken.

Dan Johnson was offered the policy in question in 2001, just months before he was fired. Irma Johnson’s lawyer Mike Myers, who also argued the Wal-Mart case, claims that Dan Johnson was not made aware that the policy he signed included a payout for the bank that was 67 times the amount of his annual salary, which had been $70,000.

According to Irma Johnson, her husband could not qualify for life insurance to shield his family from financial difficulty after his cancer diagnosis, which makes the huge payout to the bank even more upsetting. Myers also claims that the company purchased the dead peasant policy before getting consent, and that because of his illness, Johnson was not of sound mind. Amegy disagrees that Johnson did not comprehend his actions, and says that a disability claim settlement he had with the company included forfeiture of future lawsuits.

The Johnsons’ story has been featured on Good Morning America and is discussed in the recent Michael Moore film Capitalism: A Love Story.

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