Are 'Dead Peasant' Life Insurance Policies Fair?

Oct. 2, 2009— -- Life insurance used to be rather straightforward, known for offering security to loved ones in a tough time.

So when Irma Johnson learned that her husband, Daniel, who died of brain cancer, had been insured for $1.5 million, it should have been at least a small comfort.

But she did not receive the money. His employer did.

It's one of the strangest free-market perversions that Michael Moore highlights in his latest film, "Capitalism: A Love Story."

In the corporate practice dubbed "Dead Peasants" life insurance, companies wager on employees' lives, expecting to make money when they die.

And it's pervasive, said Mike Myers, an attorney who has uncovered many of these cases and helped angry relatives sue.

"Life insurance is traditionally used to guard against the death of breadwinners. This is an investment scheme," he said.

Dozens of blue chip companies have these policies, according to Myers. But only banks are forced to reveal them, and several have billions of dollars worth of policies.

"The driving force behind it is the tax deductions," he said.

The life insurance policies were designed to allow companies to insure a few crucial executives. Savvy companies then realized they could also get a tax break by insuring many lower-level employees.

The financial scheme doesn't actually cost the employees anything, except, some say, their trust.

Betina Tillman felt shocked and deceived when a reporter from The Wall Street Journal told her that her brother, a music store cashier, was insured by his employer for $339,000 when he died, despite the fact that he no longer worked at the store.

"We were just in disbelief they were able to do it, and actually cash the policy and cash in on the policy," Tillman said.

Families Battle in Court

She sued, and won. Now, the government mandates that companies obtain the consent of employees.

In the case of Daniel Johnson, Amegy Bank told ABC News that Johnson did give his consent, but Irma disputes that, and she's suing.

Rep. Gene Green, D-Texas, has pushed for even tougher restrictions. "We hope our laws are based on not only fairness, but morals," Green told ABC News. "And to me, it's immoral to benefit from your death if I don't know you."

Meanwhile, for those who feel they have been wronged and were never told about the insurance, it's up to them to brave the court system.

"It was a matter of making sure we did the right thing and something that would honor our brother," Tillman said. "We sent a message across to that company, to let them know you may have gotten away with it all these years, but not this time."

Michael Moore's new movie, "Capitalism: A Love Story" opens nationwide today.