Wouldn't it be much cheaper to offer a life insurance policy for each employee that would pay out enough to generate this much income at a relevantly low interest rate? Or is that what they are actually doing and just packaging it differently?
How could it possibly be cheaper? The insurance premiums will have to be enough to cover the costs of the payouts plus overhead and some additional margin of profit for the insurance company.
Insurance is just a way of converting a small risk of a large loss into a large risk of a small loss, by spreading the risk over many people. It never saves money on average. If your company has as many employees as Google has, you may as well bypass the middleman.
>How could it possibly be cheaper? The insurance premiums will have to be enough to cover the costs of the payouts plus overhead and some additional margin of profit for the insurance company.
This isn't completely true. Most insurance companies make additional income on investing the float[1]. Warren Buffet started his economic empire through his insurance company and his ability to prudently invest the float it generated.
For the majority of companies I would assume it is still cheaper to buy insurance than it is to self-fund since they do not have the actuarial or investment expertise that many insurance companies have built up over the years. And I doubt Google is going to be doing something like that in-house, though it is possible. It's also equally possible that they are just taking out life insurance policies on their employees and then sugar-coating it as a "death benefit".
Investment on the float is something you can do on your own without insurance. There have to be better ways to access that level of investment expertise without paying an insurance company for it.
Is the actuarial expertise necessary here? That's needed to set premiums for individuals who take out policies so you know how much they should pay given their situation. But when you're self-insuring like that and not requiring anyone to pay premiums, what does it matter? At most, you need a general idea of the overall costs based on the aggregate demographics of your workforce, which is a much less complicated proposition when you have as many employees as Google. Depending on how you want to do it, you may not even need that, since Google has a lot of cash and can probably just make a guess.
Wouldn't it be much cheaper to offer a life insurance policy for each employee that would pay out enough to generate this much income at a relevantly low interest rate? Or is that what they are actually doing and just packaging it differently?
Pretty sure Google would have run the numbers on that.
It is a life insurance policy, but that isn't the only difference. A key point for me is that google employees are ensured to a very high level without having to send the insurance company the results of a medical exam. Most companies I've worked at can only insure you to 2x or 3x your annual salary without the exam, and they charge you extra to provide even this level of coverage. Google's policy is slightly better than 5x.
Its true that theoretically the value of 3x up front is in the same ballpark - but only if you invested all of it wisely. But in reality my wife would need to use the entire benefit to pay down our mortgage and refi, so those theoretical gains mean little. Meanwhile, she has to somehow get enough income elsewhere to pay what is left of the mortgage, our kids college, etc. Knowing there is some real level of income security for 10 years is way way better.
Life insurance/assurance doesn't make much sense for an entire workforce - the insurance company has to make money somewhere. The total you would pay in premiums to cover everybody would almost certainly exceed what you'd end up paying out of your own pocket instead.
I don't want to come off as morbid, but I assume it must be reasonably straight-forward for Google to estimate/budget how much this benefit will cost long-term. After all, death rates amongst populations are generally well known.
That's not necessarily what is best for the survivors. Managing money requires effort, and you can't get scammed out of something that you haven't been given control over.
Google is sitting a giant pile of cash, with few attractive places to park it. In that situation it makes a lot more sense to self insure. If that changes in the future they can always take out a reinsurance policy to cover the costs.
