Friday, August 10, 2012

Can we stop hyperventilating over the Google employee death benefit?

There’s been a lot of coverage in the past few days about an employee benefit at Google: The spouse of a Google employee who dies receives half the employee’s salary for 10 years.

That’s a nice benefit, but the coverage—both in terms of the benefit to employees, and the “harm” to shareholders—has been hyperbolic. Business Insider concludes:

It kind of makes the free lunch pale by comparison.

Targ manure! It does not make the free lunch pale by comparison. In fact, for many employees, the free lunch is the more valuable benefit!

This death benefit is basically life insurance. And that means it’s not too hard to figure out the value. Through my employer, I can purchase optional group life insurance (in addition to an employer-paid policy of 1x my salary). I’m 35 years old, and for someone in my age bracket (35–39), the coverage costs $0.09/month per $1,000 of coverage. There is no additional employer-paid contribution for the optional insurance.

So let’s consider an employee my age at Google, earning $100,000/year. If he were to die, his spouse would receive $50,000/year for 10 years. That’s a nominal payout of $500,000, but it’s not paid out all at once like a normal insurance policy would be. At modest discount rates, the stream of payments has a present value of perhaps $400,000. But the Google benefit provides an additional payout for each child, so let’s compromise by using a discount rate of 0% and saying that the Google payout is worth $500,000 right now.

At the rates I pay for life insurance, that means the Google benefit is worth 500×$0.09/month, or $45/month. How does that compare to free lunches? I have to think that decent, healthy lunches in Silicon Valley cost more than the $2 or $3 per workday that the death benefit is worth. Probably more like $8 or $10 per workday. Lunch beats death in my book!

If you’re 50 or older, it gets closer, and if you’re on the north side of 60, the death benefit is probably more valuable. But I’d expect the Google workforce to be young and healthy on average.

Note: My understanding is that life insurance policies are purchased with premiums paid after taxes, and the payouts are not typically subject to income tax. If the Google benefit is not a true life insurance policy (and the employees have not paid taxes on the premiums), then I wonder about the tax treatment of the payouts. If the payouts are taxable income, then the value of the death benefit decreases, and the lunch wins by a larger margin.

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