Amitai Etzioni reports his horror at discovering that Au Bon Pain, where he frequently buys lunch, takes out COLIs (Corporate Owned Life Insurance policies) on some of its employees. The idea here is that the company takes out a policy with itself as the beneficiary in the event of the employee’s death, and in many cases the payoff isn’t shared with the employee’s survivors.

Now, I won’t pretend I don’t share with Etzioni a vague sense that there’s something morbid, even ghoulish, about the practice. But is it really unethical? It can’t be, as Etzioni suggests, that this is really just a form of “investment.” Even if it’s possible to use insurance benefits as a tax shelter, the one thing more certain than taxes, despite their frequent pairing as icons of inevitability, is death. If the actuarial tables used to calculate insurance benefits actually made life insurance a good investment, we could all get quite rich by taking out policies on random pools of acquaintances (or strangers) and insurance companies would be out of business in short order. Death is, rather obviously, not a productive process. Insurance is, in terms of raw wealth, a zero sum game: it can’t work unless premiums paid in exceed benefits paid out. As the name “insurance” suggests, it makes sense only as a way of pooling risk. The expected value of any insurance contract is presumably negative if you’re risk neutral (ignoring adverse selection and other complications). We take out such policies because we aren’t risk neutral: we’d rather take a series of smaller (though, on average, cumulatively larger) hits over time than risk a big, catastrophic hit (or, in this case, a hit for our families) all at once.

So if it’s not a form of investment in the ordinary sense, I think it makes sense to regard it as what the companies say it is: a hedge against the risk of suddenly and unexpectedly losing an employee. That is, after all, a real economic loss, since the employee was presumably creating more value for the firm than the amount of her wages. Desptite the intuitive creepiness, is there really anything more wrong with a firm hedging against that risk than against the risk of the unexpected loss of any other asset or source of value?

Etzioni thinks the problem is the failure to share benefits with the families. But that’s a separate issue, isn’t it? The company’s desire to hedge against its own loss is one matter, with its own internal cost/benefit calculation. A separate payment to the family could be provided, as a sort of pension program offered as an employment benefit. But why do it that way? Maybe there are tax reasons, in which case companies might find they could attract employees by displacing wages with a death benefit of some kind. But absent tax considerations, why not allow workers and families to make their own insurance decisions? The added cost of providing that sort of benefit, after all, would just end up being counterbalanced by proportionately lower wages or reductions in other benefits. A company could, by the same token, give employees part of their wages in the form of, say, clothing or food. And presumably some—clothing and food producers, I’ll guess—do offer benefits of that kind. Again, for tax reasons, a lot of jobs offer health insurance as part of a compenastion package. But absent some special reason to do it that way, it seems to make more sense to offer compensation in cash and let employees use the money for insurance if that’s what they want to do.

Long story short: it’s not clear that anyone’s better off if we prohibit COLIs. If you just ban them outright, you remove an instrument for companies to hedge against risk, which in itself seems like a bad thing. If you mandate that death benefits be shared, either it becomes too costly a proposition to be worthwhile, in which case the policies aren’t taken out at all—again, to nobody’s benefit—or you’ve effectively mandated a wage increase for insured employees: the additional money paid out to the family above the optimal hedge (and the added premium to cover that difference). That either just displaces ordinary wages and other benefits or, if we’re talking about minimum wage employees, has the same employment reducing effects as raising the wage floor would. And in that case, why not just argue for increasing that floor directly?