In two previous posts we discussed the “big” elections during open enrollment – health care and retirement savings. While these consume the most pre-tax payroll dollars – and therefore employee mindshare - your employer is likely offering other supplemental and/or elective products during benefit selection season.
Benefits Selections Beyond Healthcare
Below we discuss a few of the more common ones, and how to consider them in the context of your family’s broader approach to financial wellness.
Let’s face it, we all like feeling secure. Employers and the benefits brokers they hire know this and over the years employees have come to expect insurance coverage options for more than just healthcare. However, if you look underneath the covers of vision and dental “insurance” programs, you may find they begin to look like what they truly are: prepayment programs.
Kind of like the Sears layaway programs of yesteryear, our vision, and dental insurance premiums essentially pre-pay on services coordinated through an intermediary. Unlike how our parents may have purchased before the age of credit cards, sometimes we forget and never use what we’ve already paid for. How many of us consistently visit the dentist chair twice a year for dental cleanings?
Shop around, however, and you might find purchasing vision checkups and dental cleaning directly from your local optometrist and dentist can save you money. Many of these specialties, like medical general practitioners, are converting to cash-only, no-insurance practices, so you might find you are better prepared for the ongoing retail shift in healthcare.
Of course, if your employer offers dental and vision programs at no cost then consider yourself lucky. On the other hand, if premiums will be deducted each pay period for these elective programs, determine how much you would pay by purchasing the services directly. You might find you could save money by skipping this employer-sponsored benefit.
Short and Long Term Disability.
Many employers offer disability insurance, and often standard with larger employers. Disability insurance tends to be fairly inexpensive at the group level and can provide a critical income stream should you need a longer leave of absence due to illness or injury.
Whether provided as an employer benefit or purchased on the market directly, most financial planners recommend both short-term and long-term disability, with a minimum coverage of 60-70 percent of your salary. Be sure to understand whether the policy is for “own” occupation or “any” occupation, as these provide clues as to what type of insurance you are receiving. In general, and particularly for highly skilled professionals such as surgeons and orthodontists, you will want “own” occupation insurance. Other features to look for are the elimination period (essentially time required before benefits begin), length of the benefit period, renewability and residual benefit provision.
Keep in mind if your employer is paying the premium for disability insurance or you pay the premium with pre-tax dollars, any insurance benefits you receive as a result of a disability claim will be taxable to you. Likewise, if you pay for the benefits using after-tax dollars any benefits received will be tax-free. Most financial planners would recommend paying for disability insurance with after-tax dollars if only to avoid the additional financial strain of paying taxes on a reduced income stream when you are unable to work.
Disability insurance tends to be forgotten about right until you need it. As someone with first-hand experience, the benefit of the right disability insurance product cannot be overstated. Talk with your HR department about the specifics of your program and consider doing some additional research. You may want additional coverage.
Group Life Insurance and Supplemental Life Insurance.
Large employers typically provide group term life insurance as part of benefits packages. Because premium payments are a form of employee compensation, the IRS assesses taxes on the value of the insurance; you may have even noticed tax withholding on your end of year W-2 from your employer.
While you shouldn’t turn down a “free” benefit – aside from the taxes you pay on the value - keep in mind your employer owns the policy. Ask yourself these questions:
- Is my employer-sponsored group term life insurance enough?
- What happens to my life insurance policy if I leave my employer?
Group term insurance coverage levels are variable from employer to employer, though not uncommon to find employers will offer term policies equal to your base salary. Others may offer a multiple of your salary up to a cap. Financial planners have a number of methods to determine appropriate coverage levels specific to the individual and family, but by far the simplest is a (very) rough rule of thumb: 10x salary.
Which brings us to the question of whether you purchase additional insurance, and from whom. Many benefits plans feature additional, supplemental life insurance protection to employees for additional costs deducted from their pay. This may or may not be a competitive price depending on your insurability in the open market.
If you are young, healthy and perhaps willing to have a medical examination performed to qualify you for the “ultra-premium” life insurance rates, you may find much better value than what is available through your employer. On the other hand, if you have a documented medical condition that makes life insurance expensive on the open market, you may discover group insurance is a much better option, as evidence of insurability is not required. Either way, you should call for quotes before purchasing supplemental life insurance through your employer to better understand what is available and at what pricing levels.
The other aspect of employer-sponsored group term insurance is convertibility into “whole” or permanent, cash value insurance at the time of separation. This can be particularly useful as the conversion is based on age and, once again, does not require evidence of insurability.
As with disability insurance, life insurance can be a complex topic, with as many variables to consider as there are products available! Before purchasing additional insurance do some homework and consider meeting with a financial advisor, such as a Certified Financial Planner (CFP), either someone available through your employer or on your own, who will discuss your specific situation and present options.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.