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17 October 2011
The first three quarters of 2011 have proven, yet again, that we live in a world full of uncertainty. Stock markets have continued their roller coaster ride and world events continue to dominate the headlines.
In conjunction with that reflection, it provides time and an opportunity to prepare for the year(s) and uncertainty ahead. Instead of viewing your open enrollment period as another formality that you have to go through each year, consider it an opportunity to plan for the certainty of uncertainty. While it is extremely difficult to consider that a devastating life event may happen to you, your employee benefits often provide the first line of defense to ensure your family is going to be ok.
Here are some specific benefit tips to consider this fall:
Health Insurance
Health insurance is often the granddaddy of benefits decisions. While some employers only offer one plan for employees (thus negating the decision), larger employers typically offer several to choose from.
There has been a gradual shift toward high-deductible plans in the group market the past several years and that shift is likely to continue as medical costs and insurance premiums continue to rise. This is not necessarily a good or bad thing on the whole, but it greatly alters the cost structure.
For those with only one option, this transition may be inevitable for you. In most cases, a healthy individual and family will benefit from this transition, while it will likely lead to increased costs for those who receive medical care more frequently.
If this change is inevitable, or you are considering switching to a high-deductible plan, you will often be provided the opportunity to contribute money into a Health Savings Account. If you are eligible to participate in one of these plans, be sure that you do. You receive a 100% tax deduction for your contributions and are not taxed at the time of withdrawal if you use the money for medical costs. And further, if you are staring a large deductible in the face and do not have the excess cash flow or savings to fund the account, the IRS permits you a one-time rollover of IRA funds into these plans.
Life Insurance
Many employers automatically provide a certain level of life insurance benefits to all employees. This often comes in the form of a fixed amount (ie. $50,000), or is based on your income (ie. 1x salary).
Some employers also provide an opportunity to purchase additional insurance through a supplemental life insurance program. The decision to participate in these programs depends first and foremost on your need for insurance in the first place. If you are single and have no children, you may not have a need for insurance at all. However, if you married with young children and are the sole income provider in your household, your family may need to carry several hundred thousand to several million dollars in insurance coverage.
This need is based on your family’s dependency on your income. Obviously, if you pass away, the income stops. Over time, your need for insurance declines because the assets you are accumulating allow your family to self-insure against the loss of income.
A healthy person can often obtain life insurance in the open market less expensively than in a group plan, but for unhealthy individuals, group rates are often more optimal. Since group costs are based on the risks associated with all of the participants, an employee who does not smoke and runs a marathon every year pays the same rates as an overweight smoker.
Another consideration is the consistency (or lack thereof) of your income. If you happen to be in a plan where benefits are based on your income, you must factor the variability of your earnings into the equation. While some plan benefits are dependent on your base salary alone, many include bonuses and incentives earned.
Let’s assume for a moment, that you have a base salary of id="mce_marker"00,000 and potential incentives and bonuses of another id="mce_marker"00,000. Then let’s assume you calculated your insurance need to be id="mce_marker",000,000. If you made your election decision the year after you hit your incentive and bonus targets, you would have chosen to purchase 5x your income in benefits ($200,000 x 5). If, however, you solely earned your base salary the following year because the economy was in the tank, you are going to be vastly underinsured (id="mce_marker"00,000 x 5) and must adjust your benefit.
Disability Insurance
You often aren’t given much of a choice for disability insurance benefits, as the default tends to be 60% of salary. However, some employers offer a base amount of benefit, plus an opportunity to purchase supplemental insurance.
In general, the cost of supplemental coverage is relatively nominal, but the benefit would make a big difference in the event you ever need it. Like life insurance, homeowners and auto insurance, this is coverage you hope you never need to use, but protects you from being financially devastated in the event the need to use it arises.
If your employer provides you with the ability to elect pre or post-tax disability benefits, choose the post-tax option. This will result in you paying a nominal amount more in taxes now, but will result in significantly greater benefits should the need arise.
Retirement Plans
There has been much written on retirement plans over the years and we discuss them regularly with you, so we are not going to spend a lot of time on this topic. But at the very least, make sure you are getting your full company match. This is particularly important in the aftermath of the last few years, when companies suspended matching contributions and people stopped contributing when their hours were cut or a spouse was laid-off work.
And in choosing your investment options, many folks take the approach of scanning the best performers of the last 1, 3, or 5 years and piling all their contributions into those funds. That approach is a recipe for disaster.
Beneficiary Designations
One of the most overlooked areas in financial planning is beneficiary designations. The most critically important thing to know about beneficiary designations is that they actually trump any asset transfers you have outlined in your Will. In other words, even if you updated your Will after getting remarried to leave everything to your new spouse in the event you die, your 401(k) and life insurance proceeds are still going to go to your ex-spouse if he/she is still listed as the beneficiary of those plans.
Life events happen all the time, whether it is death, divorce, remarriage, the birth of a new child, adoption, etc. Open enrollment periods are an excellent time to reflect on them and update your planning as needed.
Intelligent Decisions. Simplification. Peace of Mind.
