Employee Benefits: Insurance

The following is a chapter from Employee Benefits: How to Make the Most of Your Stock, Insurance, Retirement, and Executive Benefits by Josh Mungavin CFP®, CRC® and Edited by Chris Boren & Tristan Whittingham.

Employee Benefits - cover

 

Insurance

 

Health Insurance Options

Health insurance options change every year, so it’s important to look over new healthcare options every year. Think about how these options are presented to you, think of everything that will affect you and your family, and reanalyze the math you did the year before to make sure the plan you’re in, if still available, is the right plan rather than just staying in a plan that may no longer be right for you. You have to look beyond the premium. While a low-cost plan might be nice if you don’t expect anything to happen, remember that everyone is healthy until they’re not.

Optimal Use: Strategies and Analysis

You must look at copays (i.e., the fixed amount you pay for services), deductibles (i.e., the amount you pay before your insurance starts paying), coinsurance (i.e., the percentage of costs covered after you meet the deductible), and out-of-pocket maximums (i.e., the most you’ll have to pay before the insurance pays 100% of any remaining costs). Depending on your health that year, going with a lower premium might end up meaning you need to pay higher out-of-pocket expenses. Things to think about include new babies, newly diagnosed illnesses, or a recent marriage. You also want to know if you have dental and vision coverage and how long it has been since you’ve used either. It’s also important to look over which health plan will be most beneficial to you over the year and not let the “tax tail wag the dog” by looking at the tax and savings benefits of a Health Savings Account (HSA) and whether a plan without a high deductible will be more beneficial for you over the course of the year since taxes aren’t everything (HSAs are discussed in more detail in the next section).

Generally, plans cover preventative care such as annual physicals, gynecologist visits, mammograms, and immunizations at no cost, but that varies from plan to plan. Make sure that you can use the doctors you want to go to under the plan you choose and that you’re not limited to a doctor who works for an insurance company you may or may not be happy with when you already have an existing physician.

One way to compare a traditional healthcare plan and a high-deductible plan is as follows: take the annual premium, deductible, coinsurance after the deductible, out-of-pocket limit, any employer contributions to the HSA, and the tax break you get from the HSA to do a little math. The math works as follows: look at the cost of coverage if you need absolutely nothing over the course of the year. To do that for the traditional plan, use the annual premium as the total cost. To do that for the high-deductible plan, use the annual premium minus the tax benefit of fully maximizing the HSA plan if you plan to fully do so or the tax benefit of any amount contributed to the HSA plan.

17. Traditional plan Annual premium Total costSo, if the annual premium for the traditional plan is $1,000 a month, its yearly cost to you is $12,000 if you don’t need any medical care at all.

18. Traditional plan Annual Premium 1000 monthIn this case, if the high-deductible plan costs $500 per month, the yearly cost is $6,000 minus the tax benefit of the HSA deduction.

19. High-deductible plan Annual premium 500 monthIf you maximize the HSA as a family with the full $6,900 per year allowed and you are in the 20% tax bracket you get a tax benefit of $1,380 (Note that your personal tax rate makes a big difference, so one person’s decision may be completely different than another’s given the same circumstances and the same plan but different tax rates). From there, take the yearly cost of a high-deductible plan coverage of $6,000 and subtract the tax benefit of $1,380 for a total yearly cost of $4,620.

20. Maximizing the HSA as a family

If you do not need any medical care, subtract any employer HSA contributions for the year from your effective yearly number (for this example, we’ll use no money from the employer so the calculation is easy). The high-deductible plan coupled with the HSA also allows the benefit of tax-free growth on the investment of $6,900, which is a benefit you would see above and beyond the effective yearly premiums, being $7,380 less expensive (calculated as $12,000 traditional plan annual cost – $4,620 HDHP annual cost after adjusting for the HSA tax benefit, all as illustrated above).

Next, we’ll look at how much the plans would cost if you maxed out your coverage for the year. In this case, let’s say the traditional plan has an out-of-pocket maximum of $3,000 and the high-deductible plan has an out-of-pocket maximum of $10,000.

21. Traditional plan Out of Pocket maximum 3000For the traditional plan, add the $3,000 out-of-pocket maximum to the $12,000 yearly cost of premiums for a total insurance cost of $15,000 as a worst-case scenario.

22. 12000 premium yearly cost

For the high-deductible plan, add the $4,620 “effective” premium to the $10,000 out-of-pocket maximum for a worst-case scenario of $14,620.

23. 4260 Premium yearl costIn this case, taking the high-deductible plan would be something of a no-brainer. The math changes substantially if the cost for the yearly premium under the traditional plan is only $7,000. In this case, the worst-case scenario would be the $7,000 yearly premium plus the $3,000 maximum out-of-pocket for a total worst-case scenario of $10,000.

24. Traditional plan Yearly Premium 7000

You would then compare the traditional plan’s worst-case scenario of $10,000 to the high-deductible plan’s worst-case scenario of $14,620 to see a difference of $4,620 dollars in a worst-case scenario per year.

25. 14260 High deductible worst case

Now look at the difference between the $7,000 traditional yearly premium and the $4,620 effective high-deductible yearly premium, and you’ll come up with a difference of $2,380 per year of an effective premium difference.

26. 7000 Traditional yearly premium

Now you will calculate the number of years it will take you to break even by dividing the $4,620 difference in a worst-case scenario by the $2,380 per-year effective premium difference to come up with 1.9 years to break even.

27. 4260 Difference in worst case scenario

This means that as long as you don’t max out your insurance every other year, you are better off with a high-deductible healthcare plan even though you will max out the high-deductible healthcare plan in some years, making you worse off for that year. In this case, you will have saved money over the long run by going with the high-deductible healthcare plan as long as you can afford to pay for your medical costs in the years with high expenses. If you find that the break-even point is three, four, or five years, it may be worthwhile to look more closely at the traditional plan. If you expect to have regular healthcare treatment needs or plan to have some level of expenses every year, you may need to alter this calculation so the 1.9 years to break even becomes a little bit longer since you will have to pay everything out of pocket using the high-deductible healthcare plan, whereas you may have some help paying in the years with a moderate amount of healthcare costs with a traditional healthcare plan.

Generally, a high-deductible healthcare plan with an HSA will be more attractive to younger people in good health who aren’t expecting to have any children or major medical issues. The good news here is that if you make the wrong decision, it’s only the wrong decision for one year and you’re not locked in forever since you can move to the other plan at the end of the year. Furthermore, if you have any money in an HSA, you can keep that and use the HSA money whether you decide to use the high-deductible healthcare plan or a traditional healthcare plan the next year.

It’s important when working through a health insurance analysis to look over the health insurance options available through your spouse or domestic partner’s employer (if the employer covers domestic partners) to make sure you choose the best plans since you may want to split coverage or have both of you covered under one of the plans.

General Considerations

Will you have access to a flexible spending account (FSA) or an HSA? Both options allow you to set aside pre-tax dollars to cover future medical expenses, but there are differences between the two.

If you have the option of setting up an FSA with your insurance company, do so. Doing this allows you to use the money in the account for copays; however, remember that those funds are use-it-or-lose-it, so make sure you have a back-up plan for how to spend the money by the end of the year, such as new glasses or dental work.

Keep in mind that while HSA savings amounts are federally tax deductible, they may not be deductible for state tax purposes depending on what state you live in.

Health Savings Accounts

According to a 2018 study, the average couple who is 65 years old today will require an estimated $280,000 in today’s dollars for medical expenses in retirement, excluding long-term care.9 It is likely that the amount needed for those who are younger will be even higher. This is one reason, but not the only one, to fully fund an HSA every year in which you are eligible. In fact, I think an HSA is one of the most powerful savings tools currently available, especially if it is used optimally.

Specifically, an HSA is a tax-advantaged account created for individuals covered under high-deductible health plans (HDHP) to save for medical expenses those plans do not cover.10

Optimal Use of an HSA

In 2017, only 18% of the money that went into HSA accounts stayed invested until the end of the year. This means most people use HSA money to pay off current bills. Putting only enough money in an HSA to cover your current year’s medical bills is a straightforward way to get a tax break for your non-deductible medical bills for the year, but I think there’s a better way.11

A large portion of the long-term benefits of an HSA comes from the tax-free growth of the account through the years. This means that the longer you invest in the HSA, the higher your likely lifetime benefit. To get the most value from the HSA investment vehicle, fund the HSA with the most you can every year but hold off on using the funds (absent an emergency) until late in life. Retirement healthcare expenses should be one of the first uses of HSA funds. In addition to regular out-of-pocket medical expenses, you can generally use HSA funds to pay for premiums for long-term care (with the qualifying amount based on age), health insurance continuation coverage (i.e., COBRA), health insurance while receiving unemployment, and Medicare if you’re over age 65 (not including Medigap).

Receipts for medical expenses that were not deducted through the years should be saved along the way. There is currently no deadline for self-reimbursements, so if you have paid out of pocket, have not deducted the expense on your taxes, and have the records, you can theoretically reimburse yourself for years’ worth of expenses if you need extra money and do not have anywhere else to withdraw from or if you have more money in your HSA than you will need for lifetime health expenses.

Furthermore, if you find yourself with sufficient funds to fully reimburse yourself for all past medical expenses and cover all future medical costs, you can consider taking distributions from the HSA for living expenses. While HSAs do not have any minimum distributions after age 70.5 like IRAs, you do have the option to use the funds for anything, paying only taxes with penalties after age 65.

If the HSA account is severely overfunded and there is charitable intent, this may be the first account to turn to for charitable bequests by naming the charity of your choice as the beneficiary of your HSA. Otherwise, you may think about intentionally beginning to draw the account down slowly so taxes are spread out over the course of years. Unlike retirement accounts, HSA accounts are liquidated upon the death of the account owner, and all taxes are due as ordinary income in the year of death.  Meaning, a highly funded HSA could push you into a much higher tax bracket than normal.

Finally, remember that we are always subject to changes in tax law when you are planning a very long-term tax and investment strategy (as we plan the government laughs).

HSA Providers and Account Costs

There are quite a few HSA providers, but the expense breakdown usually follows a similar formula. The HSA provider has a banking side and an investment side. There is a $2.50 per-month fee if the banking side doesn’t maintain a balance over $5,000. This fee amounts to 0.6% of the $5,000, which I believe the investments will outperform over time. This means, it makes sense to pay the fee rather than keep the cash on the bank account side. There is also the underlying investment fund fee, which can be minimized by using the link to a brokerage firm (if the HSA provider has one) to invest in a much wider variety of funds available than under their standard list of investment options. This allows the account to be linked to an Evensky & Katz portfolio to make the most of tax-sheltering assets that would otherwise create a high percentage of tax liability in the portfolio. There would also be a $3 per-month fee if your investment account drops below $5,000, along with any number of fees attributable to things such as closing the account closure, ordering a checkbook, ordering a debit card, and so on.

It’s crucial to know how you plan on using the HSA account and make sure you have the best supplier for your needs based on fees and investment options.

Special Considerations

If the spouse is the beneficiary of the HSA, it will be treated as the spouse’s HSA after your death. If the spouse isn’t the beneficiary, however, the account stops being an HSA, and the fair market value minus any qualified medical expenses for the person who passed that are paid by the beneficiary within one year after the date of death become taxable to the beneficiary in the year in which the account owner dies.

One HSA rollover is allowed per year within 60 days of receipt, but the rollover is not limited in terms of the amount of money rolled over.12 This means you can briefly tap into HSA funds in an emergency as long as you can pay it back within 60 days. Any amount not rolled back into an HSA account will be taxed, and penalties could be charged.

If employers offer HSA funding through a cafeteria plan payroll deduction, it is generally not subject to FICA taxes that go to Social Security and Medicare, which generally amount to about 7.65% of the amount contributed by payroll deduction. This means that absent a better use of your employer cafeteria deduction amount, it can be even more profitable than usual to fund your HSA plan with as much of the cafeteria plan funds as possible.

A qualified HSA funding distribution from an IRA to your HSA can be made once during your life. It reduces the amount you can contribute to the HSA that year by the amount converted. This means, in a year in which you can’t afford to fully fund your HSA from your income and savings, you can fund it with IRA money. If you have saved up sufficient health receipts and you had the HSA open during the proper period, you may be able to reimburse yourself for past expenses with the current value of the account. The money must pass directly from the IRA trustee to the HSA, and it isn’t included in income or deductible. This can be done from a Roth, but that generally wouldn’t make sense since you would be putting money you have already paid taxes on into an account you may have to pay taxes on (if not used for medical expenses). The qualified funding distribution can’t be more than any amount you are entitled to contribute to an HSA that year. You must also remain a qualified individual for 12 months after this transaction takes place, which means your insurance or qualifying insurance must remain in place for 12 months after the money is moved.

This one-time funding of your HSA from your IRA can be beneficial for years in which you can’t fund an HSA, especially if you would otherwise need to tap into your IRA for living expenses (which would cause you to pay taxes and possibly a penalty). Depending on the situation, you may be able to fund the HSA with your IRA funds and then reimburse yourself for past medical expenses from the money now in your HSA, doing away with both the early withdrawal penalty and taxes associated with the withdrawal.

Some HSA Rules

  • HSA distributions prior to age 65 for people who are not disabled for non-healthcare qualified expenses are charged ordinary income tax plus a 20% penalty.
  • An HSA can be funded by an individual, an employer, or a combination of the two. You don’t have to use the employer-provided HSA provider unless your employer requires you to maintain an account with them to receive employer contributions. Once the employer contributions are received, they can generally be transferred to your preferred HSA provider (you can have multiple HSA accounts). Any contributions are tax deductible (even if the tax return does not itemize deductions) but keep in mind that the IRS does not see employer contributions as income, which means they are not taxed to begin with and so cannot be deducted.
  • Funding an HSA requires a high-deductible health plan, and the person for whom the account is titled can’t be claimed as a dependent on someone else’s tax return for the year. In 2018, a high-deductible health plan has a minimum annual in-network deductible of at least $1,350 for an individual or $2,700 for a family and a maximum annual in-network deductible of $6,650 for an individual or $13,300 for a family.13
  • Contributions are limited to a combined funding limit of $3,450 per year for an individual or $6,900 per year for a family in 2018, but remember that the funding levels cover total funding among all HSA accounts, including any Archer MSA accounts. Anyone over the age of 55 can contribute an additional $1,000 per year, which means an individual over 55 can contribute $4,450 and a family with two eligible spouses over 55 years old can contribute $8,900 for 2018.14
  • You (or your family) are eligible for the entire year if you are eligible on the first day of the last month of your tax year (which is December 1st for most taxpayers) even if your spouse has a non-high deductible health plan, as long as the non-HDHP doesn’t cover you. However, there may be some limitations to how much you can contribute, and you may be required to keep the health plan or other qualifying health plan for 12 months to ensure that the HSA contributions are not included in the next year’s income with a penalty.
  • There are other rules to determine eligibility. If you have any questions regarding your eligibility, you should speak with your financial advisor or accountant. Contributions to an HSA can be made until the tax filing deadline for the year, which is usually April 15 of the following year.
  • You do not have to be eligible to save in an HSA account or have a high-deductible healthcare plan to use previously saved HSA money for health expenses tax free. Any money you save in the HSA does not go away at the end of the year. HSA funds roll over and accumulate from year to year (unlike funds in FSAs) and remain in your account if you leave your employer (unlike company-owned Health Reimbursement Accounts).
  • You cannot use HSA money for health expenses that will be reimbursed by your health insurance and still have the HSA distributions count as qualified tax-free distributions. You also can’t deduct medical expenses you have used HSA funds to pay for. You must keep all pertinent records for any HSA distributions, including receipts and proof that the expenses weren’t paid for by a medical plan, reimbursed from another source, or taken as an itemized deduction in any year.
  • Qualified medical expenses are generally expenses your insurance would cover if your deductible had been met that were incurred after you qualified for and established your HSA.
  • You generally can’t use the account to pledge for a loan or buy goods and collectibles without risking the amount used being deemed as distributed for non-qualified medical expenses for the year and fully taxed with potential penalties (although there are some exceptions).
  • Any distributions the HSA owner takes by mistake having reasonably believed they were for a qualifying medical expense can avoid tax consequences by returning the funds to the HSA before April 15th of the year after they discover the mistake.
  • For employers, the amount contributed to employees’ HSAs aren’t generally subject to employment taxes, although there are non-discrimination rules stating that all employees in the same class must receive HSA contributions (if any employees receive HSA contributions) to avoid an excise tax of 35% on contributions. This may mean employers strategically classify full-time and part-time workers, individual and family participants, and employees who are or are not enrolled in high-deductible health plans.

Flexible Spending Account

FSAs allow you to put away money before taxes to pay for medical expenses. You may be able to set aside money every year to use pre-tax dollars for your insurance copays, deductibles, some drugs, and certain other healthcare costs. However, remember that an FSA is a use-it-or-lose-it arrangement, which means you generally must use all or the vast majority of the funds within a certain time frame, generally by the end of the year.

Medical FSAs put all the employee’s annual contributions in at the start of the plan year. The employee can elect to defer a certain amount of money, spend the account down, or leave the employer for another employer without actually saving the amount of money from their paycheck withholdings that they’ve spent on tax-free medical expenses.

Strategies

If the plan allows the rollover of a certain amount of money, it is almost always recommended to fund the FSA with at least the amount you can roll over from one year to the next to take advantage of the tax savings as long as you have the excess cash flow to afford to do so. Keep in mind that this money may go away if there is a separation from service with your employer, so it can be very important to spend down an FSA before quitting or being terminated from your employer.

If you decide to use an FSA, make sure you know how you’ll spend any extra money at the end of the year, including getting an additional pair of glasses, having dental work you might not otherwise have done, or buying medical equipment you need or know you will need. If you find you are getting close to the end of your plan year and you have money left in the plan you will not spend, it is worthwhile to go on websites that cater to FSAs to see what you may need that is available rather than losing the money when the plan year ends.

Remember that there may also be requirements to apply for refunds or reimbursements from the plan, so the dates of those filings should be noted and followed strictly.

Contributions

Employers can make contributions to your FSA, but they are not required to. FSAs are limited to $2,650 per year per employee; if you’re married, your spouse can also put up to $2,650 in an FSA with their employer.15 FSA funds can be used to pay for not only your medical expenses but also medical expenses for your spouse and dependents. The funds cannot be used to pay for insurance premiums. The funds can be used for over-the-counter medicines with a doctor’s prescription (although insulin is allowed without a doctor’s prescription). They may also cover the cost of medical equipment.

Money put into your FSA by your employer that is not deducted from your wages is generally not counted against the FSA funding limit for the year. This means that if your employer contributes $1,000 to your FSA, you are generally still allowed to contribute the full $2,650 per year to your FSA. An exception to this would be if your employer’s FSA contribution comes from your employee benefits cafeteria plan, in which case your employer benefits would reduce the amount you can put into your FSA to a combined $2,650. In addition, if you have multiple employers offering FSAs, you may elect to defer an amount up to the limit under each employer’s plan; this differs from HSAs and IRAs, which only allow the combined funding up to a certain limit no matter how many accounts or employers you have.

Depending on the FSA, you may be allowed a grace period of up to two and a half extra months to use the money in the account or a carryover to the next year of up to $500. Only one of these options can be offered, and plans aren’t required to offer either one.

Carrying over a certain amount of money does not reduce the participant’s maximum FSA contribution for the next plan year. So, someone who carries over $500 from one plan year to the next can still contribute the maximum for the next plan year so they can get reimbursed for more than just the plan maximum for the next year.

Rules and Tax Implications

Generally, the money put into an FSA is not only exempt from your regular taxes but also not subject to payroll taxes for Medicare, Social Security, and Medicaid. This leads to an even higher tax savings than many other ways of saving money in a tax-benefited savings vehicle.

People who have high-deductible health plans with HSAs they are eligible to fund are generally not allowed to also have FSAs, except for a limited-expense FSA, which is also called a limited-purpose FSA account. This type of FSA can be used to reimburse dental and vision expenses as well as potentially eligible medical expenses incurred after the health plan deductible is met; however, it is important to understand the details of how this works for your particular plan before thinking about funding it with anything above the amount that can be rolled over or that you know you will need during the plan year. You may be able to extend your ability to keep your FSA money after you are laid off if you continue health coverage under the company’s COBRA health insurance or another arrangement.

In addition, there may be multiple types of FSAs offered through your employer, such as health and dependent care, but generally speaking, the money cannot be transferred from one type of account to another.

Dental Insurance

The cost of all types of health coverage has been on the rise, and dental insurance is no exception. In fact, dental care is not only more expensive, but employers are now putting more of the costs of dental insurance on their employees.  This means it’s important to shop around before defaulting to your employer’s plan since you may find that an organization you belong to provides a plan that better fits your needs (e.g., professional organizations, AARP, and many other organizations offer group dental plans).

When comparing dental plans, it is important to not only look at cost but also make sure your dentist is considered in-network; if not, consider whether you are willing to switch to another dentist in the dental plan’s network. Dentists outside the plan may provide you with little to none of the plan benefits.

You may see dental plans list coverage with three numbers illustrating the percentage of particular services the plan will cover (100-80-50 plan). These numbers can be understood as follows:

  • 100: The plan covers 100% of preventative dental work, including regular check-ups and cleanings.
  • 80: The plan covers 80% of the cost for common dental procedures the plan covers. Common procedures include cavity fillings, braces, root canals, whitening, etc.
  • 50: The plan covers 50% of the cost for major dental procedures the plan covers. Major procedures include tooth crowning, tooth implants, procedures requiring sedation, etc.

Typically, plans will require you to pay a small deductible. They will cover a certain percentage of costs after the deductible has been met, depending on the category in which the procedure falls, up to a yearly cap, after which point you will have to pay all remaining costs.

Vision Insurance

Vision insurance commonly pays for the following:

  • Preventive care, including annual eye exams and check-ups;
  • Costs associated with contact lenses, lens frames, lenses, and lens protection methods;
  • Disposable contacts (typically an added coverage that costs more); and
  • Eye surgery discounts (typically an added coverage that costs more).

It’s important to note that it’s not uncommon for vision insurance providers to deny coverage for medical issues related to your vision. Should something come up during a check-up, your doctor will likely refer you to a specialist, the costs for which wouldn’t be covered by your vision insurance. The good news is that although vision insurance may not cover the cost of such medical issues, your health insurance would cover the costs more often than not.

Some important questions to ask yourself and your employer regarding your vision insurance include the following:

  • Does your vision insurance cover the costs of eye tests or exams you want or need?
  • Does your vision insurance cover the costs of glasses you want or need?
  • Does your vision insurance cover the costs of lenses you want or need?
  • Are you required to go to a low-cost chain store, or can you go to your private practice doctor?

Life Insurance/Accidental Death and Dismemberment

Life insurance offered through your employer is often a very good deal. Because the underwriting is done for the employer as a whole, it’s generally low cost; it may even be free. Signing up is easy since you are generally not required to undergo a physical exam to qualify, and it’s usually pretty inexpensive. The problem is that a person can often buy a limited amount of insurance through their employer’s plan, which may not be enough to cover the amount of life insurance you need.

How much life insurance is necessary?

Life insurance is looked at as an income replacement insurance plan in case someone passes away. To find the minimum amount of coverage you should have, figure out how much it would cost for your family to live without your income and replace that amount minus any growth on the assets you think they’ll receive. This involves thinking about things like additional childcare and someone to help around the house. It can help to figure out how much it costs for you to live currently and how much each partner earns, although the lifestyle costs may increase or decrease depending on the family dynamic.

As a very rough starting point, if you are the sole breadwinner, it is generally recommended to make sure your assets minus your house add up to at least roughly 20 times your yearly expenses (you should speak with your financial planner and insurance provider for a specific recommendation). If your assets do not add up to 20 times your yearly expenses, then the current amount of shortfall is a very easy way to gauge the least amount of life insurance you should purchase from your employer or other life insurance program if possible.

Change of Employment Status

Another important point to make about employer life insurance is that you may lose life insurance if you quit your job or get fired from your job. You may be unable to get private insurance, and your next employer may not offer insurance. Some employer-sponsored life insurance plans are portable, so you can take them with you if you leave the job, but it’s important to know what type of life insurance your employer offers so you can buy insurance on the open market if your employer does not provide enough or the right type of life insurance.

Short and Long-Term Disability Insurance

According to the Social Security Administration16 one in four people in their 20s working today will become disabled before retirement age. One way to hedge against a disability is via disability insurance, which gives you a portion of your pay if you can no longer work for a specific period. The cost of disability insurance through your employer is often very inexpensive, making it worth considering. A disability can be due to pregnancy, short-term illness, or long-term illness.

Strategies and Tax Implications

It is important to know how to structure the payments for your disability insurance. If you pay for disability insurance with FSA funds or other pre-tax dollars, you will have to pay taxes on the benefits if or when you use the disability insurance. If you pay for the disability insurance with after-tax dollars, the benefit will be tax free. Given that the disability insurance only covers a percentage of your pay, it’s generally advisable to use after-tax dollars to fund the benefits. Personal circumstances, such as an inability to fund with after-tax dollars or to gather funds to cover any shortfall between the cost of living and the after-tax value of your disability benefits in case of a disability, may change the calculation for which option is most beneficial to you.

If your employer pays for your coverage pre-tax, your benefits will be taxable.

28. Taxation of Employer Provided Disability Insurance

Critical Illness Insurance

Critical illness insurance pays out a lump sum if the employee gets cancer or another serious illness. The insurance may be part of a cafeteria plan in which you choose how much money goes to which benefits, you may have to pay for the insurance out of withholding from your paycheck, or your employer may pay for the coverage. Remember that the benefits generally will not be taxed if the employee pays the full premium with after-tax money, whereas the lump sum payments will be taxed if the employer pays the cost with pre-tax money.

Coverage and Cost

The policy can be small or can cover as much as a million dollars per issue. So, it’s important to know how much coverage you need in coordination with any long-term care and disability insurance should you contract a major illness. Different policies cover different things, including:

  • Heart attack
  • Cancer
  • Heart transplants
  • Coronary bypass surgery
  • Parkinson’s disease
  • Alzheimer’s
  • Amyotrophic lateral sclerosis
  • Loss of sight
  • Loss of speech
  • Loss of vision
  • Heart valve replacement
  • Angioplasty
  • Kidney failure
  • Major organ transplant
  • Stroke
  • Paralysis

Keep in mind that each of these illnesses must meet the specific definition of the illness from the insurer; some cancers, strokes, etc. that you think will qualify don’t in fact qualify for a payout or only qualify for a partial payment. Likewise, some policies may require you to see a specialist in the particular field of your illness to qualify as having the disease properly diagnosed. So, it is important to know what your insurance actually covers.

It is often wise to consider disability, long-term care, and life insurance as the first places for insurance coverage money to be placed before looking at critical illness insurance. Keep in mind that self-insuring runs the risk that you contract a critical illness early on in life (in which case the insurance would have paid a significant return). If you do need coverage, this type of insurance can be very beneficial since the lump sum can be used to pay for things that aren’t covered by insurance, such as:

  • Some of your pay while not working
  • Travel costs to specialists
  • Specialists not covered by insurance
  • Experimental treatments not covered
  • Replacement of spouse’s income while they care for you
  • Health insurance premiums while you’re not working
  • Time off work
  • Out-of-network doctors & hospitals
  • Rent & Utilities
  • Mortgage & real estate taxes
  • Credit card bills
  • School tuition
  • Food

Insurers may provide up to a certain amount through your employer without going through a medical exam; however, amounts over that limit will require a physical. It’s important to make sure a failed health exam will not preclude you from getting the employer’s group coverage with no underwriting. To ensure that you’re protected in this scenario, you want to max out the available employer group coverage without underwriting while going through the underwriting just in case you fail the health exam and can’t get anything above the group coverage if that strategy is possible. Whether you go through your employer or an open-market plan from an insurance broker, you don’t want them to find cancer during underwriting, thus disqualifying you for any coverage, when you could have taken advantage of the group coverage prior to having the physical and finding out about the medical ailment. The group coverage will often require you to answer a few questions before providing the coverage you want.

Generally speaking, it is better to prioritize life insurance and disability coverage and then look to critical illness insurance since it is narrower in scope and it can be expensive. Of course, this changes for very cheap or free coverage or if your family has a medical history of critical illnesses. It is important to consider this in the hierarchy of insurance needs and decide where to spend your dollars to get the most benefit in terms of coverage and the way things will affect your life. I recommend speaking to a financial planner and insurance agent before making any decisions. The coverage may include only you or cover your spouse or domestic partner, your children, or family, so is important to know who can be covered and make sure you have thought about an objective for the appropriate coverage.

What the insurance covers can be very specific, so it’s important to know all the terms of the contract. Are pre-existing conditions covered? Which types of cancers and heart attacks are covered? Are some treatment payouts only partially covered, such as certain treatments for heart issues or cancers? Can you get a one-time payout or can you receive payments multiple times for the same illness or different illnesses over time? Do the policies require that you be hospitalized or receive chemotherapy or radiation to qualify? Is there an age-related benefit deduction (i.e., as you grow older, will the benefits decrease)? Is the policy portable (i.e., what happens if you switch jobs, retire, get laid off, or get fired)?

Payout Policy

Some policies provide multiple cash payments, such as for someone who has a heart attack followed by a kidney transplant, so the insurance will make multiple payouts from the same policy. On the other hand, some policies will only give a single payout for the first of the two issues. In addition, some policies will grant a second payout for a second occurrence of the same event, such as the second occurrence of a heart attack, although the second payout may be lower.

You may find that different illnesses provide different payouts as a percentage of the full value of the coverage (i.e., some cancers may pay out 100% while other cancers pay out 25%; skin cancer pays out a flat rate far lower that is not tied to the total coverage amount). There may also be a requirement that a certain amount of bodily damage be done in addition to the disease diagnosis to qualify for a payment.

The coverage may also provide an additional stipend for certain treatments, transportation, or lodging in association with the covered illness. Likewise, lifestyle choices, such as drug use, flying small planes, alcohol abuse, being part of a war or riot, or self-inflicted injuries, or how the illness was acquired may change your coverage. Some insurers require you to live for a certain period after a diagnosis, so someone who has a heart attack but dies the next week may not be covered for a payout under the policy.

 

To download the book – for free! – click the following links:

Amazon.com

Barnes & Nobles

Feel free to contact Josh Mungavin with any questions by phone 1.800.448.5435 extension 219, or email: JMungavin@EK-FF.com.

Click here for the previous chapter: Stock Benefits

For more information on financial planning visit our website at www.EK-FF.com

Deducting Hurricane Casualty Losses on Your Tax Return

Deducting Hurricane Casualty losses on Tax Return_DG_Blog Correction Image

David Garcia

David L. Garcia, CPA, CFP®, ADPA® Principal, Wealth Manager

Many of us in Florida or Texas endured major hurricane events in 2017.  If you suffered damage to property you may be able to deduct the property loss on your tax return as a casualty deduction.  The IRS has very specific rules that govern how much property loss you can deduct.  You’ll have to go beyond just estimating the value of the lost property.

First, you need to reduce any losses by the amount you are reimbursed from an insurance company since the deduction only applies to unrecoverable losses.  Next, you need to determine what your actual loss is.  The actual loss is the smaller of your tax basis in the property or the decrease in the fair market value.  Generally, your tax basis in the property is how much you bought it for.  For example, suppose you purchased a boat 3 years ago for $40,000.  The boat is now worth $32,000 and is destroyed in a hurricane.  For tax purposes, the loss is the decrease in fair market value since it is lower.

Once you’ve determined the actual loss you must reduce it by $100 and then by 10% of your adjusted gross income to arrive at the amount that you can claim as a deduction on your tax return.  To claim the deduction, you must be eligible to itemize your deductions on schedule A.  This means your total deductible expenses for the year exceed the standard deduction.

The government provides additional relief when the area you live in is a federally declared disaster area.  For example, you can claim the loss in the year of the disaster event or the prior tax year.  For further information, please click on the IRS links for Irma and Harvey below.

https://www.irs.gov/newsroom/tax-relief-for-victims-of-hurricane-irma-in-florida

https://www.irs.gov/newsroom/tax-relief-for-victims-of-hurricane-harvey-in-texas

Feel free to contact David Garcia with any questions by phone 305.448.8882 ext. 224 or email: DGarcia@EK-FF.com.

LTC – To Buy or Not to Buy

Roxanne Alexander

Roxanne Alexander, CAIA, CFP®, AIF®, ADPA® Senior Financial Advisor

The decision of whether to buy long-term care insurance vs. self-insuring is a question about which many clients ask. If you can afford to self-insure based on your planning, then the choice boils down to whether you would like to retain the risk or share the risk with an insurance company. The goal would be to take the worst case scenario off the table if possible.

Insurance companies offer many different products with various bells and whistles (such as LTC with life insurance or annuities), so it is important to determine what you would like to cover and what you can afford to pay for premiums. Since you have no idea of the final outcome, and there are many variables and unknowns such as if and when you will need care or how much the insurance company may raise the premiums in the long term, this comes down to what lets you sleep best at night.

You will also need to make sure you qualify for long-term care as some pre-existing conditions may prevent you from being insurable. You can also potentially get a discounted premium if you and your spouse choose to purchase policies together. Long-term care costs and increases in premiums can also vary by state.

Some policies allow you to use the benefit in whatever way you would like, so, if it’s a three-year benefit option and a starting monthly benefit of $6,000, this means you have a total starting coverage of $6,000 times 36 months or $216,000. If you start using the benefits this year, as an example, and you used the maximum benefit every month, you would run out of money in just three years. However, if you start using 50% of the monthly benefit instead, then your coverage can last twice as long, or six years.

For most people, buying a long-term care policy is all about care at home, according to a study done by researchers at Boston College. The study puts the lifetime risk of needing nursing-home care at 44% and 58% for 65 or older men and women, respectively. Also, the study concluded that nursing home stays are shorter than previously believed: 10 months for the typical single man and 16 months for a woman.

If you decide you want to go ahead with a policy, there are several considerations, such as:

  1. How many years to insure for? What are the advantages and disadvantages to insuring longer and shorter periods? According to the Society of Actuaries studies on long-term care insurance claims, the average time on claim for claims that last longer than a year ranged between –three and a half to four years in 2014. Usually between two to four years is a good ballpark. Three years is about average. The longer the benefit period, the higher the policy benefit, the higher the cost. It is a tradeoff between accumulating and using the benefits and not using them at all. Essentially, the longer the benefit period, the higher the risk that the client might end up paying thousands of dollars in premiums and getting nothing in return.
  2. Can the policy premiums change, and if so, by how much? Many insurance companies increase premiums and you have no idea if or when this may happen. You might be paying $3,000 annually for a policy for 15 years but the insurance company decides to raise your premium to $5,000. If you decide this is too costly after 15 years and cancel the policy, you have already paid $45,000 to the insurance company and have not used the benefit. However, like other insurance such as homeowners, you may be paying for peace of mind but never have to claim on it. Clients who cannot afford to self-insure now may be able to insure during the earlier years of the plan and as time progresses, there may be a point where the client can support a LTC event and at this point the policy can be dropped.
  3. Is this a cash plan (indemnity) or a reimbursement plan? A cash plan has more flexibility since you are paid a cash benefit equaling the entire daily benefit vs. being reimbursed for actual expenses. A reimbursement policy will only pay the full daily benefit when the actual cost of care is greater than or equal to the daily benefit. Policies with a cash benefit are more expensive. However, if you have a cash plan, you have the option of paying a relative or friend to care for you. [i] From Morningstar: “50 Must-Know Statistics about Long-Term Care” by Christine Benz – 09-23-16 – “65%: The percentage of older adults with long-term care needs who rely exclusively on friends and family members to provide that assistance.”
  4. If you do go into care and come out, does the policy reset or do the benefits paid reduce the benefit available for the next occurrence?
  5. Are there any policies with compound interest available, and if so, what do they cost? Compound has better inflation protection but may have a higher premium. Some policies have a 5% simple interest vs. others with a 3% compound interest. Depending on the policy and the rate, simple may be a better option over the long term as the breakeven point may not occur until later. Inflation is compounded but if the LTC policy uses simple interest, at a certain point inflation overcomes the simple interest and the policy pays for less than the actual costs. [i] From Morningstar: “50 Must-Know Statistics about Long-Term Care” by Christine Benz – 09-23-16 – “3.5%: Five-year annual inflation rate in nursing-home costs, private room, 2016.”
  6. Does the policy have a waiting period? The shorter the period, the more expensive the rider. You will be responsible for any costs during the waiting period.

LTC usually turns into a less-than-ideal investment at some point. The decision to buy is very individualized and if you happen to use it early, it can be a good investment since you have paid less in premiums up front and are using the benefits. The longer you take to use a policy, the lower the return on the policy. If you end up using the policy during the first five to ten years, this can be very advantageous, but the longer you take to use the benefits, it may make more sense to just put money aside yourself if you can afford to self-insure. Of course there is no way of knowing if and when an event will happen.

Feel free to contact Roxanne Alexander with any questions by phone 305.448.8882 ext. 236 or email: RAlexander@ek-ff.com.

Note: We are not licensed insurance agents and cannot give insurance advice, but we can help you through the process of deciding what is best for you and provide a broad overview of the advantages and disadvantages. Please discuss this with your agent before purchasing or making any changes to your existing policies.

[i] Morningstar: 50 Must-Know Statistics about Long-Term Care by Christine Benz 09-23-16 

http://news.morningstar.com/articlenet/article.aspx?id=770860&part=1

A Baby Changes Everything – Part 1

AnneBednarz_175x219

Anne Bednarz, CFP®, AIF® Financial Advisor

There is no greater joy than finding out that either you or a loved one is expecting to bring a new little baby into the world. It can bring a flood of emotions, from excitement to terror of not knowing what’s to come, but being prepared is a good first step.

I created a checklist to prepare new parents on the issues they will encounter along the way that may not be as obvious as cribs, car seats, and other items needed to care for a new baby. This is not an exhaustive checklist; everyone’s situation is different, but I hope to capture the general idea of things to consider prior to baby’s arrival. Feel free to use the checklist and make it your own along your expectant path. This checklist can also be used for families who adopt with a few minor edits. I have included an image of the checklist in the post, but there is a link for a printable version as well.

 

While most of this post is for someone who is already pregnant, I’ll digress momentarily — the first topic is for someone who’s planning to be pregnant in the near future.

Pre-Pregnancy

The most recent edit I have made to our expecting checklist is the topic of short-term disability insurance. If you don’t have short-term disability prior to becoming pregnant, that does not mean that you are unable to purchase a policy; however, any disability or unpaid time from work would not be covered for the existing pregnancy, as it is considered a “pre-existing” condition. However, any subsequent pregnancy would be covered after your nine- to twelve-month window, depending on the policy.

Disclaimer: not all short-term disability policies cover pregnancy/maternity leave, and it would only apply to mothers who give birth; short-term disability policies will not cover leave for parents who adopt.

 

Expecting — Back to Already Being Pregnant.

I’m a planner by profession and highly encourage all expectant parents to review the checklist below.

  1. You have more time with fewer interruptions before the baby arrives, especially if this is your first child.
  2. The sooner you can get a plan, the better.Life Changing Event Checklist - Expecting A New Baby - Both PagesClick here to view the checklist in a printable format. 

    The checklist is generally self-explanatory; however, there are a few points that I want to address in a little more depth.

    Adequate Emergency Fund

    Depending on your employer and family situation, your emergency fund may differ from the general rules of thumb of enough to pay for either three or six months of expenses. It depends on your employer and how its maternity/paternity/family leave policy works.

    • Are you covered by short-term disability while at home with the baby?
      • What is the elimination period prior to benefits being paid?
      • How long will benefits last?
      • What percentage of your income will be paid?
    • For working parents…
      • Do you need to use paid-time-off (PTO), vacation, or sick days?
      • Will your time at home with your baby be unpaid family leave?

    Expected Increase of Expenses per Month — A Few Items

    • Medical expenses for prenatal care and labor/delivery.
      • You can discuss this with your doctor’s office and the care facilities to determine what type of payment options they have.
    • Diapers — start stockpiling in advance.
    • Formula/Breastfeeding Supplies
    • Child Care

    Childcare Options

    This is unique to each person and how you view child care or if it will be needed. I highly recommend that you starting looking into child care at least four to six months in advance of the baby’s arrival.

    Many facilities have a waiting list that can be several months long. This will be the place that your child spends the majority of his or her waking hours; you need to be comfortable with the facility and the type of care that is provided to your child.

    Make an appointment to meet with the right personnel for your initial meeting. Bring a list of questions or concerns you have regarding the care of your child and how different situations would be addressed. I also encourage you to stop by without an appointment to see how the facility operates daily.

    Licensed care facilities are monitored by the state to ensure they are in compliance with the rules and regulations of the state. In Texas, the Department of Family and Protective Services website is where violations are reported and monitored.

    General Guidelines

    Discuss with your employer, human resources department, or supervisor your upcoming arrival. It is better to give everyone adequate notice of the new baby, so plans can be made and other colleagues can be trained to cover your responsibilities while you are out with your baby. Know what the policy for maternity/paternal/family leave is and what is required of you prior to taking your leave. Also, if your employer falls under the Family Medical Leave Act, know what type of protection that provides you and your job.

     

    There are a number of things that should be planned for prior to your baby’s arrival; however, relax and enjoy this time too. Seek out others who have prepared for a new baby. Family and friends are always happy to give insight, sometimes more than is wanted, but know they are eager to help make the transition a little smoother. If you are not sure whom to ask, feel free to contact me; I have children myself and will be expanding my family by one more in February. I will have another post and checklist in a couple of weeks for what to do after baby’s arrival.

    If you have any questions/comments, please feel free to reach out to me at 806-747-7995 or abednarz@ek-ff.com.

Umbrella Liability Insurance – Do I need it?

Roxanne Alexander

Roxanne Alexander, CAIA, CFP®, AIF®, ADPA® Senior Financial Advisor

Umbrella liability insurance is a type of liability insurance available to individuals and companies protecting them against claims above and beyond the amount covered by their primary policies. If your liability coverage isn’t enough to cover the damages of an accident or an incident on your property, a personal umbrella insurance policy kicks in when your other liability insurance’s underlying limits have been reached. In other words, an umbrella policy can protect you when your automobile or homeowner’s liability insurance is not enough.

Keep in mind that an umbrella policy requires you to have a specific amount of underlying coverage on all other policies. In most states, you will need to have a homeowner’s policy with a minimum of $300,000 in personal liability coverage, plus an auto policy with limits of $250,000 or $500,000 for bodily injury coverage and $100,000 for property damage coverage and uninsured motorist coverage.

When an insured has a liability claim, he or she is covered up to the underlying policy limits, but any additional amount will be covered by the umbrella policy. The policy can protect future income as well as possibly cover legal fees. For example, if you have a car accident and your current auto policy has liability limits of $300,000 but the claim is $500,000, your personal assets would be a stake for $200,000 if you have no umbrella policy.

As another example, if you are required to have $300,000 worth of liability on your homeowners or car insurance but only have $100,000, and you have a $2M umbrella policy, you will still be liable for the “donut hole” of $200,000 before the umbrella policy will start paying.

The required limits for underlying policies can vary by insurer, so it’s important that you speak with your insurance agent regarding the limits on your primary policies, and determine how they correlate with the umbrella coverage you are considering purchasing.

What about excess liability?

Although you can get excess liability coverage on an existing policy, the main difference between excess liability and an umbrella policy is that the umbrella extends to automobile or other broader protections.

For example, if you only have excess liability on your homeowner’s policy and have a car accident, the excess liability policy on your home will not cover the additional liability for your car accident.

Umbrella coverage can also extend to other vehicles, boats, personal injury, or director/officer liability, depending on the policy. Also, umbrella policies tend to be more cost effective since you can spend less on the coverage but receive greater insurance protection.

Do I need an umbrella policy?

If you are a high net worth individual or are exposed to more than normal risk, it makes sense to look into this coverage. Do you spend a lot of time driving? Do you have a boat or RV? Do you entertain frequently in your home? Do you have a pool? Do you have any pets? Do you have a vacation home? Do you have teenagers who have just started driving? Do you own a small business?

Umbrella liability is fairly inexpensive and can protect you and your property from lawsuits. If you have assets to protect in the event of a lawsuit, it makes sense to have this type of policy. The policies usually start around $1M and cost around $200 to $400 per year. They are available in million-dollar increments — each additional million usually costs marginally less. Cost may vary by location, credit history, and driving records of the people in your household.

Have you evaluated your current policy recently?

You may already have an umbrella policy in place, but as assets grow over the years, you may need to consider raising the limits to cover your current exposure. In general, your policy should be equal to or greater than your net worth.

Note: We are not licensed P&C insurance agents and can only give you a broad overview of the advantages and disadvantages. Please discuss this with your agent before making any changes to your existing policies.

Feel free to contact Roxanne Alexander with any questions by phone 305.448.8882 ext. 236 or email: RAlexander@ek-ff.com