Open enrollment season is upon us, and it’s that time of year when you have the opportunity to review, renew, and make choices that can significantly impact your financial and healthcare future. Whether you’re selecting a health insurance plan, considering life or disability coverage, or evaluating other employee benefits, open enrollment is your window of opportunity to make informed decisions that will shape the year ahead. In Part One, we kicked things off by covering the basics of HSAs and FSAs and went over vision and dental insurance. Our coverage continues below:
Safeguarding Your Loved Ones: The Essential Role of Life Insurance
Life insurance offers financial security for your family should something happen to you. During open enrollment, you can review and adjust your policy to match your present situation. There are various ways to calculate the amount of life insurance that’s right for you.
The Human Life Value Approach: The Human Life Value (HLV) approach is a method used to determine the appropriate amount of life insurance coverage a person should have based on their economic value to their family or dependents. This approach focuses on assessing an individual’s future earnings and the financial support they provide to their loved ones.
The Needs Approach: The Needs Approach is a method used to determine the appropriate amount of insurance coverage a person should have based on their specific financial obligations and the needs of their beneficiaries in the event of the policyholder’s death. This approach focuses on assessing the financial requirements of the policyholder’s surviving dependents and other obligations rather than estimating the policyholder’s potential future earnings, as is the case with the Human Life Value approach.
The Capitalized Earnings Approach: The Capitalized Earnings Approach is a method used to determine the appropriate amount of life insurance coverage by focusing on the income or earnings that the policyholder’s family or dependents would need to replace in the event of their death. This approach is particularly relevant for individuals who are primary income earners or play a significant financial role in their families.
For individuals who face challenges in meeting the underwriting criteria for life insurance, group life insurance could be an option to obtain coverage without the need to provide evidence of insurability. Although group insurance can offer more affordability compared to individual policies, the maximum coverage available may not adequately address all your requirements.
Protecting Your Financial Future: The Crucial Role of Disability Insurance
Disability insurance is like a safety net for your income. If you get sick or hurt and can’t work, it provides you with money to help cover your living expenses, like rent, food, and bills, until you can work again or, in some cases, for the rest of your life. It’s like income protection when you need it most. While many individuals don’t choose this insurance option, it’s worth considering if your employer offers it.
There are two terms of disability insurance:
Short-Term: These policies pay benefits for short periods of time ranging from three months to two years. The most common policy duration is one year. Short-term insurance policies typically come with higher costs compared to long-term ones. It’s often advised to rely on an emergency fund to help maintain your usual lifestyle during a short-term disability. Using short-term disability benefits can also provide additional income to support you during the period following the birth of your baby.
Long-Term: These benefits start once your short-term disability coverage ends and can extend until you reach retirement age or in the event of your passing. Most people do not have the funds to cover a gap in income due to a disability should it be long-term, which is where the need to insure comes into play.
To qualify, you must meet the specific criteria for what is considered a disability, and it’s important to note that this definition can vary from one insurance policy to another. It’s a good practice to review your policy’s definition of disability.
Here are some considerations to keep in mind when reviewing your organization’s disability insurance policy:
- What is the elimination period for short-term and long-term disability?
- How long is the benefit period?
- What % of my salary is covered and is it integrated with Social Security?
- What is the definition of a disability?
- If I leave this employer is the coverage portable?
- Will benefits received be taxable or tax-free?
Additionally, it’s crucial to be aware that if you use post-tax income to cover your policy premiums, the benefits you receive won’t be subject to income tax. However, if the premiums were paid with pre-tax income, for example, if your employer offers this benefit at no expense to you, then the benefits become taxable income.
Employer-Sponsored Retirement Plans: Your Path to Financial Independence
Aside from health insurance, the most popular employee benefit is workplace retirement plans. Retirement and financial Independence are on the minds of many Americans, but to achieve it, we need to have enough savings. There are multiple vehicles to save for retirement, but very few, if any, offer more benefits to achieve financial independence than the trusty workplace retirement plan.
Not only do employees receive tax incentives by contributing to their workplace retirement plan (in the form of pre-tax or Roth, if your plan allows) but many receive additional pay from through an employer match or contribution.
While you can make changes to your retirement plan at any time, open enrollment serves as a good opportunity to check in and see if you are maximizing your benefits. Below are some recommended approaches:
- Take advantage of the employer match: If your employer offers a matching contribution, aim to contribute at least enough to get the full match. It is essentially free money that can significantly boost your savings.
- Tax efficiency: Be mindful of the tax advantages of your 401(k). Contributions are made pre-tax, reducing your taxable income, and investments grow tax-deferred. Consider the Roth 401(k) option if your plan offers it, which provides tax-free withdrawals in retirement.
- Start Early: The earlier you start, the more time you have on your side to allow compounding interest to work its magic. Feeling like you’re too young to start saving for retirement? Check out this video on BPAS University that explains the gift of compounding interest.
- Increase your Savings Rate: You’ve probably heard in the past that 10% is a good savings rate for retirement. Some people would argue that the number is closer to 15-20%, but for argument’s sake, let’s agree on a double-digit savings rate being preferred. Most people cannot afford a double-digit savings rate right off the bat, and it’s okay to work up to that gradually. If you get a 2% salary increase every year, consider keeping 1% for yourself and contributing the other 1% into your retirement plan until you are at a savings rate that will support your goal of retiring one day.
- Keep the retirement account a retirement account: Avoid withdrawing from this account for anything other than retirement. Building a separate fund for emergencies, a boat, or your school tuition will help you avoid any penalties and keep you on track.
- Stay informed: Know the rules and options for your plan. Vesting schedules, withdrawal rules, etc. Your Plan Sponsor or Financial Advisor can provide this information.
- Diversify your investments: Spreading your contributions across several different asset classes can reduce your risk. Consider your risk tolerance and time horizon and seek professional help should you need it.
- Review your beneficiaries: As you’re going through open enrollment, you may have identified your partner and children as dependents in your health care plan or recipients of any life insurance plans. While that information is readily available, review the beneficiaries of your Workplace Savings Account to make sure they’re also up to date.
Open enrollment is a critical period for taking control of your healthcare and financial well-being. It’s the time to carefully assess your needs and options, whether you’re considering health insurance, life insurance, or other employee benefits. It’s an opportunity to make informed decisions about your coverage, ensuring it aligns with your current circumstances and future goals. Remember to review all available plans, weigh the costs and benefits, and seek guidance if you’re unsure. Your choices during open enrollment can have a profound impact on your health, financial security, and peace of mind. So, make the most of this window of opportunity and empower yourself with the right insurance choices for the year ahead.
- Dalton, James F., et al. Insurance Planning / James F. Dalton, Michael A. Dalton, Thomas P. Langdon, Joseph M. Gillice. 7th ed., Money Education, 2020.
Post contributed by Dalton Lehnen, CERTIFIED FINANCIAL PLANNER™ | Trust Officer