Posted by Joe Wride
Questions regarding the insurance you need aren’t easy to consider. No one likes to think about what may go wrong, but failing to do so leaves you and your loved ones at risk. And with annual enrollment around the corner, the time to consider these questions is now.
Thankfully, when approached correctly, you can experience a surge of confidence and relief when your open enrollment benefits are maximized. You’ll be able to step into the security of knowing you’ve put yourself, and your loved ones in the best position to handle the unexpected.
Together in this article, we’re going to touch on critical points of consideration in regards to your upcoming enrollment. These include, wrongful assumptions, strategic ways to pay, and conversations to have in advance.
Don’t Assume “The Best” Is The Most Expensive
It’s easy to assume whatever health plan has the highest premium offers the best coverage. But this is often a wrong (and costly) assumption to make. The truth is, you need to do the math. You have to take inventory of your personal health needs. And the premiums of the insurance need to be weighed against the out-of-pocket expenses.
The premiums on your plan are the costs you pay monthly. But the out-of-pocket expenses are comprised of three parts:
- Deductibles: This is the amount you personally pay for your health care before your insurance starts footing the bill.
- Coinsurance: After your deductible is met, this is your share (or percentage) of the health care service(s) you're responsible for paying while insurance covers the rest.
- Copayments: This is a fixed amount you pay for a given health care service (note: the amount can vary by service type).
As a general rule of thumb, if you don’t make regular visits to a doctor, you may want to consider a health plan with a higher deductible. Granted, you’ll have to pay more yourself initially. But the offset in lower premium payments can be enormous in helping you crush your other long-term goals (ex: saving for college).
Consider Dependent Care FSAs And HSAs
Dependent Care FSAs
Some employers offer a Flexible Savings Account (FSA). But there’s a specific type you should look over if you’re a parent. It’s known as a Dependent Care Flexible Savings Account (DCFSA), and its parental benefits are pretty incredible.
DCFSA aren’t subject to payroll taxes, which means you get to pay for eligible dependent care services with pre-tax dollars. These services include, but aren’t limited to before/after school care, preschool, summer camps, and babysitting.
DCFSA funds are reserved for children under the age of 13. And you do not have to have a specific type of insurance to be eligible for one. But you don’t own the account, your employer must offer it. And any savings inside a DCFSA must be used within the year, the funds do not carry over to next year.
In the end, it’s a simple math problem. The contribution limit for DCFSA is $5,000 per family.1 And most people spend that (often more) for their child care. By using a DCFSA, you get a discount on $5,000 worth of child care at your tax bracket rate. So, for example, if you’re in the 24% tax bracket, you’ll be receiving $1,200 in tax benefits- not too shabby.
If you enroll in a qualifying High Deductible Health Plan (HDHP), you’ll be eligible for the benefits of a Health Savings Account (HSA). These benefits allow for the powerful combination of tax-free contributions, growth, and withdrawals (for qualifying medical expenses). No other qualified plan has this “triple” tax benefit.
Unlike with Flexible Savings Accounts (FSAs), HSAs have no “use it or lose it” policy. Your savings rollover to subsequent years. You’re also the owner of your HSA, not your employer. This means you can take your tax-advantaged savings with you should you change jobs.
Additional benefits of HSAs include:
- Employer Contributions: Similar to a 401(k) match, some employers offer contributions on the behalf of their employees who use HSAs.
- Huge Savings: Contributions limits for HSAs are as high as $3,850 (self), and $7,750 (family) for 2023.2 These high contributions coupled with lower premiums for the high-deductible plan, the potential tax deductions and employer match, results in substantial savings overtime.
- Investability: You can often invest the money you accumulate inside of your HSA.
- Later-Age Functionality: After turning 65, you can start using your HSA money on non-qualified medical expenses. You’ll end up paying taxes here, but this essentially turns your HSA into a traditional IRA!
The biggest downside to HSAs is how much you’re on the hook for before your insurance picks up the tab. Per 2023 IRS requirements, HDHPs that are HSA-eligible have minimum deductibles of $1,500 (self), and $3,000 (family). Additionally, they have maximum out-of-pocket expenses of $7,500 (self), and $15,000 (family).2 But, if your medical needs are few and far between, and you can afford it, the HSA offers stellar long-term benefits.
Communicate With Your Partner
Generally speaking, if you’re in a spousal relationship, you’ll have the option of hopping on the plan offered by their employer and vice versa. For this reason, it’s imperative that you include your partner in discussions regarding your annual enrollment.
Failing to have these conversations can result in huge opportunity costs. Remember, it’s an annual enrollment. So you’ll likely be locked into your electments for an entire year. Though exceptions can be made for Qualifying Life Events (ex: getting married, losing a job, and having a child).
These life events are another reason why it’s critical to speak openly with your life partner. If either of you are looking to adopt kids, move to another city, quit your job, etc. this could have a serious impact on your enrollment decisions. So don’t jump into anything until both of you are on the same page.
Pay For Long-Term Disability With After Tax Dollars
It's heartbreaking, but many Americans will need long-term disability coverage over the course of their lifetime. Recently, some of the most common reasons cited for long-term disability claims include cancer (15%), injuries (ex: fractures and sprains) (12%), and mental health issues (9.3%).3
So if long-term disability is offered by your (or your spouse’s) employer, it’s worth seeing if you can elect for the premiums to be paid with after-tax dollars. That’s because employer-paid premiums are always pre-tax. This means, should you need long-term disability benefits, *knock on wood* the income you’ll receive (sometimes as high as 60% of your salary!) will be taxable.
Yes, you’ll be paying more now with after-tax dollars. But this is while you’re working and healthy. And generally speaking, long-term disability insurance premiums are fairly inexpensive.
By paying a bit more today, you could save enormously when you and your family need it most *knock again*.
Employer-offered life insurance needs to be thought out carefully. That’s because there are significant pros and cons. And depending on your specific circumstances, these decisions can be vital in protecting your loved ones fully.
Pros of Employer-Sponsored Life Insurance:
- Quick and Easy: Unlike with individual life insurance policies, group policies are much faster to set up. You just have to opt-in.
- Guaranteed/Less-Restrictive: Some forms of life insurance garnered through your employer offer guaranteed coverage. There’s no underwriting process. Some forms (ex: supplemental) may require underwriting, but it’s usually far less stringent when compared to that of an individual policy.
- Lower Cost: Premiums for your employer-sponsored life insurance can be far less impactful on your paycheck, especially if you have poor health. Not every circumstance renders this true however- especially for older workers. Sometimes buying insurance privately can be cheaper, you won’t know until you shop for each.
Cons of Employer-Sponsored Life Insurance:
- Fewer Options: You’ll likely find less choices for life insurance through your employer, then you would pursue an individual policy.
- You Can’t Take It With You: Typically, your employer-sponsored life insurance is conditional on your active employment with the company.
- Increasing Premiums: Depending on the insurance offered by your employer, your premium costs may increase as you age.
Talk With A Pro In Advance
At Crafted Finance, it’s our responsibility to keep you and your loved ones tracking towards your financial goals. That encompasses making sure proper safeguards are put in along the way. And during your annual enrollment, you’ll have the opportunity to protect what you care about most.
Figuring out what coverage is right for you, what taxes can be avoided, and what conversations need to be had, can be daunting. But you don’t have to be alone when weighing all the pros and cons of your choices.
Our team is experienced in navigating employee benefits solutions So if you’re ready to plan alongside a professional, we’re here to help. Reach out to us at (650) 336-0598 or fill out a contact card here, and we’ll reach out to you.