COBRA vs. ACA

Due to the recent presidential election, parts of the Affordable Care Act described below may change. The current rules will likely stay in place through 2017. We’ll provide updates as they occur.

When you leave a job, a key decision you need to make is what to do about health insurance when your current coverage ends. If you’re under age 65 and not yet eligible for Medicare, then your two major options are either COBRA, or policies on health insurance exchanges set up under the Affordable Care Act (ACA).

istock_000018475056xsmallConsider the following factors to help you decide.

Cost

A big difference is cost. If you continue your existing coverage under COBRA, you pay 100% of the cost of coverage, plus an additional 2% in administrative costs. COBRA coverage is not eligible for any sort of subsidies to reduce the cost.

Policies sold through health insurance marketplaces generally cost less, especially some of the more “stripped down” policies. Also, as discussed in a previous post, low- and middle-income households may be eligible for a subsidy to further reduce the cost. The amount is based on household size and income. A family of four with less than $97,200 of household income may qualify for a significant subsidy.

Coverage

One benefit of COBRA is that you keep the same coverage. You know that your doctor is already in-network, so you won’t have to change care providers. And, your deductibles and copays remain the same.

COBRA allows former employees to continue comprehensive medical insurance, dental, and vision plans. COBRA does not apply to life insurance or disability benefits. (more…)

Affordable Care Act – the Subsidies

Due to the 2016 presidential election, parts of the Affordable Care Act described below may change. The current rules will likely stay in place through 2017. We’ll provide updates as they occur.

When an employer provides health insurance, you receive tax advantages that you don’t get when purchasing health insurance on your own. All the premium costs – whether paid by the employer or employee – are excluded from taxable income (both income tax and FICA taxes).

By contrast, individual health insurance you purchase on your own is paid for with after-tax dollars. These payments don’t receive the same tax advantages, so purchasing $1 of health insurance on your own is more expensive than purchasing $1 of health insurance through your employer plan

To address this, the Affordable Care Act (ACA) created a tax credit for individuals who purchase health insurance through the ACA marketplace. The credit is available to taxpayers earning up to 400% of the poverty level in the current year. For a household of two, that limit is $64,080 in 2017. A taxpayer’s income for this calculation is adjusted gross income (AGI), plus tax-exempt interest and any Social Security that was excluded from taxable income. So a married couple with no kids who earn $50,000 in 2017 would qualify for a tax credit if they had to purchase their own health insurance.

Because tax credits aren’t calculated until the end of the year, you have to pay your health insurance premiums all year in order to get money back when you file your taxes after the end of the year. This is where subsidies come in. (more…)

Student Loan Protection Riders and Retirement Protection Riders

Disability insurance helps protect you by providing income in the event of a disability. This insurance is particularly important because people are much more likely to become disabled than they are to die, which would be covered by life insurance. In fact, according to the Disability Insurance Resource Center, a 32-year-old is 6.5 times more likely to suffer a serious disability lasting 90 days or longer than to die.

In a previous post, we looked at a program designed to help young professionals, and even some students, protect their future earning ability in the event of a disability. There are two other disability benefits that individuals should consider, depending on their specific needs.

Student Loan Protection Rider

Student loan debt now totals $1.2 trillion, and the total student loan debt in the country is now greater than the total credit card debt. Not surprisingly, student loans are now the largest financial concern for many people. One reason for concern is that it’s almost impossible to get rid of student loans in the event of a financial hardship. For recent graduates with significant student loans, these can become an even greater burden in the event of disability.

The student loan protection rider can be added onto a disability insurance policy. With this rider, if the insured becomes disabled, the insurer will pay $500 to $2,000 per month for the student loan payments. Payments are made directly to the loan provider so that the beneficiary will not be over-insured. The rider has the flexibility to be dropped when student loans are paid off and it’s no longer needed.

The student loan protection rider is generally an inexpensive addition to a supplemental disability insurance policy. As medical students and other professionals increasingly graduate with over $100,000 in student loans, this rider can be a significant benefit for young professionals.

Retirement Protection Rider

With the loss of income that results from a serious disability, an individual also loses the ability to save for retirement. The retirement protection rider can be added onto a supplemental disability insurance policy like the student loan protection rider.

With this plan, after a client has been disabled for 180 days, the monthly benefit will be given to a fund where it’s invested as the client or advisor allocates. The benefit received from the insurer is non-taxable income because it’s a disability benefit purchased with after-tax dollars, but any income later earned by the investments would be subject to income tax.

Parting Thoughts

The riders described above are more appropriate for some people than for others. Merriman does not sell insurance, but it’s important that we work with our clients to develop comprehensive financial plans. We are proud to work with our clients and their family members to identify what may be appropriate based on their specific needs and circumstances.

New Professionals Program – Future Income Protection Plan

Disability insurance is a well-known and valuable tool for protecting future income. In most cases, an individual can get insurance that pays up to 60% of her current income if she becomes disabled. This can be especially valuable for high-income professionals like physicians, who would have a difficult time finding work at a comparable salary in the event of a disability.

As valuable as this resource is, traditional disability insurance has a significant gap for a specific type of professional: those who have recently completed or nearly completed their training, but do not yet receive the salary they expect to eventually earn.

New Professionals Program

For new professionals, the ability to earn your future income, or human capital, may be your largest (or only) asset. Also, medical residencies generally involve long hours and low pay – especially relative to what you can earn later. Traditional disability insurance that pays 60% of current income doesn’t accurately reflect the medical resident’s future earning power.

Disability insurance under the new professionals program provides the ability to get a salary based on future income, rather than current income. In fact, current income isn’t considered when determining benefits – it’s based on a formula.

Let’s consider Nicole, a hypothetical fourth-year ER resident. She’s making $60,000 per year and has a group disability policy provided through the hospital that would cover up to 60% of that salary. She purchased a disability insurance policy using the new professionals program, which gives her an additional $6,500 monthly benefit if she becomes disabled. It also continues to provide a partial, residual benefit if she’s able to return to work at lower pay. This policy would cost her $4,698 per year with the level premium option. However, she also has a graded premium option, which costs less at first, but increases slightly each year. This would initially cost her $2,172.

Nicole completes her residency the next year and receives a contract with a $360,000 salary. She already has a disability insurance policy in place with a future increase option (FIO) that can increase the benefit without having to undergo additional medical underwriting. Also, she can choose to continue paying premiums on the graded option, or she can switch to the certainty of a level premium.

Protecting Your Most Valuable Asset

Most insurance providers now offer disability insurance through the new professionals program. It’s available to various medical professionals, as well as CPAs, attorneys, engineers, architects and others. Medical professionals are generally able to enroll in the program as early as their third or fourth year of medical school. The available benefit starts around $2,500 per month and gradually increases throughout the residency to a maximum of $5,000 to $7,500 per month, depending on the specialty. (more…)