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.
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.
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…)
When switching jobs, it can seem overwhelming to review all of the documents related to your new company’s employee benefits. These plans include choices for medical, dental, vision, retirement, life and accidental death and dismemberment, short-term and long-term disability and many other additional benefits that may be useful.
With all of these options to navigate through, combined with the anxiety of starting a new job, it can help to focus on making a few key decisions.
You don’t want to leave free money on the table, so enroll in your company’s 401(k) plan as soon as you are eligible, and set your contribution percent (deferral rate) to at least the minimum required to receive the full employer match. This may mean contributing 6% to receive the employer match of 3%.
If you don’t start out deferring at a rate above the matching percent, let’s say 3% to 6%, then try to increase your deferral rate by 1% every 6 months to increase your retirement savings. You can also make a plan to increase your contribution rate when you receive any raises.
If you’re given the option between a Traditional (pre-tax) and Roth (after-tax) 401(k), consider your age and income level, and whether you’re already contributing to an outside Roth IRA. The employer match will always be to the Traditional 401(k) portion, so you can decide whether your contributions are pre-tax or after-tax for your portion. If you think your tax rate will be much higher in retirement than it is now, Roth 401(k) contributions make sense. Sometimes splitting your contributions 50/50, where 50% goes into the Traditional portion and 50% goes into the Roth portion, is the perfect medium. This way, you receive a tax deduction for half of your contributions now, while the other half is contributed after taxes and can be withdrawn tax-free in retirement.
Health care plan
Some companies give you multiple health care plans to choose from, while others give you just one option. These options may include an HMO, PPO, POS, or high-deductible health plan (HDHP) paired with a health savings account (HSA). If you’re deciding between an HMO, PPO or POS, make sure you’re comfortable with the in-network doctors available to you and your family, as well as the level of deductibles and out-of-pocket maximums. It doesn’t make sense to choose the least expensive health plan if you can’t afford the deductible.
If it’s available, select the high-deductible health plan paired with an HSA. It can provide the best overall value of any health plan available. If the total of your and your employer’s contributions reach the maximum you can contribute, then you receive a unique tax advantage because payroll taxes, federal income taxes and most state income taxes won’t be deducted from these contributions. They grow tax free, and withdrawals can be made tax free for qualified out-of-pocket medical expenses, including dental and vision. And, unused funds in the account are not forfeited at the end of each year like with a flexible spending account, so you can invest and allow these funds to grow.
Life insurance and accidental death and dismemberment
It’s a good idea to have life insurance that’s 10 times your income, especially when you have young dependents to provide for. Group plans may not let you go higher than 5 times your income, so acquiring the remaining coverage through an individual term policy may make sense.
Be aware that group life insurance through work is contingent upon your employment at the company, so if you are no longer working there, you may experience a loss of coverage. An individual term policy would avoid this, but may be more expensive than group benefits.
Even though the chance of having an event where accidental death and dismemberment (AD&D) pays out is slim to none, it’s still a worthwhile benefit if it doesn’t cost more than a few dollars a month. Most benefits plans sign you up for it automatically.
Short-term and long-term disability
Usually you’re automatically enrolled in short-term and long-term disability benefits. However, if you’re given the choice, select the option where you can pay these premiums with after-tax dollars, versus pre-tax dollars from your paycheck. These premiums are often less than $25 to $30 each pay period, and are paid pre-tax, meaning not subject to tax. Paying for these premiums after tax permits you to receive benefits tax-free if you ever need to file a claim. Since these premiums are small and have minimal tax consequences, receiving tax-free benefits if you have a claimis substantially more favorable.
Employee stock purchase program
If your employer offers an employee stock purchase program (ESPP) where they allow you to buy their stock at a 10% to 15% discount during stated periods in the year, considering enrolling with up to 10% of your paycheck. To avoid concentrating too much risk in your company, i.e., human capital plus financial capital, it makes sense to sell this stock as soon as possible to pocket the after-tax gain from the discount and any appreciation to help diversify. That 10% to 15% discount is considered compensation and taxed as ordinary income. Additional profit is taxed as short-term or long-term capital gains depending on how long you end up holding the stock.
Other popular benefits like legal aid, group long-term care insurance and identity theft protection can also be valuable benefits, but make sure you aren’t already receiving these benefits through another source. Group long-term care insurance is becoming more common, but it’s worth shopping around to make sure you’re getting a favorable rate. Also, one caution about group long-term care is that the insurance provider doesn’t have to get permission from the state regulators to raise premiums like they do for individual policies.
When evaluating benefits, we recommend contacting an advisor to review your options.
Even though they first became available in 2003, health savings accounts (HSAs) paired with high-deductible health plans are becoming more popular and are being offered by more employers. These accounts receive a unique triple-tax advantage, whereby contributions are made pre-tax (federal, most states and payroll taxes), can grow tax free and can be withdrawn tax free for qualified medical expenses at any time. Unspent funds aren’t forfeited at the end of each year like a health flexible spending account, so they can be accumulated and invested during your working years and spent in retirement to cover healthcare expenses.
A recent Fidelity study estimated healthcare costs for couples in retirement is $245,000, and this figure doesn’t even include the cost of long-term care. Rather than drawing down cash reserves or taking retirement account distributions to cover healthcare costs in retirement, why not accumulate and invest the funds in an HSA to spend tax free later?
So what is a high-deductible health plan paired with an HSA?
Similar to other health care plans, where you have an annual deductible that can be anywhere from $250 to $10,000, a high-deductible health plan has an annual deductible of at least $1,300 for an individual and $2,600 for a family. Contributions limits to an HSA for 2016 are $3,350 for an individual and $6,650 for a family, and those 55 or older can contribute an extra $1,000. Many employers contribute the deductible on your behalf and permit you to make contributions to reach the contribution limits. And, maximum out of pocket expenses are $6,550 for individuals and $13,100 for families. Once you reach this maximum, your health insurance provider will cover all remaining costs for the year.
You can’t make contributions to an HSA once you enroll in Medicare. However, if you’re still employed after reaching age 65 and want to stay on your employer’s health plan, you can postpone enrolling in Medicare and continue to contribute to an HSA. Keep in mind that you must enroll in Medicare within eight months after you retire and/or lose group health coverage to avoid paying any penalties.
What can the account be spent on?
The account can be spent tax free on out-of-pocket qualified medical expenses. You can also use an HSA to pay for a portion of your long-term care insurance premiums (based on your age), continuation coverage through COBRA, and Medicare premiums, except Medigap. You can’t use an HSA to pay for regular medical premiums, though, unless you’re unemployed and receiving federal/state unemployment benefits.
Investing an HSA
HSAs often have investment options similar to a 401(k). Some of these plans may carry high expenses, so be mindful of fees when reviewing options.
If not needed for health care costs in retirement, HSA funds can be used after turning age 65 for non-medical expenses; however, withdrawals will be subject to ordinary income tax. Funds withdrawn for non-medical related use before 65 are subject to a 20% penalty plus ordinary income tax. They can also be rolled over to a new employer’s HSA.
A high-deductible health plan paired with an HSA can provide the best overall value of any health insurance option, especially if invested during your working years to cover medical costs in retirement tax free.
So you’ve accepted a job offer at a new company, but you want to take some hard-earned time off before you start. The problem is that your current employer will only pay your medical premiums through the end of your last month on the job, and you’re starting the new job in the middle of the following month. So what do you do for the two weeks in between?
COBRA, short for Consolidated Omnibus Budget Reconciliation Act, bridges this gap by providing workers and their families with continued group health benefits during this transition. Once you leave an employer, your plan administrator will send you information regarding your rights under COBRA, stating that you have 60 days from whichever of the following happens last: receiving this notice, the last day on the job or the last day of health care coverage at the end of the month. If elected within the 60-day window, the coverage becomes retroactive.
If you have a medical claim during the two weeks before you start with your new employer, you can elect for coverage after the fact within that 60-day window and pay one month’s worth of medical premiums to receive insurance coverage. Note that this could cost as much as 102% of the cost of the medical premium that was previously split between the employer and you. Still, this is much cheaper than paying thousands of dollars in medical expenses if you’re not covered. One suggestion is to put off any non-emergency medical visits for your family until after this two-week period.
It’s also important to know when your medical coverage for the new job starts. Many employers start these benefits on your first day, but some may have a 30-day waiting period.
Other COBRA Scenarios
Continued coverage under COBRA also applies in the following situations.
Leaving a job voluntarily
Becoming eligible for Medicare
Having a dependent child who loses dependent status
Having the number of hours you work reduced
Death of the covered employee
Divorce or other big life events
For a termination or reduction in hours worked, you and your family will be eligible for 18 months of continued coverage under COBRA, while the other scenarios qualify for 36 months of coverage. More information can be found on the Department of Labor website.
With smartphones providing 24/7 connectedness, and the aging of the US population, more and more innocent victims are falling prey to scammers. Whether it’s by phone, email, text message, social media, fax or mail, it can be a challenge to figure out what is a scam and what is real.
Phishing has been the most prevalent scam, where people open emails or visit websites that appear legitimate and are lured into providing personal and financial information. Lately, though, scammers posing as IRS or Microsoft employees have been particularly insidious – and successful. Since everyone knows to take the IRS seriously, and most people rely on Microsoft software for all or part of their computer needs, it isn’t difficult to understand how this happens.
The best plan of attack is to arm yourself with knowledge about how agencies like the IRS and companies like Microsoft contact their customers, and how to determine whether the caller is an employee of those organizations.
Internal Revenue Service
Across the country, taxpayers have been receiving calls from supposed IRS employees telling them they owe money, and that it must be paid promptly through a bank wire or prepaid card. These fraudsters sometimes threaten taxpayers with arrest, deportation or suspension of a business or driver’s license, and become hostile and insulting if you don’t pay them. You can find more information on these scams on the IRS website.
The only way the IRS initiates contact with taxpayers is by US mail – not by phone, email, text message, social media or fax. If you do receive a call from the IRS, record the employee’s name, badge number and call back number. Then call the IRS back directly at 1-800-366-4484 to determine if the person calling is actually an IRS employee, and if they have a legitimate reason for contacting you. Also, if you receive a letter in the mail from the IRS, you can verify that it’s legitimate on the IRS website.
The IRS recommends that if you suspect someone posing as an IRS employee has contacted you, report it promptly.
Similar to the IRS scam, thousands of people have received unsolicited calls from people claiming to be from Microsoft technical support, calling to help fix their computer, phone or tablet. The scammers have you visit what appears to be a legitimate website, then have you download malicious software onto your device. They may request credit card information for services, or direct you to a fraudulent website to enter the information. They identify themselves as employees of Windows Help Desk, Windows Service Center, Microsoft Tech Support, etc. You can get more information about these scams on the Microsoft website.
Here at Merriman, Tyler Bartlett recently received a call from one of these fraudsters posing as a Windows Help Desk employee. He immediately knew it was a scam because he uses a Mac at home, not a Windows computer. From Tyler’s experience, you can see the importance of being knowledgeable about the types of computers and devices you own and the software used on them on a regular basis.
Like the IRS, Microsoft does not initiate contact with customers. If you created a technical support case and you receive a call, you can verify the person is a Microsoft employee by matching up the Support ID given to you when you opened the case. If you didn’t initiate contact with Microsoft, get the person’s name, phone number and department, and then call Microsoft directly at 1-800-426-9400 to confirm that the caller is an employee with a legitimate reason for contacting you.
Keep in mind that Microsoft does not ask you to purchase software or services over the phone. If there’s any sort of fee or subscription for the service, or a payment request from someone claiming to be from Microsoft tech support, Microsoft recommends you hang up and report the incident to them and local authorities.
The IRS and Microsoft aren’t the only large organizations whose customers have been victimized. Customers of organizations like Bank of America, Chase Bank, PayPal and Apple have received phishing emails with catchy subject lines written to entice you to open them and provide personal and financial information. Be on the lookout for subject lines such as “We have temporarily disabled your account,” “Information about your account,” and “About your last transaction.” Rather than potentially giving away your information to a crook, it’s worth contacting the institutions directly to clear up any matters.
Even though it may take more time, it’s important to ask the right questions to verify the caller is an employee of the company, and that they have a good reason for calling you. Also, it’s important to be cautious when opening links or attachments in emails from unknown senders.