Starting Monday, January 11 through Friday, January 29, eligible City of Tacoma employees have an opportunity to buy affordable additional long-term disability insurance coverage through the City. While this benefit may not sound too exciting, it represents essential insurance coverage that can protect your income in the unfortunate event that you become disabled.
City of Tacoma employees should sign-up and take advantage of this benefit.
Who am I? My name is Geoff, and I am a financial planner with Puget Sound-based Merriman Wealth Management, LLC. I got excited after seeing the special benefits notice my wife received as a City of Tacoma employee. I do not work for the City or the vendor, and I do not receive any personal benefit from you enrolling in this extra disability coverage. I am just passionate about helping families make the best financial decisions possible and wanted to provide additional information on a topic that can seem overly complicated or may often be overlooked.
The FAQ below illustrates just how important this additional long-term disability coverage is, whether or not you have dependents:
What is disability insurance?
This type of insurance is used to protect your income and financial livelihood in the event of an untimely illness or injury.
There are two types of disability insurance: short-term and long-term. Long-term disability coverage is the most valuable because it replaces a portion of your income starting 90 days after your disability until recovery or age 65, whichever is sooner.
Don’t I already have long-term disability coverage through the City of Tacoma?
You do. However, for most employees this basic employer-paid benefit only protects 60% of the first $1,500 in monthly pre-disability earnings. This means that if you earn $6,250 a month or $75,000 a year, you will only receive $900 a month in benefits. Will $900 a month cover your bills?
How much extra income protection will this additional benefit provide me?
Up to $4,100 of extra income per month of pre-disability earnings. Combined with the basic employer-provided benefit described above, you could receive up to $5,000 of income replacement (i.e., a total of 60% of $8,333 pre-disability earnings). The employee from question two above, earning $6,250 a month or $75,000 a year, would receive $3,750 a month in benefits, which would go much farther toward being able to cover bills.
Note:Employees earning $100,000 or more would receive the maximum benefit of $5,000 a month.
What is the difference between the 90-day and 180-day waiting period options?
This waiting period, otherwise called the elimination period, is how long you have to wait to start receiving long-term disability payments from the insurance carrier. Premiums are naturally higher for the 90-day waiting period option as you will start receiving benefits earlier. The difference in premium for choosing the 90-day waiting period over the 180-day waiting period is offset by starting to receive income 3 months earlier.
How much does this benefit cost and how is it paid?
The benefit costs 0.303% of pre-disability earnings up to the pre-disability earnings cap for the 90-day waiting period option. This means the employee earning $75,000 would pay an extra $18.94 per month or $227.28 a year (i.e., 0.303% X $6,250 pre-disability earnings). Employees earning $100,000 or more a year would pay an extra $25.25 per month or $303 a year. This extra benefit far outweighs the additional premium cost.
Note: This premium cost would be deducted via payroll as a post-tax cost.
What happens if I stop working at the City of Tacoma?
Generally, you cannot keep group disability benefits like this one offered through the City of Tacoma if you leave (i.e., not portable).
If I do become disabled, how does the benefit work? How long would the benefit last?
In the unfortunate event of an illness or injury that qualifies for disability insurance benefits, you would file a claim with the disability insurance carrier that includes medical evidence of your disability. If approved, you would start receiving the above-described benefits after the waiting period until recovering from the disability or age 65, whichever comes first.
Would the benefits received from this extra policy be taxable?
Because the premium is paid post-tax rather than pre-tax where you receive a tax deduction for the premium cost, the disability payment you would receive would be tax-free. SAID AGAIN: All of the income received from this extra long-term disability coverage would not be subject to taxation. The tax-free nature of the payments further helps replace your pre-disability income (as your pre-disability income is gross income or otherwise subject to taxes).
Note: Income received from the employer-paid basic long-term disability coverage (i.e., 60% of the first $1,500 in monthly pre-disability income) would be subject to taxation. This is because your employer pays the premiums for this benefit.
What if I earn more than $100,000 a year? Do I need additional income protection beyond this extra benefit offered by the City?
Maybe. Start by asking these questions:
Does my contribution to covering household expenses exceed $5,000 a month?
Do I expect these expenses above $5,000 a month to continue for at least another year?
Do I expect my income and expenses to increase in the future?
If you answered YES to these questions (and be conservative on this), then it makes sense to consider buying an additional individual disability policy outside of your City benefits. This is especially important for households with a single earner.
An advisor can get quotes through an insurance broker to help you make an informed decision. It is also important to evaluate this decision through the lens of your overall financial plan, taking into account all of your goals and resources.
If you have questions about how much disability insurance coverage you need to protect your income or any other financial planning topics, like whether you are on track to achieve your financial goals, feel free to contact me directly at email@example.com.
Disclosure: The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax or legal advice, and nothing contained in these materials should be taken as such. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always please remember investing involves risk and possible loss of principal capital; past performance is no guarantee of future performance. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman Wealth Management unless a client service agreement is in place.
What could be the cost of ignorance? For some mistakes it could be a couple of dollars; for others, it could run into hundreds or thousands of dollars every year. Not paying attention to your enrollment benefits falls under the latter.
Recent research indicates that more than half of employees spend 30 minutes or less reviewing their enrollment benefits and 93% of people make the same enrollment selection without evaluating their options. While it may be easy to re-enroll in the same options every year, I recommend grabbing a cup of coffee or a glass of wine and setting aside a couple of hours to consider your options thoroughly. With the open enrollment deadline approaching soon for many, consider this essential advice to help you take full advantage of your employer benefits.
Medical, Dental & Vision
Many employers offer different medical plans to choose from. With insurance premiums, deductibles, and out-of-pocket costs on the rise, it’s crucial to evaluate your choices every year and make sure your plan still makes sense for you. If your spouse has coverage that will cover you or your dependents, don’t forget to compare these options with your employer’s plans as well.
It’s common for risk-averse people to choose a plan with a higher monthly premium in order to have a lower deductible and out-of-pocket maximum, but this isn’t always wise. If you are young or in good health, selecting a high-deductible plan and bolstering your emergency cash reserve by at least the amount of your annual deductible can save you money in the long term. This is especially true if you have the ability to contribute to a Health Savings Account (HSA) in combination with the high-deductible plan. All contributions to HSAs are pre-tax and all withdrawals used for eligible medical, dental and vision expenses are tax-free. For people in high income tax brackets this can be a significant savings. If you don’t end up needing the funds for medical expenses you can invest them to grow tax-deferred until needed, which can be a considerable help in retirement.
Flexible Spending Arrangements (FSAs) are another common benefit option that can provide tax savings. Similar to HSA plans, contributions are made pre-tax and withdrawals for eligible healthcare expenses are tax-free. Be sure to check the fine print on these plans, because contributions not used during the calendar year are often forfeited! It’s important to consider your expected medical expenses carefully before enrolling. Some FSA plans can also be used for dependent care expenses, which is a fantastic benefit given that daycare costs are not only expensive, but generally consistent and predictable making the “use it or lose it” feature of FSA plans less daunting.
We generally have fewer choices with our dental and vision plans, but make sure you consider enrolling since the cost of annual coverage is often significantly less than one filling or pair of glasses. If you do have plan choices, compare the copays in addition to the monthly premiums.
With all plan options pay attention to “out-of-network” restrictions and check to see if your favorite doctor is considered “in network” if you are unwilling to make a switch.
At the very least, you want to be sure you are enrolled in your company retirement plan and contributing enough to receive the full benefit of any employer contributions. This is free money, so don’t leave it on the table! If you really want to take advantage of your retirement benefits, it’s best to take a careful look at all of the options, evaluate whether you are contributing enough to provide for your future retirement, and analyze your investment allocation at least once a year. Many people find this process overwhelming, but this is an area where a financial planner can prove their worth, so don’t hesitate to ask for help. Even savvy investors can miss out on significant benefits by overlooking options in their retirement plan such as mega back-door Roth contributions or discounts in an employer stock plan.
Many employers automatically provide a certain amount of life insurance for you, generally a multiple of your salary. For a lot of people this is not enough coverage, but you often have the ability to purchase additional coverage through your employer’s group plan. This insurance is generally less expensive and can make sense for a portion of your insurance needs, particularly for people whose health may preclude them from qualifying for an individual policy. However, it’s important to keep in mind that the premium will likely increase every year as you age and the policy often terminates when you leave the company. It’s therefore important to consider whether you should obtain additional outside coverage, either because you have a long-term need or to lock in a rate while you are young and healthy.
People often protect their loved ones with life insurance, but fail to plan for a disability which is statistically much more likely to occur. Make sure to enroll for both short-term and long-term disability coverage.
As part of your annual benefits evaluation process it’s always a good idea to double-check that your beneficiaries and dependents are correct and up to date.
If you’re working with a financial planner, make sure to bring them your enrollment packet and get their advice before you finalize your enrollment. It’s surprising how many people don’t truly understand or take full advantage of their employer-sponsored benefits, and your financial planner can’t give you proper advice without knowing everything you have access to.
The Bottom Line:
Benefits enrollment might appear to be a trivial task, but it could have substantial financial implications if done incorrectly. Be smart about your choices and do the necessary homework to maximize your benefits.
Let me play out a scenario for you. You’re a 34-year-old registered nurse, working long hours helping patients in a local hospital. You go home to your husband and two kids, cook dinner, give baths, and play hide and seek. One morning you step wrong getting out of bed. Your foot is throbbing, but you get to work on time. (more…)
For most people, a successful retirement means finding a way to ensure their money outlasts them. Achieving this goal is usually done by saving enough money and then creating a practical and sustainable budget. Unexpected and unplanned costs can jeopardize this, so it’s important to have the right insurance to provide protection against the unknown. One type that’s changed in recent years is long-term care insurance (LTCi). There are different LTCi options available today, and it can seem overwhelming when trying to find the right fit. This article introduces the different types of LTCi. (more…)
Term life insurance is used primarily for pure income replacement (i.e., your human capital). When you apply for term life (non-permanent) insurance, you have to choose the amount of coverage you want ($50,000 to more than $2,000,000) and the term of the policy – usually a 10-, 15-, 20- or 30-year policy. The coverage amount and term depend on your specific needs, such as taking care of young children, or paying off the mortgage if you pass away unexpectedly.
Since term life insurance policy premiums stay level, i.e., the same, your premium does not change during the term. This causes the premium to be higher for longer terms. At the end of the term, you either lose life insurance coverage or apply to obtain a new policy with a different term, conditions and premium costs.
How the Premium Is Determined
Your premium is determined by your age, gender and health rating, multiplied by a stated factor for the term and coverage amount you’re applying for. The health rating component requires an insurance physical exam where a nurse visits you at home or at work, or you can go to a doctor’s office.
When deciding how much insurance to get, consider the costs of raising a child and potential college tuition, plus the mortgage, funeral costs and any other potential debt. For lower coverage amounts, such as under $250,000, many companies offer simplified issue insurance, which you usually receive advertisements for by mail from your mortgage lender or homeowner’s insurance company. This type of life insurance doesn’t require a medical exam and can be approved in just a couple of days. (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.
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