Q. Can someone be overinsured through workplace programs?
A. One of the most over-used insurance workplace programs is Accidental Death & Dismemberment (AD&D) policies. They are very inexpensive, but that’s because they rarely pay out. (People don’t often become dismembered. There are many other ways to die besides in an accident that this policy doesn’t cover such as cancer, flu, and heart attack.)
Q. How much life insurance should someone buy — is there a rule of thumb?
A. General rule of thumb is eight to 12 times your salary. But, the specific amount varies drastically from person to person. There are several different factors to look at to determine the appropriate amount of life insurance, such as age, health, income, expenses, marital status, number of children, ages of children, net worth, goals, etc. One way to determine the appropriate amount of insurance is to map out your cash flows, run a what-if scenario showing what the cash flows look like with a premature death, and then calculate the amount of life insurance needed to fill the gap.
It also might make sense to explore the option of getting a private term life insurance policy (one that’s outside of the workplace benefits) instead of relying solely on group life insurance. The cost of group life insurance increases exponentially as you age, whereas level-term policies have fixed premiums over the lifetime of the policy. Unlike most group life insurance policies, term policies will also stay in effect even if you retire or change jobs.
Q. What coverage or benefit tends to be underutilized? Something your clients overlook and you’re thinking, “WAIT! That’s key. You’re leaving money and peace of mind on the table.”
A. There are three main benefits that I think are underutilized: HSAs, Roth 401(k)s, and After-Tax 401(k)s.
HSAs — You need to be enrolled in a high-deductible health care plan to be eligible for an HSA. HSAs are extremely tax-efficient; you get a tax break for anything you contribute (i.e., if you contribute $2,000 to an HSA, you pay income tax on $2,000 less income), any of the growth in the HSA (if it’s invested) is tax-deferred, and you can take money out of your HSA tax-free for medical expenses. I also see two common errors among people who do utilize HSAs. 1) People keep the funds in a money market account instead of investing it. 2) People withdraw most of their money from the HSA each year instead of treating the HSA as a retirement account and letting the money grow for tax-free use in retirement.
Roth 401(k)s — Many people assume they’re going to be in a lower tax bracket when they retire, but that isn’t always the case. Many people end up in a higher tax bracket in retirement and end up paying more taxes over the course of their lifetime than they should. You need to run the numbers to see what’s best in your specific circumstance, but it might make sense to pay the taxes now and build up some tax-free accounts.
After-tax 401(k)s — This is not a common feature of most 401(k) plans (I wish more employers would offer it). Many employees who do have this option in their 401(k) don’t know about it. And the ones that do know about it don’t know how to use it properly. After-tax 401(k)s allow you to put more money into your 401(k) above the normal IRS limits ($22,500 per year in 2023, plus an additional $7,500 if you’re age 50 or over). Contributions to an after-tax 401(k) can then be rolled into a Roth account. (This is a complicated strategy, so be sure to consult your financial planner and/or tax adviser to make sure it’s done correctly.)
Q. Open enrollment aside, what year-round benefit should people take advantage of, if they do nothing else?
A. At bare minimum, start contributing to your 401(k,) at least to get the full employer match.