Maximizing Your Benefits During Open Enrollment Season
introduction
Open enrollment season is here! Millions of Americans will review a laundry list of employer-offered benefits this October, November, and December. For some of you, selecting which benefits to utilize is straightforward. However, for many, careful thought is required, as failing to maximize your benefits could cost you and your family thousands of dollars. With that said, today’s blog post will discuss the following:
1) How to Interpret Your Health Insurance Options
2) Protect Your Income Through Disability and Life Insurance
3) The Hidden Gems Not to be Overlooked
4) Checklist Before You Click Submit
understanding you health insurance options
Example: Different Health Insurance Options Available to Employees
Often, your employer will provide you and other employees with various health insurance options. Let’s dive into some of the important terms and numbers:
Deductible: The initial amount of covered expenses the insured(s) must pay before the insurance company begins to help. A plan is usually listed with two figures (e.g., $ 2,500/$5,000). The first figure refers to the individual deductible, while the second represents the family deductible. When more than one person is covered (family plan), you will want to know whether the plan is an embedded-deductible plan or a non-embedded deductible plan.
Embedded Deductible: Each family member has their own individual deductible, and his or her medical expenses will transition to the coinsurance portion of the plan once their individual deductible is met. However, the most the family will pay in deductibles is the family deductible amount.
Non-Embedded Deductible: There is no individual deductible. The family deductible must be met before any family member’s expenses are subject to the coinsurance provision. The deductible can be met by one person or multiple people.
Copayments: A fixed fee for each visit to a health care provider’s office. Copayments count towards the deductible figure.
Coinsurance: The splitting of costs between the insurance company and the insured(s) after the applicable deductible is met. The coinsurance percentage is the portion of covered expenses the insured is responsible for paying. Coinsurance is in effect until the maximum out-of-pocket limit is reached.
Maximum Out-of-Pocket: The most an insured will pay out-of-pocket for covered expenses. It essentially creates a ceiling, or cap, on how much an individual or family will pay for healthcare. When an individual or family reaches their maximum out-of-pocket limit, then the plan will cover 100% of covered expenses for the remainder of the year.
Consider the following example:
Embedded-Deductible Plans v. Non-Embedded Deductible Plans
In this example, you’ll notice that Jack had quite an expensive year in terms of medical expenses. Under the embedded-deductible plan, the first $2,500 of expenses fall within the individual deductible, whereas the non-embedded deductible plan ignores the individual deductible, making the first $5,000 of expenses subject to the family deductible. The remaining expenses transition to the coinsurance portion of the plan, which calls for the insured to pay 20% of covered expenses. Because Jack does not reach the maximum out-of-pocket limit, all covered expenses are subject to the 20% coinsurance percentage.
You’ll notice that Jill is responsible for paying her entire $500 medical claim under the embedded-deductible plan. Again, this is because each insured has their own individual deductible under this type of plan. The individual must reach their own deductible UNLESS the family deductible is met first.
All in all, Jack and Jill pay $1,600 less under an embedded-deductible plan because they pay far less in deductibles than they otherwise would under the non-embedded deductible plan.
protecting future income through life and disability insurance
You are likely eligible to obtain both life insurance, short-term disability insurance, and long-term disability insurance during open enrollment season. Let’s start by looking at life insurance:
Comparing Basic Life Insurance and Additional (Supplemental) Life Insurance
You can think of basic life insurance as a “guaranteed” benefit. That is, it does not matter how healthy you are (or aren’t); you are given a certain amount of life insurance. From my experience, I see clients who either have $50,000 of basic life coverage or an amount equivalent to 1x or 1.5x their base compensation.
Many of my clients need far more life insurance coverage than is provided by employer-provided base life insurance. Opting-in for supplemental life insurance is one way to obtain your necessary life insurance coverage. This type of life insurance usually allows employees to elect coverage as a multiple (2x, 3x, etc.) of base compensation. Supplemental life insurance is not “guaranteed”, so you will likely need to pass insurability and go through underwriting to obtain coverage.
You will want to double-check with the insurance company on whether your supplemental life insurance policy is a “portable” policy. In this case, you could elect to have the group insurance policy continue under an individual life policy should you retire or leave the employer. However, be prepared to have the premiums increase compared to the payroll-deducted premiums when the policy was through your employer.
What to Consider When Electing Supplemental Life Coverage:
Is the coverage portable? Most supplemental insurance is not portable, which is important because you would lose that coverage if you left your current employer. This is a big deal because you may not be insurable in the future. I strongly encourage clients to obtain an individual life insurance policy outside their employer to ensure their coverage is not tied to their employment.
How much insurance do I need? This is heavily based on your age, income, and current investments. Typically, your life insurance needs will increase with higher salaries, but decrease as you get older and your outside investments grow. I highly recommend working with a financial advisor to work through the right amount of coverage for you.
How much of my income is bonuses or tips? Supplemental life is typically provided as a multiple of base compensation. You may want to consider an individual policy through an outside insurer if a lot of your compensation is a byproduct of commission, bonuses, or tips.
Let’s transition to disability insurance:
Differences Between Short-Term D.I. and Long-Term D.I.
You’ll notice that the elimination period and the benefit period are shorter under an STDI policy compared to an LTDI policy.
An elimination period acts as a deductible. It is the period of time that must elapse after you become disabled BEFORE the insurance company will begin to pay benefits. The longer the elimination period, the longer you must cover your own expenses will disabled.
What to Consider When Electing Disability Insurance?
Is the Policy Employer-Paid or Employee-Paid? Who pays the premium determines the taxability of the benefits. An employer-paid policy will cause all benefits received to be included as taxable income. An employee-paid policy will allow the insured to receive TAX-FREE benefits.
How much of my compensation is from commission, bonuses, or tips? Just like supplemental life coverage, most employer-offered disability policies will cover a percentage of BASE compensation. If a large portion of your earnings is due to commissions and bonuses, then you may want to consider obtaining D.I. coverage through an individual policy.
What definition of job is used in the policy? It is best to get a disability policy with an “own occupation” definition, which means you are unable to perform the duties of the specific job you were performing when you became disabled. You wouldn’t want an “any job” definition, because you may be unable to perform surgeries as a vet, but you could work as an administrative assistant, thus making you ineligible for disability benefits.
the hidden gems of open enrollment season
Beyond selecting various insurance plans, you should not overlook these three accounts:
Don’t Overlook HSAs, FSAs, and Dependent Care FSAs
All three of these accounts are pre-tax accounts, meaning any contribution is not included as taxable income, thereby saving you taxes in that calendar year. For example, a $1,000 contribution could save you $150 in federal taxes.
The major difference between HSAs and FSAs is that HSAs allow you to make annual contributions without the worry that you have to empty the account by December 31st. All things equal, HSAs are superior to FSAs.
Something of note with Dependent Care FSAs is that a married couple is limited to the $7,500 contribution limit. This is an aggregate limit, meaning the spouses cannot contribute more than $7,500 into one or multiple DCFSAs in a calendar year. With healthcare HSAs and FSAs, each spouse may contribute the individual maximum to their own account.
All three of these accounts are great for funding future medical expenses and/or childcare costs while helping you receive some tax relief. However, HSAs require you to be enrolled in a High Deductible Healthcare Plan (HDHP). I would strongly consider your healthcare needs before selecting an HDHP solely to have access to an HSA.
your checklist before you hit submit
I want you to make sure that you’ve completed the following tasks before you click submit.
1) You reviewed the anticipated medical expenses for all insured individuals
2) You’ve compared the annual costs of each insurance plan - not just the premiums
These first two items are tied together. One of the most common mistakes I see people make is considering only the premium of a health insurance plan when weighing one plan against another. The annual cost of insurance can be calculated as:
Deductible + insured’s coinsurance portion + premiums
Premiums and deductibles/out-of-pocket maximum limit have an inverse relationship. That is, the higher the premium, the lower the deductible and MOOP limit, and the lower the premium, the higher the deductible and MOOP limit. You may find that a higher-premium plan will be more cost-effective for your family because you anticipate higher medical expenses in 2026. A common example includes a couple where the female is pregnant and anticipates a lot of doctor’s visits and a hospital stay in the following year.
So, stop and think about next year’s medical needs of each insured. Doing so will ensure that you select the most appropriate healthcare plan for you and your family’s medical needs.
3) Ensure Your Dependents Have Coverage
Make sure you or your partner selects a Family Medical, Dental, and Vision plan if you have dependents.
4) Make Sure You Are Not Over-Insured or Under-Insured
The bigger financial risk is an individual opting out of supplemental life insurance or both disability insurance policies when, in fact, they need the coverage. Often, these insurance policies are pretty cheap relative to the benefit that you could receive. Conversely, I’ve seen individuals in their mid-to-late 50s carry a life insurance benefit of 5x their salary, when they may not need any benefit at all.
5) Double-check Beneficiaries
Any life insurance policy will pay benefits to the named primary beneficiary or beneficiaries. The insurance company doesn’t care what is written in your will. So, it is ALWAYS a good idea to check the beneficiaries on your life insurance policies to ensure the person(s) receiving any death benefit aligns with your wishes.
Also, it is best practice to name one (or multiple) contingent beneficiaries. These are people who would receive any death benefit should the primary beneficiary be deceased at the time the insured passes away.
6) Budget for HSA and FSA Contributions
Sometimes, you will elect to set up payroll deductions to contribute directly to these accounts. Then, January rolls around, and you are surprised that your take-home pay is lower than you anticipated. I recommend reviewing your cash flow and adjusting your spending as needed.
parting thoughts
A 2023 study conducted by Voya Financial found that 67% of Americans spend 30 minutes or less completing their open enrollment elections. There are many big decisions you will make during open enrollment season. Making the wrong choice could cost you and your family thousands of dollars.
I encourage all of you to spend adequate time selecting the appropriate benefits and to maximize the benefits available to you.