Key takeaways
- Insurance benefits are the foundation of any solid financial plan
- New employees usually have a lot of options and decisions about insurance
- The three most essential benefits are health, disability, and life insurance
The first few days of a new job can be overwhelming: a new position, new co-workers, a whole new set of challenges and opportunities.
And then HR asks you to login to your new employee portal and make choices about insurance coverage, retirement plans, and other benefits and perks.
Some of your most critical decisions involve health, life and disability insurance. It’s important to choose the right insurance coverage options, also known as your benefit elections. You may be months away from your company’s Open Enrollment period, which is the next time you can make changes to your benefit elections.
Here’s how to analyze your options.
The benefit of benefits
Benefits are part of the foundation of your overall financial life plan. Insurance benefits, in particular, offer three types of peace of mind:
- Health insurance covers medical expenses for you and your family
- Disability insurance protects your ability to earn a living by replacing a percentage of your income if you’re disabled and can’t work
- Life insurance helps your family financially if you die
These benefits are critical for protecting you and your family in both good and difficult times. After all, your ability to remain healthy and earn a living is one of your family’s greatest assets.
Affordability and tax savings
Although you can purchase life, health, and disability insurance on your own, there are two reasons why getting that insurance through your employer is often a better deal.
First, because employers represent multiple employees, they generally have leverage and can negotiate better prices than individuals. Group benefits are generally more affordable than privately offered insurance.
Second, most insurance benefits are offered on a pre-tax basis, you save a bit on taxes. This means that an employer may deduct the premiums for your insurance from your paycheck before calculating income and payroll taxes. In this case the money deducted from your paycheck for insurance premiums isn’t taxed; when you get your W-2 tax form at the end of the year you’ll see that your taxable income is significantly lower than your actual salary (and you only paid taxes on your taxable income).
Health insurance
Your employer may offer you two types of health insurance plans: traditional and a plan that’s eligible for a health savings account (HSA). The rule of thumb is that an HSA can offer savings to younger, healthier employees who don’t anticipate needing a lot of medical care. For families, an HSA is worth looking at, but may not be the best option.
When choosing a policy, carefully review details about deductibles, co-pays, out-of-pocket maximums, coinsurance, prescription drug coverage, and in-network versus out-of-network options for primary care physicians and specialists. Dental and vision coverage are also core elements of health insurance that should be explored. If you have medical professionals or facilities that you prefer, double-check whether they’re in-network.
Disability insurance
Disability insurance can be either short-term or long-term. Short-term insurance replaces a portion of your income almost immediately if you’re disabled, and usually covers you for 3-6 months. Long-term insurance generally takes over after your short-term insurance runs out, and can cover you for years (or even up to retirement age).
Generally, disability insurance replaces 60-70% of your income, not 100%. Your employer’s policy may have options for you to pay extra to increase that percentage.
While many people can get by with only short-term coverage if they have a substantial emergency fund, long-term policies offer protection against serious disability issues that can be devastating to financial lives.
Check whether benefits that are paid are pre- or post-tax. As noted above, this can have a significant impact on your taxes and how much of your salary you actually take home.
Life insurance
Most firms offer basic life insurance coverage, which tends to be automatic, and voluntary group life coverage. The group option can be an inexpensive way to obtain this benefit; be aware that costs will increase as you get older.
For individuals and families needing life insurance, we typically recommend acquiring private coverage. You can commit to a specific level, generally more than what’s available through a limited group plan, and lock in your annual premium. That said, group coverage could be appealing to individuals who are less insurable due to health issues.
Take advantage of the opportunity
Finally, use your new position to reevaluate your insurance needs in the context of your larger financial plan. Don’t just try to duplicate the coverage you had at your previous employer, but take a fresh look at the coverage you and your family need.
