Q. Can a person be overinsured through workplace programs?
A. One of the most overused workplace insurance programs is Accidental Death and Dismemberment (ADD) policies. They are very cheap, but that’s because they rarely pay. (People don’t often get dismembered. There are many more ways to die than in an accident that this policy doesn’t cover, such as cancer, flu, and heart attack.)
Q. How much life insurance should a person have — is there a rule of thumb?
A. The general rule is eight to 12 times your salary. But, the specific amount varies greatly from person to person. Several factors must be taken into account to determine the appropriate amount of life insurance, such as age, health status, income, expenses, marital status, number of children, age children, net worth, goals, etc. The appropriate amount of insurance consists of mapping your cash flows, running a what-if scenario showing what the cash flows look like in the event of premature death, and then calculating the amount of life insurance needed to fill the gap .
It might also be a good idea to explore the possibility of taking out a private term life insurance policy (i.e. outside of workplace benefits) instead of relying solely on life insurance. collective. The cost of group life insurance increases exponentially as you get older, while term policies have fixed premiums for the life 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 underused? Something your customers forget and you think, “WAIT! This is the key. You leave money and peace of mind on the table.
A. There are three main benefits that I believe are underutilized: HSAs, Roth 401(k)s and After-Tax 401(k)s.
HSA – You must be enrolled in a high deductible health plan to qualify for an HSA. HSAs are extremely tax-efficient; you get tax relief for everything you contribute (for example, if you contribute $2,000 to an HSA, you pay income tax on $2,000 minus the income), any growth in the HSA ( if invested) is tax-deferred, and you can withdraw money from your HSA tax-free for medical expenses. I also see two common mistakes made by people using HSAs. 1) People keep funds in a money market account instead of investing them. 2) People withdraw most of their money from the HSA every year instead of treating the HSA like a retirement account and letting the money grow for tax-free use in retirement.
Roth 401(k)s – Many people think they’re going to be in a lower tax bracket when they retire, but that’s not always the case. Many people find themselves in a higher tax bracket in retirement and end up paying more taxes over their lifetime than they should. You need to crunch the numbers to see what works best for your particular situation, but it may be a good idea to pay the taxes now and set up tax-free accounts.
401(k) after tax – This is not a common feature of most 401(k) plans (wish more employers offered this). Many employees who have this option in their 401(k) don’t know it. And those who know it don’t know how to use it properly. After-tax 401(k)s allow you to invest more money in your 401(k) above the normal IRS limits ($22,500 per year in 2023, plus an additional $7,500 if you are 50 years or older). Contributions to an after-tax 401(k) can then be transferred to a Roth account. (This is a complicated strategy, so be sure to consult your financial planner and/or tax advisor to make sure it’s done correctly.)
Q. Other than open enrollment, what benefit should people enjoy year-round if they don’t do anything else?
A. At the bare minimum, start contributing to your 401(k) at least to get the full match from the employer.
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