I have found that this expertise shortage in personal lines leads to the
majority of consumers having some significant uninsured or underinsured risk
exposures that they don't find out about until the claim occurs and their claim
is denied. I have audited several hundred personal insurance programs over the
years and nearly every one has had at least 10 to 20 major uninsured or underinsured
risks.
In addition, people often need expertise to help them with many other risks
beyond those covered by standard personal insurance policies. Under the traditional
agency commission-only system, that type of help is nonexistent. In my practice,
I have created a solution to both problems.
The Personal Risk Management Solution
I break down personal risk management into two areas. The first area is acquiring
and then applying added expertise in every kind of personal lines policy. That
expertise enables me to better identify risks that are subject to policy exclusions
or limitations and to better implement the insurance needed to plug those gaps.
There is a second area that is equally important to consumers for which help
is virtually unavailable in the traditional insurance marketplace—which operates
on the paradigm that agents must sell policies to receive compensation—helping
clients identify and make good decisions about managing other risks for which
there is no agent commission. This second area is truly a fun area to help clients
with because you know that while you're doing it, you're making a huge difference
in their lives. They could not find this help anywhere else.
There's no better example to illustrate this second area than coaching clients
with their group insurance decisions. The following case serendipitously "appeared"
as I was starting to write this article.
The Facts of the Case
Emily, age 32, is an attorney earning $150,000 a year. She has just accepted
a new job and has a plethora of group insurance options available to her—three
medical plans; short- and long-term disability, with a choice of having her
premiums paid 100 percent by her employer, on a before-tax or after-tax basis;
$150,000 of term life insurance paid for her by her employer, guarantee issue,
with an option to purchase up to an additional $350,000 at her own expense on
a payroll deduction basis. If Emily opts out of the health insurance, she receives
an additional $25 a month from her employer. Emily is 5 months pregnant with
her second child.
Emily's husband, Mark, also age 32, is a salesman earning $85,000, plus bonuses.
At the moment, the entire family—Emily, Mark, and daughter Ada—is covered for
medical insurance under Mark's health plan, for which Mark pays $202 a month.
Mark's employer, like Emily's, will pay Mark an additional $25 a month if he
decides to opt out of the group health plan.
Time is somewhat of the essence because Emily has just 2 weeks left on her
30-day open enrollment period to make her decisions. That's especially important
to avoid any preexisting conditions related to her existing pregnancy.
Identifying the Issues
As a personal risk manager, my job is to identify the issues and then help
Emily make the best overall decision considering both coverage and cost for
each of her group insurance options. The following questions all need answers
to make those decisions.
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Should they all stay insured under Mark's group health insurance plan
and Emily pocket the $25 a month from her employer?
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Should Emily move her medical coverage to her new employer?
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Should she do that and still keep her coverage under Mark? Where should
the two children be covered? Should they stay with Mark or move with Emily?
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If Emily does accept her new employer's medical coverage, which of the
three coverage plans should she choose?
-
Should she elect to have the premiums on her group disability coverage
paid for by the employer on a taxable or tax-free basis to her?
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She has a $2,500 a month supplemental, private-pay, long-term disability
policy that she purchased a year ago to supplement her group benefits at
her former job and help offset the fact that her group benefits then would
have been reduced about 30 percent by income taxes. Should she keep this
supplemental disability policy?
-
Should she buy the optional $350,000 of term life insurance available
to her? She has $1.5 million already of 30-year level term insurance coverage
that she purchased last year.
Risk identification—identifying all the issues—is a most important benefit
to provide clients. I can't help them make good decisions if I miss the issues.
Evaluating the Group Health Insurance Options
The first step in helping clients evaluate their health insurance choices
is to request either a full copy of each of their group medical insurance policies,
or at least a detailed coverage summary of each, along with the employee share
of group insurance premiums for each family member.
Emily's Group Coverage Emily's employer offers a choice of three plans, all with the freedom to
self-refer to specialists. All have a $3 million lifetime maximum benefit.
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The "Full Coverage Plan", a.k.a. "Gold Plan"—Pays 100 percent of hospital
and doctor bills, subject only to $15 co-pays on doctors' office visits
and $14 co-pays on prescription drugs. The maximum annual out-of-pocket
is $2,500 for individuals, $5,000 for families.
-
A "$250 Deductible Major Medical Plan"—Pays 80 percent after the deductible.
The maximum out-of-pocket is $900 per year individual, $1,800 for families.
-
A "$500 Deductible Major Medical Plan"—Pays 80 percent after the deductible.
The out-of-pocket maximums are $1,400 for individuals, $2,800 for families.
The pre-tax cost monthly for each of the three plans is shown below (annualized
cost in parentheses).
| Gold Plan | $126 ($1,512) | $582 ($6,984) |
| $250 Deductible
Plan | $62 ($744) | $411 ($4,932) |
| $500 Deductible
Plan | $40 ($480) | $338 ($4,056) |
| *There is no single-parent
option through this group plan. |
Mark's Group Coverage Mark has just one plan available, currently covering the three family members.
It is very similar in coverage to Emily's Gold Plan option—same $3 million lifetime
maximum period; same co-pays; same out-of-pocket annual maximum. Mark's monthly
cost options are $58 a month for just himself, $93 a month for himself and the
children, and $202 a month for the whole family.
Doing Your Homework The next step is to compare the annual cost to the family, for each family
member, under the two available group plans. I compared the cost of the two
Gold plans to get an apples-to-apples comparison. There is no point in looking
at the options for high deductibles under Emily's group plan unless there's
at least one person that will be better off in her plan.
The next step is to plug these numbers from the table above to the various
combinations of coverage for each of the family members.
My Recommendations
Once I complete the health insurance costs analysis, here are the recommendations
I make to my client and reasons why.
Health Insurance Continue covering the whole family under Mark's group insurance. Do not double
cover Emily under her employer. Instead, have her pocket the $300 bonus. The
net adjusted annual cost of this strategy is $2,129—nearly $500 cheaper than
the next least expensive option and $4,000-$5,000 cheaper than the more expensive
options.
Disability Insurance Emily's employer pays 100 percent of the short- and long-term disability
premiums. Monthly, those costs are $62.50; annually $750. Assuming a 33 percent
tax bracket, Emily will pay $250 a year in income taxes if she wants her group
benefits at claim time to be tax free. If she doesn't do that, she has no tax
consequences on the premiums but will have to pay taxes on her group benefits
when she's disabled.
The group benefits are 60 percent of her income at age 65, subject to a $10,000
a month cap. Based on her current salary of $150,000 ($12,500 a month) x 60
percent = $7,500 a month of benefit. After taxes, that will net her about $5,000
a month. Plus the $2,500 a month tax-free personal policy she purchased last
year will get her a total of $7,500 a month after taxes. $7,000 net is her monthly
need if she is disabled. So she would be okay if she received her group disability
benefits tax free. Had she needed more than $7,500 or if she wanted a cushion
(a good idea), she could opt to pay the taxes yearly on this benefit.
As for whether or not to keep the supplement, my advice is absolutely. No
matter where she works, she'll always need a supplement. Plus the supplemental
policy premiums never will increase all the way to age 65. Finally, the supplement
offers an annual option to increase her coverage in the future, regardless of
her health, every 3 years or immediately following a job change. She can use
the $250 a year savings in income taxes help defray the cost of this very important
supplemental policy.
Life Insurance Emily receives, at no cost to her, $150,000 of group life insurance, guaranteed
issue regardless of her current health. She has the option to buy an extra $350,000
if she qualifies.
She already has coverage of 10 times her salary—$1.5 million—where premiums
are locked in for 30 years. Group insurance rates go up with age and are lost
in a job change. Optional group insurance costs are almost always higher than
private market rates for healthy individuals because group insurance charges
everyone the same regardless of smoking status, obesity, high blood pressure,
etc. Emily is healthy. If she were an overweight smoker with diabetes, I'd urge
her to buy all the group insurance she can get.
Even if she did need an extra $350,000 of coverage, since she is a fit, healthy,
nonsmoker, she should buy the $350,000 privately.
Charging for Your Time and Expertise
As a result of this analysis which took about 3 hours of my time, Emily and
Mark were able to make some great decisions about the group insurance options
available to her. What would I charge, and what does a client pay, for this
analysis? Probably $450 for the analysis, $600 if they wanted a written report.
What did they end up paying additionally to me? They pay me an annual risk management
fee of $300 a year for risk management advice, as needed, throughout the year.
Getting expert help in making good group insurance decisions is just one of
many benefits of a good personal risk management service. (See
more on my risk management services.) That risk management service works
much like an insurance policy. The "coverage" is "personal risk management,
as needed, throughout the year." The "premium" is $300 a year. (My annual fees
for personal risk management, as needed, vary from $300 minimum to approximately
$1,500 maximum per year, depending on the complexity of the account.)
Helping people manage risks, other than risks covered by personal lines policies
you handle, can be difficult, challenging, and take a lot of your time not covered
by small personal lines sales commissions. Thus, the need for the risk management
fees. Providing this kind of help people desperately need, but can't find anywhere
else, and knowing that you're making a huge difference in someone else's life,
easing fears and anguish, without them having to make complex decisions (like
group insurance) without the skills to do it right, is a real joy.
Jack Hungelmann is the author
of the book Insurance for Dummies. He
has been providing clients with personal risk management services in addition
to traditional insurance products for more than two decades. More information
on individual and group health insurance coverages, federal laws that impact
those coverages and recommendations on how to handle health insurance related
problems pertaining to job changes, retirement, etc., can be found there. The
book also contains useful chapters on disability and life insurance as well.
Insurance for Dummies is available at a discount at a link from Jack's Web
site to Amazon.com.