Helping Clients Make Good Group Insurance Decisions

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.

• Should they all stay insured under Mark's group health insurance plan and Emily pocket the $25 a month from her employer?

• Should Emily move her medical coverage to her new employer?

• 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?

• 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?

• 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 employer offers a choice of three plans, all with the freedom to self-refer to specialists. All have a $3 million lifetime maximum benefit.

1. 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.

2. 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.

3. 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).

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.

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.

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.

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.

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.