Family planning isn't just deciding when to have children or how many to have, it requires financial considerations as well. Clearly, some of your most important choices may be related to your medical benefits and life and disability insurances. Your employer provided benefit plans give you more than just a paycheck. They give you flexibility, financial protection, and a foundation for future security. If you fail to take the best advantage of the package that's offered to you, you're leaving money on the table. This joyous life event, the addition of a new family member, is providing you with the opportunity to reevaluate and reexamine your options. You owe it to yourself and your family to make the very best of it.
Advantages Of A Preferred Provider Organization and HMO
What is a Preferred Provider Organization? A PPO is a group of doctors, hospitals, and other health care suppliers that have been carefully selected by your medical insurance carrier and are periodically reviewed to make sure that the care and services they provide are necessary and appropriate in given circumstances. Every time you or your child needs care you have a choice of using either PPO providers or non-PPO providers. However, when you use the services of a PPO provider, whether it is a hospital or physician, your cost is lower and more services are eligible for coverage. For example, annual physicals, well-child care and certain preventive tests and screenings may be covered only when you use PPO providers. This can add up. We're not just talking about co-payments or deductibles here, we're talking about whether or not the procedure or doctor visit qualifies for coverage at all. Since your new baby can be expected to accumulate several thousand dollars in medical expenses the first two years, you can see how important your planning becomes.
If the services of a specialist are required or a hospital admission is indicated, make sure that the doctor referred or the hospital used is a member of the PPO network; that way you will receive the higher benefit levels. The responsibility for making sure that all referrals are PPO providers rests with you. Don't be caught off guard by relying on an outdated network directory or the word of a friend. Checking with the doctor or the insurance company when you make your first appointment is a good way of avoiding financial surprises later.
What about an HMO?
An HMO is a Health Maintenance Organization. Medical plans give you the option to elect membership in an HMO as an alternative to the regular health plan options. The ability to elect this option depends on whether or not an HMO exists in your community. When you join an HMO, all your medical treatment is provided by HMO physicians and facilities. Covered services vary by HMO, but generally joining an HMO offers these advantages:
- For each office visit, you pay a small flat fee with no deductible. Your hospital stays are usually covered at 100%. Deductibles and co-payments based on a percentage of the expense incurred do not apply to covered procedures and services.
- Preventive care is not only covered, it is encouraged. Services such as physicals, immunizations and routine pediatric care are covered at 100% or for a nominal flat fee.
- Your paperwork burden is reduced since there are generally no forms to fill out.
Due to the comprehensive coverage provided, joining an HMO may be right for you. But be careful, membership is expensive. Before you make the decision to join, make sure you have carefully evaluated the tradeoff of your increased premium costs against the added coverage you will be receiving. Carefully review lists of covered services and participating doctors and hospitals.
Adding Your Child to Your Health Policy
It is important to add your baby to your health policy as soon as possible. If you’re married, you should select the policy that affords the best coverage. What happens when both spouses have medical insurance coverage and the baby is added to both policies?
There are two rules that are followed to determine whose policy is primary, the "Birthday Rule" and the "Gender Rule". The Birthday Rule simply states that for parents who are not legally separated or divorced, the plan covering the parent whose birthday falls earlier in the year is the primary coverage for dependant children. Only the month and the day are considered. If the parents have the same birthday, the plan covering the parent for the longer period of time is the primary plan. If the parents are separated or divorced, the parent who has custody of the child provides coverage, unless the divorce decree or court order specifically states otherwise.
The Gender Rule simply stated is that the father's insurance is always primary. If the Birthday Rule applies under one contract, but the Gender Rule applies under the other, the Gender Rule always wins for both contracts.
Health Care Flexible Spending Accounts
These accounts are a convenient, before-tax way to pay for your out-of-pocket health care expenses. Money from each paycheck is deposited into your personal account. You submit claims to reimburse yourself for eligible expenses from the account. The money you allocate is not subject to federal income tax or Social Security withholding. The amount you can contribute to your account is generally limited annually.
When should you use a health care flexible spending account?
If you expect to incur any medical, dental, or vision/hearing expenses during the year that will not be reimbursed by insurance and payable by you personally, you should consider using this benefit.
How does it work?
You submit claims to pay for eligible out-of-pocket expenses related to health care. This includes dependant expenses, such as for your newborn. Reimbursement for your expense is paid to you out of your account, which you have contributed to on a before-tax basis. Bottom line: You save money -- permanently --on taxes.
What's an eligible expense?
Every plan has different definitions. You should refer to your benefits book for a listing of what qualifies and what doesn't. Generally, qualifying expenses are those health care expenses that would be considered tax deductible as a medical expense deduction by the IRS. For a current, complete listing of all IRS approved medical expense deductions, consult IRS Publication 502.
Should you participate?
It depends on what you expect your out-of-pocket health care expenses to be for the year. Start with your medical deductibles, then add noncovered expenses such as your co-payments, charges over the reasonable and customary standard, and other unreimbursed expenses. If you do have out-of-pocket expenses, either large or small, you should look into this option.
I'm confused...why is this beneficial to me?
These accounts are designed to help you save on taxes. Whatever money you contribute to your account reduces your taxable income; for IRS purposes it's as if you never earned the money in the first place. This saves you tax dollars. For example, if you contribute $1,000 to your account and are in the 15% tax bracket, you could save $150 in federal taxes and $76 in FICA for a total savings of $226.
Sounds pretty good...why am I looking at this now?
Remember, we're taking a closer look at how your benefit elections are affected by your new bundle of joy. If your new baby will mean more out-of-pocket medical expenses due to co-payments, deductibles, and noncovered procedures, then this may be the right time to start or increase what you contribute to these accounts.
O.K. what's the catch?
You must estimate your future claims accurately. Any amounts you contribute that are not claimed by you are forfeited. If you thought you'd have $500 in unreimbursed medical expense for the year, and contributed that much to your account, but actually ended up with only$300 in expenses, you'd lose the extra $200. We don’t want you to get too hung up on this point. For example, if you do forfeit a small amount of money in any given year, the tax advantage to participating in this plan will most likely make up for the amount of money you’ve lost.
Saving Taxes Through Flexible Spending Accounts
Estimated Annual Savings in Federal Taxes
|
Amount Contributed
|
Income Taxes
|
Social Security Taxes
|
|
|
15% Bracket
|
28% Bracket
|
|
$100
|
$22
|
$36
|
|
$250
|
$56
|
$89
|
|
$500
|
$113
|
$178
|
|
$1,000
|
$226
|
$357
|
|
$2,500
|
$566
|
$891
|
These estimates do not include state and local taxes, which may add to your savings. These figures are estimates only. Actual savings are based on your specific income and filing status.
While we're on the topic of medical plan options, your dental plan and vision and hearing plans also need attention. The birth or adoption of a child may enable you to add, elect or drop medical, dental, and vision/hearing coverage. If you have elected dental and/or vision hearing coverage for the benefit year in which your child is born, you may want to take care of your dental and/or vision exams and any other elective items before the baby arrives. Once the baby arrives, you could drop these coverages, thus saving money in premiums for the remainder of the benefits year. You can always reenroll in the plans during the next annual enrollment period.
Long Term Disability
Research shows that many of us tend to insure what we own, but pay little attention to insuring our most important asset: our ability to earn income. Life insurance alone is not the answer since statistics show that a 35 year old is about four times more likely to experience a period of disability than to die before reaching retirement age.
Many are surprised to learn that Social Security disability insurance is insufficient to support their current lifestyles, or that a surprisingly high number of initial claims for benefits are denied. If your claim is approved, Social Security will typically replace 20 to 50 percent of earnings. The definition of disability is also fairly stringent: you must have a physical or mental impairment that is expected to keep you from doing any "substantial" work for at least a year, or have a condition that is expected to result in your death.
Now that you are expanding your family, you should make sure you have enough disability coverage through your employer or you should purchase a personal disability policy that will allow your family to maintain their current standard of living in the event of your disability.
Life Insurance
What would happen to your family, as well as your aspirations, if you and/or your spouse were to die? Who would provide for your family's financial needs?
Life insurance should always be in place to provide for immediate final expenses, such as unpaid medical bills, funeral expenses, and estate settlement costs. It should also meet the day-to-day costs of running a household. You can have peace of mind knowing that the mortgage, utility bills, and taxes will all be taken care of in case of your death. Besides daily financial needs, life insurance can provide for another measure of safety: assuring that your family's long-range financial goals are met, such as retirement income or college funding.
When exploring life insurance options, you have two basic questions, how much to buy and what type to buy.
In general, the rule of thumb is that the policy's death benefit should be from 5 to 10 times the annual earnings of the person whose income the policy seeks to replace. The amount you specifically need depends on many individual variables. For example, an individual with many dependants should consider a life insurance policy that is large enough to cover them all. Someone with few dependants doesn't need as much coverage. When you consider what's right for you, consider what your family's expected expenses will be, the amount of time you need coverage for those expenses and future goals such as college funding.
What type of life insurance do you buy? Although a myriad of policies exist, there are two main types of life insurance: term and permanent. The best one for you, again, depends on your personal situation.
Term: This type offers a large death benefit with a relatively low premium. These premiums, however, go up as you age or when the policy is renewed. Term policies function as a safety net for your family, not as an investment. They do not accumulate cash value or contain a savings component. They are sometimes referred to as pure insurance.
Permanent: These cash value policies have higher premiums that are intended to remain level throughout your life. While their primary objective is to provide your beneficiary with a death benefit, they also function as a form of savings. Traditional “whole-life” policies have fixed premiums and provide guaranteed yearly increases in cash value. Some even pay dividends, which increase your total savings. Non-traditional policies -- universal and variable life -- are more flexible and accumulate cash based on current interest rates or underlying investments which you choose.
Specifically recommending the type of insurance that you buy is difficult. Generally, once you put together some of the numbers, you'll find that the coverage you require is a pretty high figure. A young family with a newborn may be able to afford only term insurance in order to get the coverage they need.
Considering Beneficiary Designations
If you’re covered by a life insurance policy, contribute to your 401(k) plan, have an IRA, or participate in a deferred compensation plan, you’re familiar with the fact that these plans ask you to name beneficiaries in the event of your death. At the moment, it’s likely that your spouse, parents, or some other family member(s) are listed as your primary beneficiary. Now that you have a new child, you should review your named beneficiaries to make sure that the list is still appropriate. At a minimum, you may want to add your new family member to your list of contingent beneficiaries. A contingent beneficiary is a secondary beneficiary, paid only after the death of your primary beneficiary. It's not something we like to think about, this business of death and beneficiaries, but it's another important element in your financial planning and in properly providing for the security of your loved ones.
