Selecting The Right Mix Of Insurance Benefits

The corporate benefits provided by many employers provide an essential source of financial protection. Today, the basic life, health and disability benefits package is augmented by other types of benefits such as legal coverage, daycare and tuition assistance. This article will examine some of the factors that employees should consider when selecting benefits.

Common Benefits

Employers have substantially upgraded the range of benefits they provide in an effort to recruit and retain qualified employees. The comprehensive benefits packages offered by many corporations today go considerably beyond the traditional life and health programs of the past and may include:

  • Term or permanent life insurance
  • Medical and dental insurance
  • Flexible spending accounts and health savings accounts
  • Long- and short-term disability coverage
  • Long-term care insurance
  • Retirement plans, both qualified and nonqualified
  • Tuition assistance and reimbursement
  • Child care assistance and reimbursement (including on-site child care facilities)
  • Health and physical fitness facilities (sometimes on-site)
  • Meals, lodging and transportation assistance and reimbursement
  • Legal insurance/assistance
  • Elder care
  • Flexible scheduling
  • Paid vacation and sick leave
  • Caregiving/maternity leave

Knowing which benefits to choose can be a complex decision that involves an employee's financial planner and tax advisor, as well as the employer's human resources department.

Benefit Selection Criteria
Employees must weigh the cost of benefits against the likelihood that they will be used. In some cases, such as when a young woman is likely to use maternity leave or an employee seeking an advanced degree applies for tuition assistance or reimbursement, the choice of selecting a benefit is easy. In other instances, such as paid holidays, participation is mandatory. For many people, insurance is a gray area requiring a case-by-case evaluation. If a particular disability or health issue runs in an employee's family, or an employee is older, purchasing or paying a portion of health or disability insurance coverage is probably a good idea if the cost is reasonable. On the other hand, others may wish to purchase only long-term disability coverage and self-insure for short-term disabilities. Long-term care insurance is not always necessary and should be chosen judiciously, keeping in mind the age of the buyer, other financial resources, and family health history.

Employees, particularly those with dependents, should probably buy term life insurance coverage equal to at least $50,000 or up to two times salary, although depending on individual circumstance this coverage alone may not be sufficient. But there are also times when a benefit may be so cheap that it is almost always worth buying. For example, if short-term disability insurance costs just $10 per month it should probably be included. An employee would only spend $120 per year on this benefit, and the cost could easily be recovered with just one claim.

Negotiating Your Benefits
Benefits are negotiated in the same manner as salary. Employee should have a fairly clear idea of what comparable workers at other companies are receiving and negotiate from there. Mentioning that receiving a certain benefit, such as flexible hours or access to on-site fitness facilities, will increase your productivity may be beneficial as well. You can also negotiate a higher salary in exchange for foregoing benefits you do not need.

Benefits Vs. More Income
You should estimate the need for benefits when weighing them against compensation. If you are young, single and in good health, you might opt to act as an independent contractor and receive $75,000 of self-employment income instead of working as an employee for a $50,000 salary with full benefits, especially if the benefits are not needed or they are relatively easy and inexpensive to obtain.

Someone who opts for the higher income could use the excess money to invest in a retirement plan for a few years and create a substantial nest egg, purchase basic health and dental premiums, and perhaps take out cheap term life coverage. Still, foregoing benefits for greater income is not always a good idea if you are likely to need those benefits or may have difficulty obtaining them on your own at a reasonable cost.

Taxation of Benefits
Another thing to consider is that the cost of some employer-paid premiums may be included in the employee's taxable compensation. In most cases, the premiums paid for health, dental and disability insurance are fully tax-deductible for whoever pays them, whether it is the employee or the employer. However, it may be unwise to deduct premiums for disability coverage. If the premiums paid are deducted, the benefit received is taxable as ordinary income. If no deduction is taken, the benefit is tax-free. The ability to obtain tax-free benefits usually far outweighs savings from deducting the premium.

Group term life premiums for up to $50,000 worth of benefits are not taxable to the employee as compensation, which is a practical reason to opt for at least this much coverage. Finally, employees should at least be aware of whether such amenities as meals, lodging or transportation are included in income.

The Bottom Line
There are many factors to consider when choosing employee benefits, such as the probability you will need them, taxation and cost. Although some benefits may not seem as necessary as others, their cost may be so low that including them makes sense. For more information on selecting benefits, consult your financial planner, benefits broker or human resources specialist.

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