Open Enrollment, Part 2: Life Insurance and AD&D

This is the second installment of the Open Enrollment mini series. I cover life and disability insurances in this post. Other posts in this series are:

1. Basic Life Insurance

The employer provides life insurance at 2 times base pay at no cost to the employee. The value for coverage over $50,000 is taxable to the employee by IRS rules. No choice here. Take the free insurance and pay the tax.

2. Supplemental Life Insurance

The employer also offers additional life insurance for purchase by employees. Unlike health care, the supplemental life insurance is not subsidized. Healthy employees should look elsewhere, but if you have health problems, you should consider this option. Life insurance through the employer is "guaranteed issue" and not medically underwritten, up to a certain coverage level. This means even if you have cancer, you can still buy life insurance from the employer’s group plan. Whether you are overweight or have high cholesterol, your rate is still the same as other employees. Many group plans also do not have separate rates for smokers and non-smokers. Because there is only one rate group, the group rates are higher than the rates otherwise would be for healthy people and lower for what not-as-healthy people can get on the market. This causes "adverse selection" — healthy, non-smokers tend to opt out and buy insurance on their own, not-as-healthy people tend to stay in the plan. This drives the rates higher and the cycle continues.

I’m not going to buy life insurance from my employer’s group plan. Instead I have a policy I bought on my own. This policy belongs to me. I have it no matter whom I work for. A policy from the employer’s group plan typically cannot be continued if you leave the employer, unless you convert it to a much more expensive permanent policy.

3. Spouse Life Insurance

I can also buy life insurance for my spouse from my employer’s group plan. The same logic for Supplemental Life Insurance also applies here. If your spouse is healthy, buy life insurance on your own from the market. If your spouse has health problems and cannot get private insurance at reasonable cost, consider buying some from the employer’s group plan.

I’m not going to buy life insurance for my spouse from my employer’s group plan, for the same reason I’m not buying life insurance for myself from the group plan.

4. Child Life Insurance

Generally it’s not necessary to buy life insurance for a child. If a child dies, you might incur some expenses and emotional distress, but you are really not depending on the child for income. The chance of a healthy child dying is very slim anyway. Save the money in a college fund instead.

I’m not going to buy child life insurance.

5. Basic AD&D

AD&D, or Accidental Death and Dismemberment, sounds very scary, especially the dismemberment part. If you die from an accident, as opposed to an illness, AD&D pays to the beneficiary. If you lose a hand, foot, limb, or the use of an eye, AD&D pays. My employer provides AD&D coverage for 2 times base pay at no cost to the employee. Nothing to decide here. Take the free insurance.

6. Supplemental AD&D

If I want more AD&D coverage I can buy more, but I’m not going to. AD&D coverage is too limited. The loss must be a result of an accident. If I must be amputated because of a bone disease, AD&D won’t pay. Money is better spent on life and disability coverage.

I’m not going to buy additional AD&D coverage.

More to come on disability insurance and Flexible Spending Account.

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