Health savings accounts (“HSA’s”) provide a means for an individual or family to self insure all or a portion of their medical expenses. Contributions can be made up to a certain annual limit, and the balance carries forward from year to year. They are designed to be supplemented with a high deductible health insurance plan (“HDHP”), a medical insurance plan which covers medical expenses and, as its name implies, has a high deductible. Premiums for high deductible health plans are typically much lower than for other health insurance plans, so by saving in an HSA the individual or family is self insuring a portion of their medical expenses and by doing so is saving on premium expenses.
Health savings accounts have several tax advantages. Contributions made to HSA’s are tax deductible in the year in which they are made, grow on a tax deferred basis, and are tax free when withdrawn, as long as they are used to pay for medical expenses. Unlike traditional IRA accounts, HSA accounts are not subject to required minimum distribution rules. For the 2018 tax year, the contribution limits for health savings accounts are $3,450 for an individual and $6,900 for a family, with an additional $1,000 “catch up” contribution for individuals 55 and older. Contributions can be made to an HSA up until age 65, after which point the funds in the HSA can be used to fund out of pocket costs associated with medicare.
The different types of health insurance policies are listed below.
Health maintenance organization (HMO)
Health maintenance organizations provide coverage from entirely within their network of providers. These plans typically have lower administrative costs and less paperwork than other plans. Members usually must obtain a referral on order to proceed with receiving care from another provider.
Preferred provider organization (PPO)
In a preferred provider network members can receive care from inside or outside the network, but typically have higher out of pocket costs when outside the network in the form of higher deductibles and co-insurance.
Exclusive provider organization (EPO)
Exclusive provider organizations are similar to HMO plans except that referrals are usually not needed.
Point of service (POS)
Point of service plans are similar to HMO plans except that care can be obtained from outside the network. Referrals are typically needed in order to do so, and costs borne by the member are usually higher.
High deductible health plan (HDHP)
High deductible health insurance plans are typically the lowest cost plans, but also have high deductibles and usually high co-insurance payments as well, resulting in high out of pocket costs overall. These plans are usually supplemented with health savings accounts (“HSA”s) which enable the member to accumulate assets on a tax advantaged basis for the purposes of paying for out of pocket costs associated with the high deductible health plan.
Trusts provide a way to preserve and protect assets, as well as pass assets to heirs outside of the probate process. They are frequently utilized in estate planning to minimize estate taxes. They can also be used to protect assets by moving assets away from the grantor. Trusts are typically formed under state law, however unlike corporations and LLC’s they are not usually registered with the state in which they are formed.
Trusts usually have grantors, trustees, and beneficiaries. The grantor contributes assets to the trust and executes the formation of the trust. The trustee is designated by the grantor, who manages the trust assets for the benefit of the beneficiaries according to the terms laid out in the trust.
A trust can be revocable or irrevocable. A revocable trust, frequently referred to as a living trust, allows the grantor to retain control of the assets while at the same time allowing those assets to pass outside of the probate process. A revocable trust typically does not enable the trust assets to avoid estate taxes.
An irrevocable trust, on the other hand, involves the transfer assets out of the grantor’s name and typically causes the grantor to lose control of those assets. Because these assets are transferred out of the grantor’s estate, they typically avoid estate taxes in many circumstances.
Disability insurance protects your income in the event of a disability preventing you from earning income through employment. Social security has a disability program which provides some amount of coverage in the event of a long term disability. The social security disability program provides long term benefits with an elimination period of 6 months. What this means is that a person must be disabled for six months before they can begin collecting benefits. More information about the details of this coverage can be found on your social security statement, or by accessing your social security benefit information online at www.ssa.gov.
In addition to benefits provided through social security, you can also obtain coverage through a group plan such as an employee group or union, or purchase individual coverage through a private insurance carrier. Private disability insurance is subject to stringent underwriting requirements, and pricing is based upon occupation, health, benefit amount, and time frame of benefits which are provided.
Private disability insurance can be either short term or long term. Short term disability insurance covers disabilities lasting from a few weeks to several months or a year, while long term disability insurance coverage begins after an elimination period of several months to a year and lasts anywhere from a few years up to retirement age or longer.
We will discuss how to protect against the most common risks – unemployment, disability and death.
Unemployment insurance is typically provided by state or federal government programs. Private insurance for this type of issue does not exist for the most part, and in order to take a proactive approach to managing this risk an emergency fund should be established.
Disability insurance is provided by the federal government through the social security program, and in some situations is mandated by states through workers compensation laws. Many employers and unions provide disability insurance for their employees and members. A proactive approach can be taken by purchasing private insurance coverage as well. Pricing for this type of coverage is typically based upon age, health and occupation. Disability insurance can generally be broken down into two types: short term disability insurance (STD) and long term disability insurance (LTD). Short term disability programs typically cover events lasting from a few weeks to a year, depending on the particular coverage, while long term disability coverage typically covers events which are long term in nature. Disability insurance policies are typically subject to an elimination period, which is the minimum amount of time which the disability must last in order for the policy holder to begin collecting benefits.
Coverage to protect dependent survivors in the event of death of a breadwinner is typically provided by purchasing life insurance. Social security also has a dependent survivor’s benefit program, where benefits are provided to a surviving spouse as well as to surviving children. Details of this coverage can be found in the social security statement.
An emergency fund consists of cash assets held in savings accounts, checking accounts, money market accounts, or CDs for the purpose of meeting unexpected expenses. How much of an emergency fund you should maintain varies depending on a variety of factors including the amount of your income and the stability of that income. Having more reserve assets than necessary can deprive you of the opportunity to earn a substantial rate of return on your liquid assets, while having an inadequate amount of cash reserves can subject you to the risk of having a cash shortage should an unexpected emergency event arise.
On one end of the spectrum is an individual or family with steady, predictable income. A family in this situation could likely survive with an emergency fund consisting of three months living expenses. On the other end of the spectrum is an individual or family which relies on business or self employment income. Such a family would likely require a much larger emergency fund, consisting of as much as twelve months of living expenses.
It is also important to perform a risk analysis to determine the likelihood of an emergency event occurring and the risk management systems in place to plan for the possibility of such events occurring. This includes analyzing existing insurance coverage with respect to coverage amounts as well as deductibles, as well as cash reserves held in vehicles such as health savings accounts. For example, individuals or families who self insure will need to maintain a higher cash reserve in an emergency fund than those individuals or families who maintain a substantial amount of insurance. Similarly, having insurance coverage with high deductibles will necessitate having sufficient cash reserves to pay those deductibles should a claim arise.
According to the Social Security Administration, over half of the elderly in the United States receive more than half of their income from social security, and in 2015 social security benefits accounted for almost 40% of the income of the elderly. Besides providing old age benefits, social security provides protection related to disability as well as benefits for dependents of a decedent. We will focus primarily on retirement income benefits in this article.
In order to qualify for social security, you must first acquire 40 credits (if you were born before 1929, you may need less). You can obtain up to four credits per year, and in 2016 you would have earned one credit for each $1,260 of covered earnings. So if you had earned $5,040 in 2016, you would have earned the maximum four credits for that year. Once you have earned the required 40 credits, you qualify for retirement benefits, and the amount of your benefits will depend on your earnings throughout your working life.
The retirement benefit amount will depend upon the age at which benefits are filed for, with “full retirement age” being the benchmark . Benefits will be higher if taken later than full retirement age, and lower if taken earlier than full retirement age. Full retirement age will vary depending upon your birth year. Details of your retirement benefits can be found in your social security statement, which is sent to you annually, and can also be accessed online at www.ssa.gov.