After the quick walkthrough of 401(k), let me discuss the life insurance part of the benefit package. Being risk-averse, I consider insurance as a critical part of my personal finance world. You have known from PFBlog that on top of $500,000 liability coverage in my auto and home insurance policy, I also obtained $1,000,000 umbrella insurance. Life insurance is no exception and I am taking it seriously.
Here are the basic rules of the game:
Employee Life Insurance
- Microsoft pays for the cost of employee life insurance equal to two times of annual base pay.
- Employee can elect to purchase coverage up to six times of annual base pay. Insurance over two times of annual base pay can be purchased with pre-tax dollars.
- According to IRS rules, employer-paid life insurance coverage above $50,000 is considered taxable income to you. The effect on your Federal Income and Social Security taxes will depend on your age, tax situation and how much life insurance over $50,000 you choose.
Dependent Life Insurance
- Employee may elect coverage for spouse/same-sex partner and/or children using after-tax money, including:
* Spouse/same-sex domestic partner (from a minimum of $5,000 to a maximum of 50% of the amount you elect for yourself)
* Children’s insurance ($5,000, $10,000, or $15,000 in coverage for each child)
Now comes the decisions. As a starter, child insurance is definitely a no-go (and here is why). Between employee insurance and spouse insurance, apparently we can either purchase insurance for our own, or let the other purchase dependent insurance to server the same purpose.
The math is pretty interesting: for me to purchase every $100,000 coverage for my wife (under the dependent insurance benefits), it will cost $2.35 per pay period or $56.40 per year. For my wife to purchase her own employee insurance from the benefit package, every $100,000 coverage will cost $3.34 per pay period or $80.16 per year.
The other way around, for me to get into my wife's dependent policy, every $100,000 coverage will cost $96.48 per year; I can get the same $100,000 coverage from my employee insurance for $56.40 a year only.
So I can play a little bit arbitrage here: I will purchase both life insurance policies from my benefits package, and allow my wife to enrol for the minimal ($50,000 coverage) and take some money from Microsoft.
One final check will be whether the coverage is sufficient, and my judgment is it is. Even the coverage is not enough, having to pay $80-$90 a year for $100,000 coverage is a waste of money -- the last time I checked, I can get $500,000 coverage for about $200 a year with 10-year guaranteed rate.
Read The Complete Benefits 2005 Series:
Benefits 2005, Part 1: 401(k)
Benefits 2005, Part 2: Term Life Insurance
Benefits 2005, Part 3: Flexible Spending Accounts
Benefits 2005, Part 4: Accidental Death and Dismemberment
Benefits 2005, Part 5: Everything Else