BP Open Enrollment is coming up. Before automatically making the same elections as the prior year, stop and review how these elections can affect your financial future. BP Medical plans are not the only thing to consider. BP Life elections are just as important, if not more so. While uncomfortable, an important question to ask yourself as you evaluate what elections are best for you is: If you pass away prematurely, what will you leave your family with? We never think something will happen to us, but sometimes it does. During BP's annual open enrollment cycle, it's always best to be informed as you make these crucial decisions. There are a lot of choices and information swirling around before and during Open Enrollment. Having a good knowledge of BP's offerings, specifically those related to life insurance, will empower you to make the right choice for your family. So, let's dive in.
BP Life Benefits & the Importance of Life Insurance
Generally, a discussion on insurance may seem like a snooze-fest. But, when you consider your well-being in the mix, things quickly get more interesting. So, before we dive into how these elections affect you, let's start more generally.
What does Life and Accidental Death and Dismemberment (AD&D) Insurance through BP look like, and what are your options? According to BP, their Life and AD&D Insurance coverages "provide important security and financial protection to you and your beneficiary(ies) if you are injured or die while covered under the plan." Put simply, this means that coverage provides those you leave behind with a financial safety net if something happens to you. Isn't that what we all want for our loved ones?
BP Insurance Coverage: Life & AD&D
In terms of actual coverage, you may wonder what BP provides. BP pays employees' life insurance coverage at double the base salary, up to $3.75 million.
Accidental Death and Dismemberment (AD&D) insurance coverage is two-fold. First, in the case of accidental death, BP will pay for coverage at double an employee's base salary (up to $1 million). For covered loss of limb(s), BP pays for 25% to 100% coverage of double the employee's base pay. Covered losses are covered on page 9 of BP's Basic Life and AD&D benefit book. BP pays AD&D in addition to other life coverage through BP. The best part about these benefits is that they are 100% covered by BP, so you don't even have to make an election to sign up for them. You may wonder: If BP covers it, and I don't have to make an election, why are we talking about life and AD&D insurance?
Additional Cost for Life Insurance
Extra insurance sounds great, but what is it going to cost you? Let's walk through an example:
Step 1: Identify your current base pay (If it's not an even multiple of $1,000, round up). If your current base pay is $155,500, you will use $156,000 for the cost calculation.
Step 2: Next, identify how much more insurance you'd like to cover. Suppose you'd like to insure up to 3x your base salary (on top of the 2x BP already provides).
Step 3: Multiply your base pay by this number to calculate the total amount of coverage you want. In this example, coverage for 3x of your base salary would equal $468,000.
Step 4: Divide the coverage amount by $1,000. In this example, the result would be $468.
Step 5: Multiply that number by the monthly rate from the table below. If you are 40 years old and a non-smoker, your monthly cost is $28.08.
Twenty-eight dollars per month for almost ½ million in additional coverage? That's nothing to sneeze at if it's something that makes sense for your situation. Because this insurance is through an employer like BP, rates are typically lower than what you could get in the marketplace. However, it's never a bad idea to price it out yourself and get quotes for outside-term insurance.
Advisor Tip: One of the great things about BP's Group Universal Life Insurance is that you can convert it to an individual policy if you leave BP.
Cash Accumulation Accounts
Extra life insurance coverage is great, but what else? Remember that BP employees can also buy a Cash Accumulation Account (CAA), included for purchase with the Group Universal Life Insurance. The CAA program allows you to set aside funds through payroll deduction or lump sum contributions. The main benefits of the CAA are:
- Your contributions grow at a guaranteed interest rate. This rate is set in December and can vary, but it will always be at least 4%.
- The growth in this account grows on a tax-deferred basis, similar to an IRA or a 401k.
- You can use this account to pre-fund insurance premiums when you leave BP. You can also continue contributing to this account even after you leave BP.
- You can withdraw these funds at any time.
How Much Life Insurance Do I Need?
If you're still awake, let's discuss how this information applies to YOU. The details are great, but how do you know if you need to elect additional insurance? Let's walk through a few examples. For simplicity, we are assuming 8% annual returns on investments and no change to expenses after a spouse's passing.
Considerations for a One-Income Household
Pat and Sophia are 40 years old with two young kids. They have $300,000 in investable assets and only one income. Sophia's annual salary and bonus equal $250,000. They have $100,000 in expenses per year.
If Sophia passes unexpectedly tomorrow, BP will pay Pat and the children $500,000 from the basic insurance coverage. Will that be enough? How long will the $800k last them? Because there is only one income and the family's breadwinner has passed, these funds will only last Pat and the children 13 years. Pat has a few options: drastically reduce expenses, or get a job. As a sole caregiver, this puts Pat in a very difficult place.
To avoid this issue, we would have advised Sophia to sign up for additional life insurance through BP to provide for her family if she were to pass early. It's relatively inexpensive and provides comfort and financial well-being if something unexpected happens. Without purchasing additional insurance, this family has a gap in life insurance, and it's simple to fix during BP open enrollment.
Considerations for a Two-Income Household
Let's consider a different scenario. Logan and Riley are 50 years old with no children. They have $700,000 in investable assets and both work at BP. Riley has an annual income of $200,000. Together, they have total expenses of $150,000. In addition to the basic BP coverage, they have elected to pay for additional coverage of 5x Riley's base salary. Is this enough? Is it too much?
Based on our calculations, Riley has signed up for more than enough insurance for Logan to continue with their current lifestyle. To help determine if it's "too much" insurance, we need to ask Logan and Riley what their goal is for this insurance. Is it just to help the surviving spouse live the same lifestyle after one of them passes, or do they have additional goals that require more funds?
Suppose they have goals beyond continuing the same lifestyle, like charitable giving or passing a certain amount of assets to family. In that case, this insurance coverage will help them do that and continue their legacy. However, they likely have too much insurance if they want the additional funds to give Logan a comfortable lifestyle. 3x or 4x Riley's salary on top of what BP provides would probably be sufficient to cover Logan for the remainder of their life.
Considerations for a Near-Retirement Household
Lastly, let's look at Parker and Alex. They are 60 years old with grown, self-sufficient children. They have $4 million in investable assets. Parker works at BP and is thinking about retiring next year. Parker's annual income is $250,000, and yearly expenses for the household total $150,000. The two words we like to focus on with those close to or at retirement are: Financial Independence.
Do they need life insurance if Parker and Alex have enough to retire? We typically think about life insurance in terms of human capital replacement. If Parker plans to retire soon and there won't be income coming in after this, they likely don't need life insurance. With this withdrawal rate, total portfolio assets, and annual spending, there is no need for life insurance, as Parker and Alex are already financially independent. The only reason they should consider life insurance is if they want to leave additional funds behind for the surviving spouse or other family members to inherit additional funds over and above what is needed.
Take Action During BP's Open Enrollment Period
BP's open Enrollment is one of the only times you can make changes to existing elections, so it's essential to start thinking about making changes to your elections now. We strongly encourage consulting with an advisor before making insurance changes to ensure that you coordinate this strategy with the rest of your financial plan. In addition to making the proper elections, please ensure that you have selected and updated the beneficiaries for each benefit in alignment with your estate planning documents.
Work with a Fiduciary Financial Advisor to Assess Your Insurance Needs
When done correctly, insurance as part of your financial strategy can make a substantial difference in savings over time. Our firm focuses on comprehensive financial planning and ensuring that strategies like evaluating insurance gaps are correctly executed to help our clients reach their financial goals. While ensuring you're correctly handling all of these pieces may seem daunting, you don't have to do it alone.
At Willis Johnson and Associates, we do financial, investment, and tax planning with our clients continuously to ensure that we optimize their financial situation in retirement. We believe this is an integral part of a comprehensive financial plan and that you should always review your insurance needs in coordination with your overall tax picture and financial plan. As a Registered Investment Advisory firm (RIA), we're held to the fiduciary standard to work in our client's best interest and make insurance recommendations based on individual needs and goals. Unlike other firms, we don't sell insurance, so we can focus on finding the right plans and amounts needed for our clients without any conflicts of interest.
At WJA, we look at all your financial pieces to ensure nothing gets overlooked or left on the table. Working with a financial advisor is a beneficial way to determine if this or other tax-efficient savings strategies can help you reach your long-term goals. Start the conversation with an advisor today.
