Open enrollment is a two-week window related to Occidental Petroleum benefits where employees make decisions on some of their company benefits and coverages. It isn’t given much attention by most even though some of the highest-consequence decisions are made in this window.
One of the fascinating parts of being an advisor is getting to see the financial stories of hundreds of different families. I’m amazed how often I meet someone who has faced a critical life event and insurance played a decisive role in their financial fate. I’ve had clients that were reliant on disability insurance for more than a decade. They weren’t planning on needing it, but it saved their financial lives.
My story is a great example. A few years ago, we had our youngest son, Peter. A few days later, I had a small procedure to remove what we thought was a cyst. Turns out it wasn’t a cyst. Fourteen days after my wife gave birth to Pete, I walked into the house and told her I had cancer. We were absolutely shocked. Didn’t see it coming at all.
We also didn’t expect the complications that treatment would bring. One month into chemo, I had a pulmonary embolism. To make a long story short, I couldn’t work for months.
This period was absolute mayhem for us and our three children. But, it had almost no financial effect on us at all. Our decisions in open enrollment were the reason why.
Your financial life can be split into two buckets: defense and offense.
Defense: Estate Planning and Insurance
Offense: Investments, Tax Planning, and Retirement Planning
Until age 55-65, insurance is the most important part of your financial life. More specifically for those of you with children, until you have about $3Million in assets or $1-2M AND reach age 65 (Social Security and Medicare), insurance is critical. Most families are severely under-insured outside of their employer plans. So for many of you, open enrollment is the primary vehicle for the most important part of your financial life.
Let’s walk through some of the big topics with open enrollment
I won’t get too specific, because you obviously have to understand your personal needs for insurance and what’s best for you. But I will give a quick advertisement for HSA’s and some thoughts on how to best use them.
HSA’s are the most tax-friendly account in the tax code. Contributions lower your taxable income. Growth is tax-deferred. And for qualifying expenses, you can access it tax-free. That’s a huge incentive to choose and utilize the HSA.
How to best use it? Don’t spend any of it now! Growth and future distributions are tax-free for medical expenses. So, max it out (the IRS gave a bump for 2021 limits), invest it using low-cost funds with broad stock exposure, and see if you can get to a few hundred thousand dollars in your HSA by retirement age.
This article is not about retirement planning, so I’ll be brief on this point: One secret to successfully retiring and not running out of money is navigating age 55-65. For most people, you either need to work part-time or have significant savings (more than $3M) to retire at age 55. A huge reason why is $2,000/mo healthcare until you reach age 65 and become eligible for Medicare, which is much more affordable.
Your HSA can solve this. If you’ve saved and invested your HSA instead of spending it now, you can afford the expensive health care that early retirement brings. HSA’s often fly under the radar but can be an excellent tax-effective way to save for the future. CNBC wrote a great article outlining the various potential tax benefits.
Here are some things to consider with life insurance:
The vast majority of you should avoid whole life, universal life, or any cash value life insurance. It is a terrible investment, horribly expensive, and causes most to be under-insured.
Getting a fixed term life policy (Note: NOT “Term 80”) outside of your employer is often a great choice if you’re young with kids. The reason that having your own term policy is ideal is because Oil & Gas is volatile. You can’t know for certain whether your current employer will be your employer in five or ten years.
If you don’t have a private fixed term policy, your employer is a great way to make up for an insurance gap.
If you are married with a few young kids, you need A LOT of insurance. I could easily think of scenarios where a 35-year-old with 3 kids would want $3M in term life insurance coverage.
As your personal savings and net worth grow, you don’t need as much. Your goal is to be self-insured by the time you’re in your 50’s or 60’s.
This is critical. Most estimates say you are 3-4x more likely to need disability insurance than life insurance. It’s such a critical section that I’ll bold this. Most of you should probably choose the highest long-term disability option available-60% coverage with a tax-free benefit. If you work in Oil & Gas (I’m guessing you’re only reading this if you do), the greatest thing you have going for you financially is the present value of your future earnings and benefits. It’s a no brainer to make sure this is properly covered. Similar to life insurance above, it’s a good idea to have a private policy outside of your employer if you’re still young and insurable.
What about all of the extra accident, hospital, etc. policies?
Do you need them? I can’t make a blanket statement for everyone reading this (and I’ll remind you of the disclosure that applies to all of our content: this is educational and you have to become a client to receive actual advice). With that long disclaimer out of the way, most of you don’t necessarily need to do these extra policies. But you can if you want to.
Would it be nice to have a lump sum $15,000 check if something happens? Yes. If you have a sufficient emergency fund, it’s probably not a total necessity.
But if you really want to and are comfortable with the cost of these policies lowering your take-home pay, knock yourself out.
My thoughts here are also a great summary of how we view insurance as a whole: Insurance is protecting you from big disasters so that you can build wealth outside of insurance.
If you’re working at a large O&G company like Oxy, you probably have an income that is significantly higher than the national average, and you have substantial retirement benefits. Use those to create wealth and make yourself financially independent. Insurance should be used for its highest purpose: protecting you from disaster. The role of insurance should stop there.
If you want to learn more about OXY’s 401(k) plan, read the recent piece we wrote.