News

This open enrollment mistake can cost you and your family thousands, according to a doctor and CFP

This open enrollment mistake can cost you and your family thousands, according to a doctor and CFP
Momo Productions | Digitalvision | Getty Images

During open enrollment season, many workers focus on the big, headline decisions that tend to come at the beginning of the process, such as the premiums, deductibles and styles of coverage offered by various health, dental and vision insurance plans.

But if you don't pay attention to some of the smaller details, you could end up costing you or your family time, money and anguish, says Carolyn McClanahan, a physician, certified financial planner and founder of Life Planning Partners.

Take workplace life insurance policies, which you can often opt into during open enrollment by simply checking a box. Doing so is almost always a good idea, says McClanahan, but failing to properly designate who gets the policy's payout in the event of your death is a big mistake.

"The biggest mistake I see during open enrollment is people not listing beneficiaries or listing minors as beneficiaries on their workplace life insurance," she says.

Luckily, this is a problem you can rectify by updating your beneficiaries throughout the year. But other mistakes, such as opting into expensive policies you don't need, will likely cost you throughout the upcoming year.

Here's how to avoid unforced errors when you choose your insurance coverage this month.

Be smart about beneficiaries

It's easy to gloss over the life insurance portion of the open enrollment. Many companies offer a modest policy to employees with no premium. For many people, it makes sense to check the box to opt into what is essentially a free policy and move on.

But don't go to the next step without making sure you've named beneficiaries on the account. In the event of your death, the payout on your policy β€” often the equivalent of about a year's salary β€” will go to whomever you choose during open enrollment. Fail to name someone, and your loved ones may end up having to duke it out in a lengthy and expensive legal process.

McClanahan suggests not only listing a primary beneficiary β€” often your spouse, if you have one β€” but also secondary beneficiaries, in case something should happen to both of you. And neither your primary nor secondary beneficiary should be a minor child, she says, since they can't legally take possession of the money.

"If you have a kid named as a direct beneficiary, the court is going to name a guardian and then that guardian has to report how the money is used for the kids," she says. "It becomes an expensive nightmare and a pain in the butt."

Her advice to parents of small children: Name your spouse as a primary beneficiary and secondarily leave the money to a trust you have set up for your children. Talk to an estate lawyer or other financial expert about setting up such a plan.

Be wary of extra insurance

Beneficiary concerns aside, if your workplace offers a no-premium life insurance policy, it's a no-brainer to sign up. But many employers give you the option of tacking on extra policies, and those should be viewed with more skepticism, McClanahan says.

"An extra life insurance policy through your work may come with limited underwriting," she says. "Always take the free insurance, yes, but for people who are healthy, it's usually cheaper to get additional insurance on your own."

In other words, before buying additional life insurance from your employer, see what kind of premiums you'll have to pay and what the policy will pay out in the event of your death. Then compare the value with what you can get from a term life insurance policy elsewhere.

As the name implies, term life insurance pays out if you die during a certain pre-determined period of time. Parents might take out a policy that lasts until their kids are grown up and out of the house.

After doing some shopping around, you may find that you can insure yourself for cheaper elsewhere. Or, if you have health problems, you may find it difficult to get a private policy, making the workplace insurance your most attractive option, says McClanahan.

"For those people, the workplace policy is a no-brainer."

Want to master your money this fall?Β Sign up for CNBC's new online course. We'll teach you practical strategies to hack your budget, reduce your debt, and grow your wealth. Start today to feel more confident and successful. Use code EARLYBIRD for an introductory discount of 30% off, now extended through Sept. 30, 2024, for the back-to-school season.

Plus, sign up for CNBC Make It's newsletter to get tips and tricks for success at work, with money and in life.

Copyright CNBC
Contact Us