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Are group benefits that important? A case study on CVS benefits.

March 29, 2023

In this month’s blog article, I thought I would dive into group benefits.  When I meet with clients and potential clients, we often spend a good deal of time on their employee benefits.  They can be a crucial part of your financial plan, and they are quite often overlooked.  Specifically, I want to touch on the benefits offered by CVS.  Full disclosure, I work with many pharmacists that are employed by CVS and have access to much of the information that may not be readily available.  Many of the concepts I discuss this month will apply to many companies’ group benefit plans.  The four areas we are going to focus on this month are Life Insurance, Disability Insurance, 401(k), and the Employee Stock Purchase Plan.




Life Insurance.


There are many ways to view life insurance and how much you actually “need”.  I subscribe to the theory of “Human Life Value” 1.  HLV is the concept that if something were to happen to you prematurely, we would want to keep as much of your salary as possible on your balance sheet.  If you are younger than 40, the limit is 30 times your income, from 40 years old to 50 years old that number drops to 20 times your income, and when you are over 50 it is calculated based on your net worth.  CVS offers 1 times your current income.  You can also purchase up to $3,000,000 in supplemental life insurance.  A quick example to illustrate this concept:


$120,000 (Annual Salary of a 35-year-old) x 30 = $3,600,000 HLV.  You can get up to $3,000,000 through CVS, but could probably use an additional $600,000 of private insurance.  As you can see, the more income you make, the higher the need to analyze what you are eligible for gets.  Group life insurance is great, but it doesn’t go with you if you leave the company.  You also aren’t going to be any younger than you are now, and we typically don’t improve our health as we age.  I usually recommend a combination of group life insurance and private life insurance.




Long-Term-Disability Insurance.


Long-Term-Disability or LTD for short is the insurance you have to protect your income in the case you get sick or injured during your working years.  Currently, CVS provides 40% of your income for LTD.  Since this is a company-provided benefit and you don’t pay for the coverage, it is paid out on a taxable basis.  For example, let's assume you make $120,000 and you get sick or injured and can’t work.  Based on the coverage CVS provides your income would drop from $120,000 to $48,000.  Not only is there a substantial drop in income but it is also taxable.  You do have the ability to “buy up” additional coverage, but if you are going to that, you might as well do that on the private side.  LTD is something you want to get as young as you can.  The price only increases over time.  The same concept applies to life insurance.  You can’t take it with you if you switch jobs, so it is often a good idea to get a combination of group and private policies.  There is no guarantee your next employer will have LTD of any kind.  I meet with many people, and the ability to earn an income is often the largest asset on their balance sheet.






Currently, CVS offers a 401(k) with a 100% match up to 5% of your income.  Essentially, if you contribute 5% of your salary, CVS will match that 5% dollar for dollar.  That is free money!  I encourage everyone to take advantage of free money.  There is also a pre-tax and ROTH (post-tax option).  In most cases (but not all/especially those in the top tax bracket) I usually advise clients to use the ROTH option.  Yes, you are going to pay taxes this year and not get a tax break.  But from a long-term perspective, I think it makes sense.  It doesn’t feel like it, but we are currently in a historically low-tax environment.  If nothing changes between now and January 1, 2026, the Trump Tax Cuts are going to expire, and tax rates are going up across the board.  I would much rather pay taxes upfront in a historically low tax environment than pay them down the road when taxes are projected to be higher. 




Employee Stock Purchase Plan (ESPP)


The ESPP is a way for employees of CVS to purchase CVS stock.  There are two offering periods.  January 1 – June 30 and July 1 – December 31.  The ESPP allows employees to use a post-tax payroll deduction to remove a portion of their income and set it aside to purchase CVS stock at the end of the offering period.  This can be very advantageous because the price the stock is purchased at is the lower of the beginning day and the ending day of the offering period, plus a 10% discount.  For example:  Let’s assume the price of CVS was $10 on January 1 and $20 on June 30.  You could purchase the stock at $10 with an additional discount of 10% making the stock $9.  This means at the end of the offering period you would have bought CVS stock at $9 per share which is immediately worth $20 per share.  You do have the ability to sell the stock at any time, but if you want to take advantage of taxes you need to hold the stock for 18 months after the offering period.  This can be a great way to accumulate after-tax dollars, but you also need to have a plan to divest this stock.  You don’t want to get in a situation where you have extremely high concentration.  A strategy that typically works very well is having an automated system where each time the stock meets the 18-month holding period it is sold and diversified.  This allows you to take advantage of the plan, while still creating a sound investment strategy.




I hope this helps, and as always, please let me know if you have any questions or want to hear about topics in the future.


1. The HLV Theory states that one should maintain life insurance equal to the present value of their expected future earnings. Life insurance companies place limits on life insurance available to consumers based upon this formula and have created age-based multiples of current income as a guideline. For example, a person in their 30s may be insured for around 30 times their annual income, 20 times for a person in their 40s and 10 times for people in their 50s. Age 60 and over about 1 times net worth.


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