The Permanente Medical Group (TPMG) announced that it will cap what it pays toward your life insurance in retirement at $50,000. That's one of the headlines from the August town halls. You may be wondering: What did I actually have before? How does this change things for me?

• What changed: Kaiser/TPMG is capping retiree life insurance coverage at $50,000
• What it was before: today's retiree coverage is based on a formula tied to your hire date and your pre-retirement coverage, not a full match to what you carried while working
• What it costs: coverage over $50,000 comes with imputed income tax, whether you're working or retired
• The bigger question: this is also a good time to think about how much coverage you actually need in retirement

How much coverage did you have before?

TPMG's retiree life insurance was never a full continuation of what you carry while working. It's a formula, and it depends on when you were hired and how much coverage you carried before retiring.

How much life insurance does TPMG provide while you're working?

As a Senior Physician working at least a 6/10ths schedule, TPMG pays for whatever coverage you've elected, up to four times your prorated base salary, capped at $2,000,000.

How does that translate in retirement?

If you were hired before January 1, 2003: your coverage decreases by 9% a year, starting the month after your 63rd birthday. By age 70, it settles at 15% of your age-62 salary (or your salary at retirement, if you retire earlier).

If you were hired on or after January 1, 2003: it's simpler. You get 15% of the coverage you were carrying before you retired.

Either way, both groups eventually end up in the same place: 15% of your pre-retirement coverage, whether you arrive there immediately (hired 2003 or later) or by age 70 (hired earlier). For both examples below, we'll assume the physician carried the plan maximum, 4X their base salary, during their working years, and use that same 15% figure for both. Here's each hypothetical physician's in-retirement coverage today, and how much of it disappears under the new $50,000 cap:

• $350,000 salary: $1,400,000 in working-years coverage (4X) → $210,000 in retirement (15%) → $160,000 lost under the new $50,000 cap
• $500,000 salary: $2,000,000 in working-years coverage (4X, the plan max) → $300,000 in retirement (15%) → $250,000 lost under the new $50,000 cap

Was your life insurance coverage ever free?

You may not have paid a premium for your TPMG-provided life insurance, whether while working or in retirement. But coverage above $50,000 was never actually free: it's taxed as imputed income, and that's true today, before any of these changes take effect.

What is imputed income? The Internal Revenue Service (IRS) lets an employer provide the first $50,000 of group life insurance tax free. Anything above that, the IRS treats as if you'd been paid the cost of providing that coverage. That amount gets added to your taxable wages. So if your formula-based retirement coverage exceeds $50,000, you would pay tax on the excess. (The same is true of working-years coverage above $50,000, but that's a separate question for a future piece; this one is about what happens at retirement.)

The calculation: take your coverage above $50,000, convert it to thousands, then multiply by the IRS's monthly rate for your age (from Publication 15-B, Table 2-2), then multiply by 12.

Two examples, using each physician's actual in-retirement coverage shown above.

A physician earning $350,000, with $210,000 in retirement coverage: coverage above $50,000 is $160,000.

• Age 60–64: $0.66 per $1,000/month → $1,267 a year
• Age 65–69: $1.27 per $1,000/month → $2,438 a year
• Age 70+: $2.06 per $1,000/month → $3,955 a year

A physician earning $500,000, with $300,000 in retirement coverage (the plan max): coverage above $50,000 is $250,000.

• Age 60–64: $0.66 per $1,000/month → $1,980 a year
• Age 65–69: $1.27 per $1,000/month → $3,810 a year
• Age 70+: $2.06 per $1,000/month → $6,180 a year

That's the amount added to taxable wages, not the tax bill itself. What you actually owe on it depends on your marginal tax bracket, which is the one variable I won't guess at here.

So what actually changes?

Two things. First, TPMG's own contribution gets capped at $50,000. So the imputed income question on TPMG-paid coverage goes away entirely. Second, if you want more coverage than that, you'll be buying it yourself rather than having TPMG fund it.

How much life insurance do you actually need in retirement?

This is a good time to ask a more basic question: how much life insurance coverage do you actually need in retirement, and for how long?

Life insurance in your working years usually exists to replace income for people who depend on you. In retirement, that calculation often changes. Are there still dependents relying on this income if something happened to you? Is a spouse's financial security already covered by other means: your pension, your savings, other assets?

For some physicians, the honest answer shifts the decision. If there are no dependents left who need income replacement, and a spouse's retirement is already secure through the pension and investments, the coverage you're losing under the new cap may be solving a problem that no longer exists. For others, a younger spouse, dependents with ongoing needs, or estate planning reasons mean the coverage can still have its place.

What should I do next?

Take a look at your family situation and how much coverage you actually anticipate needing in retirement. Once you've answered that, the mechanics are straightforward:

• Go with the new $50,000 cap if that covers what you need, or if you already have coverage outside TPMG.
• Buy supplemental coverage on your own above the $50,000 cap. Talk to an advisor about whether that means buying up through TPMG or getting coverage elsewhere, and about the timing, since some of this is worth deciding before you retire rather than after.

Once TPMG's Frequently Asked Questions (FAQ) document is out with more detail on the transition, I'll come back with updates on how this fits into the bigger picture.

Pillar Point Wealth Management is not affiliated with TPMG or Kaiser Permanente. This piece is educational, not individualized advice. What's described here reflects TPMG's benefit plan documents and current IRS rules; verify the specifics against your own coverage, and consult a tax professional about your own situation.