1) Your firm has been providing long term care insurance (covering nursing home

Question

1) Your firm has been providing long term care insurance (covering nursing home care) for your workers. It costs the firm $2200 per year per employee to provide this benefit. Suppose it also costs employees $2200 per year to buy on their own. The employees’ marginal tax rate is 28%.

a) If your firm decided to stop providing the insurance, by how much would it need to increase salary so that employees could continue to buy the benefit on their own?

b) Suppose most of your employees are in their 20s and early 30s. Is this a good benefit to provide? Or should the firm stop providing it (without increasing salary)? Explain your answer.

Explanation / Answer

Details Amt $ a Cost of Buying insurance             2,200 Marginal tax rate   28% Required salary Increase=2200/72%=           3,056 So to cover the insurance cost, the salary of each employee needs to   be increased by $3,056. b As the employees are in early   20s and 30s , the premium will also be lower. So it is better to keep the cover and have a safe policy to   avoid any big expense on medical ground.

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