A Health Insurance Question, and Beware of Chapter 11 Stocks!

This week, Gail answers a question about employee health insurance -- and has some strong words of caution when it comes to Chapter 11 stocks.

Dear Gail,

My daughter reached the ripe old age of 23 and is now ineligible for the health insurance offered by my employer. My wife's employer allows dependant coverage up to age 25 so I want to change all of my insurance to her policy. The problem is that my employer refuses to allow me or any other member of my family to withdraw from their health insurance. My wife's employer has already signed us up and our family is now covered by their health insurance.

I am getting conflicting stories because my employer is saying that we are going to be liable for the taxes on my wife's insurance payments but my wife's employer is saying that my employer is full of beans. Both say they are backed up by the opinion of qualified lawyers, however I cannot get the lawyer's opinions in writing. How do I find out who is right?

Daniel

Dear Daniel -

I have never heard of a company requiring employees to accept their health coverage, so I checked with labor attorney Alan Sklover. He agrees.

According to Sklover, any insurance program offered by an employer is voluntary. Furthermore, health insurance benefits are not taxable.

But what really bothers Sklover is that this is really none of your employer's business! "It sounds as if you've got a meddling employer," he says. "They have no right to force you to stay in an insurance plan or to give you tax advice. That's a matter for you and your accountant."

While most large companies automatically offer health insurance to their employees, there is usually an extra cost --paid by the employee -- if you want coverage extended to your spouse and other dependants. You pay stub will itemize this.

This is the time of year companies require their employees to elect the health benefits they want. Make sure you review the paperwork you receive. In many plans, if you do nothing, they will assume you want the same coverage as the year before. In your case, you want to opt out of coverage for your wife and daughter since they're covered under her employer's plan.

And in light of your company's history, I'd make a copy of my benefits election form before I send it in. Just in case.

Take care -

Gail

Gail-

I have been thinking about buying stock in a company that may go into chapter 11. When that happens, do the shareholders get to keep their stock and carry on as normal? Meaning that the shareholders will not lose their money and be out of luck.

Thanks!

Matt

Dear Matt -

Quite the contrary. First of all, there are no guarantees in the stock market.

Here's what you need to understand: no company, no government, nobody determines the price of a stock. What does? "The Market." A stock's price is simply the collective evaluation of tens of thousands of investors -- both professionals and ordinary folks like you and me.

When you purchase shares in a company, you are taking an ownership position in it. This entitles you to share in the profits it earns, if any. The selling price of the stock reflects the value investors place on this future payoff.

Let's say Company A is well-run, dominates its market and makes something unique that's in strong demand, with new-and-improved versions already in development. Its earnings look pretty secure. In fact, they're on track to grow over time.

Company B, on the other hand, makes large personal loans to its CEO, is up to its corporate neck in debt and is in a brutal price war with the competition, meaning its profit margins are shrinking. It will be lucky to eke out a profit this quarter.

Which company's stock would you place a higher value on? Duh!

When a company files to reorganize under Chapter 11, stockholders are last in the pecking order: You certainly get to keep your shares, but all bets are off in terms of what they're worth.

The bankruptcy court has nothing to do with the market value of your shares and, frankly, could care less about it.

What happens to the stock price depends upon what investors think of the company's ability to earn a profit when it emerges from bankruptcy. Has there been a management shake-up? Have certain parts of the business been sold off to reduce debt? Is there a new focus?

Take WorldCom, for example. About a year ago, it was selling for around $16 a share. Then on July 21 it filed for bankruptcy protection. After falling to a low of one cent per share in early October, it has rebounded in recent weeks to trade around 20 cents a share.

If you were clever or crazy enough to scoop up WorldCom for 1 cent a share, you might say it's had a terrific rebound. But if you bought it a year ago you're definitely not a happy camper. And there is no guarantee you will ever get your money back.

Ever.

Only the market will determine that.

Think twice, my friend.

Gail

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The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments Inc. or any of its affiliates. You should consult your own financial adviser for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.