insurance ch.9c

CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

© 2007 DF Institute, Inc.

Chapter 9Chapter 9

1. Life Insurance

2. Annuities

3. Health Insurance & HSAs

4. Long-Term Care

5. Disability



Individual Health InsuranceIndividual Health Insurance

Purpose: • Customized affordable care• The more coverage provided, the higher the premium

Cost concerns: • Group, employer pays on ave. 70-80% of premium• Individual – ACA (Affordable Care Act), 2014 Individual

Mandate to pay penalty if no health insurance• Social insurance -- Medicare, Medicaid (Remember FICA

tax?)

Eligibility: • Group – no eligibility requirements• Individual – ACA, effective 2014 no coverage

exclusions/access due to pre-existing conditions regardless of age



Affordable Care Act (ACA), 2010Affordable Care Act (ACA), 2010

• Health Care Exchanges• https://www.youtube.com/watch?feature=player_embedded&list=PLUslxKz-YuCjD-9VR

KOQkd4GHoZDrbMaV&v=2Rrq8GzWxs8

• Great Overview• http://youtu.be/n4hpyk2Cfo4

• Other Helpful Videos• http://www.healthinsuranceexchangeenvoy.com/exchange-related-videos.aspx



Affordable Care Act (ACA), 2010Affordable Care Act (ACA), 2010

• Guaranteed issue and renewable• Penalty for not maintaining required coverage• No cancellation of coverage after insured gets sick (unless there was fraud

in application)• No preexisting conditions or exclusions• Coverage for adult children until age 26• Preventive services without deductibles, co-pays, co-insurance• 2014, no annual or lifetime coverage limits for essential health benefits

(see page 338)• Out-of-pocket spending max: $12,700 family; $6,350 individual• Premium and cost-sharing credits available for low income people• General impact of premiums:

• Younger people – higher

• Older people - lower



Major Medical Insurance (Individual)Major Medical Insurance (Individual)

Purpose: Broad coverage for expenses associated with an illness or injury.•Stand alone or in conjunction with basic coverage•Comprehensive: hospitalization, physician’s and surgeon’s, drugs/supplies•Typical exclusions: elective cosmetic, self-inflicted, war-related•UCR (Usual and Customary Expenses), stop-loss limit and co-insurance apply, with high deductibles of $500 to $10,000

• After deductible, coinsurance applies until stop-loss limit is reached. See book example, page 337.



Medical Expense Insurance (Individual) Medical Expense Insurance (Individual)

• Three broad coverages:

Hospital expense (expenses incurred in a hospital)

Surgical expense (can cover surgery outside of a hospital)

Physician’s expense (nonsurgical care – “regular” care)

• Coverage limits apply, in addition to co-insurance, deductibles and co-payments



HSAs & HDHPsHSAs & HDHPs

HSA: IRA/529 for health care (http://www.hsacenter.com/index.html)

• Only available with a HDHP (individual or group)http://www.hr.vt.edu/employeescorner/_files/file-benefits-summary.pdf

• Contribution is adjustment to income (no-tax) or if through a cafeteria plan are pre-tax

• One-time transfer from IRA• Annual limits & catch-ups (age 55 and older) apply

$3,300 individual; $6,550 family; $1,000 catch-up (2014) if >age 55

• Income limits or earned income requirements do not apply• Employer, employee, or both may contribute• Contributions stop with Medicare enrollment



HSA: DistributionsHSA: Distributions

• Restrictions by custodian may apply• Tax-free for qualified medical expenses, including OTC

drugs Person covered by HDHP

Spouse of person (even if not covered by HDHP)

Dependent of person (even if not covered by HDHP)

http://www.irs.gov/publications/p969/ar02.html#en_US_2013_publink1000204081

http://www.irs.gov/publications/p502/ar02.html#en_US_2013_publink1000178885

• Must report distributions to IRS on annual tax form• If not after age 65, disability, or death, non-qualified

distributions taxed + 20% penalty



HSAs & HDHPsHSAs & HDHPs

High Deductible Health Plan• HMO, PPO, or indemnity plan• HMO vs. PPO: Primary difference is how you work with

specialists (referral needed vs. not needed)http://www.bcbsm.com/index/health-insurance-help/faqs/topics/how-health-insurance-works/difference-between-hmo-ppo.html

• Min. annual deductibles and max. out-of-pocket limits (both inflation indexed) must apply

$1,250 individual; $2,500 family (2014) minimum deductible

$6,350 individual; $12,700 family (2014) maximum out-of-pocket



Other HSA RulesOther HSA Rules

• Rollovers allowed once per year, within 60 days; no limits on trustee-to-trustee rollovers

• Upon death of owner: Spouse as beneficiary, treated as HSA

Non-spouse as beneficiary, account taxable

Estate as beneficiary, account taxable to the decedent after payment of any medical expenses or estate taxes

• Custodian or trustee fees paid from the account or by owner but not counted toward annual contribution limit



HSA Advantages/DisadvantagesHSA Advantages/Disadvantages

+Tax-free investment growth for qualified expenses and past 65 available for other uses (deduction FOR AGI as opposed to Schedule A medical with 10% limit)

+Cost conscious medical care

+ No “use it or lose it” rules

─ No account established OR limited funding for first dollar requirement of HDHP



Flexible Spending Acct (FSA) (p. 372)Flexible Spending Acct (FSA) (p. 372)

• Employer established savings plan funded with pre-tax dollars: medical OR dependent care

• Max. applies, now $2,500 (medical); $5,000 (dependent care)

• “Use it or lose it” annually: 2.5 month grace period OR carryover of up to $500 for the next year

• Pay for unreimbursed medical expenses, copays, deductibles, OTC meds required for medical care, dental/vision not covered by plans, etc.

• Some restrictions apply: elective cosmetic surgery, OTC meds NOT required for medical care, insurance premiums, tattoo removal, health club dues



LTC Insurance Coverage (7 types)LTC Insurance Coverage (7 types)

Skilled nursing care: dr. supervised; highest level of medical care

Intermediate nursing care: dr. supervised, but occasional care only

Custodial care: Nonmedical assistance(ADLs – eating, dressing, bathing)

Home health care: Skilled medical care or nonmedical care

Assisted living: Housing, medical and nonmedical support

Adult day care: On-site supervision

Hospice care: Terminally ill care; location varies



Need for LTC Insurance?Need for LTC Insurance?

1. Health insurance does not pay for LTC.

2. Medicaid may pay for LTC, but only if assets are depleted to ~$3,000 and the home, if lived in by a spouse/partner.

3. Medicare will pay after a 3-day hospital stay, but only for a limited time.

4. Does the client’s current health or family medical history suggest that LTC may be needed in the future?

5. Does the client have sufficient monetary resources or a family support network to “self-insure” in the event that LTC is needed in the future?

1. Non-financial factors? E.g. family conflicts



Rules of ThumbRules of Thumb

If client has:• a net worth between $250,000 and $1.5 million,

excluding the home, consider LTC.• a net worth in excess of $1.5 million, excluding the

home, should consider self-insuring (but consider non-financial factors)

• a net worth less than $250,000, excluding the home, should consider self-insuring (consider government provided care through Medicare/Medicaid)

• Keep in mind other sources of income (pension & SS).



Long-Term Care Insurance (cont.)Long-Term Care Insurance (cont.)

Eligibility, certified as chronically ill within the last year:

• Expected to be unable to perform 2 of 6 ADLs for at least 90 days: eating, toileting, transferring, bathing, dressing & continence

• Substantial cognitive impairment that threatens health & safety

• Similar level of disability as specified by a future regulation

Characteristics of policy• Defined period (3-5yrs) approach, following waiting period• Pool-of-money approach, specific $$ amount



LTC Insurance & TaxesLTC Insurance & Taxes

Tax qualified “TQ LTC” insurance• Tax deductible premiums and tax-free benefits

(regardless of who pays the premium) Premiums as itemized deduction, depending on age Employer paid then tax deduction for employer, but not taxable

income for employee LTC cannot be in cafeteria plan or FSA -- no tax benefit If paid through employer, then after-tax

• Qualified LTC services: medically necessary, maintenance or personal care services for the chronically ill & prescribed by medical provider

Non-tax qualified “NTQ LTC” insurance• Premiums not tax-deductible, benefits may not be tax-free• Fewer restrictions on qualification for coverage, type of

care, and providers of care



Disability InsuranceDisability Insurance

Coverage

Specific dollar amount or % of income (typically 60 – 80%)

Injuries or injuries and illness

If injury, defined as:• Accidental bodily injury – injury was an accident• Bodily injury by accidental means – “accidental means”

= not done on purpose by you or another

Preexisting conditions and waiting periods apply



Disability Income InsuranceDisability Income Insurance

Definition of disability: extremely important• Any occupation – cannot perform duties of any occupation

(disabled brain surgeon could be a hospital administrator, teach, research in primary field and likely not receive DI benefits)

• Own occupation – Liberal – disabled brain surgeon would likely get benefits even if able to teach or do research/admin position)

• Split definition: combo of “own” first 1- 5 yrs., followed by “any” for the remainder

Social Security definition (generally more strict): Disability or mental impairment has lasted 5 months and is expected to last 1 year or until death and prevent “substantial” work. In 2014, $1,070 income per month considered “substantial.”



Disability Insurance FeaturesDisability Insurance Features

• Elimination/waiting period• Benefit period: ST or LT disability• Waiver of premium (upon claim)

• Riders• Partial disability

• COLA rider – for benefits received

• Future increase option rider: gtd insurability

• Automatic increase rider: X% per year for benefit coverage for x years with required premium increase



Disability Income Insurance (cont.)Disability Income Insurance (cont.)

Residual benefits: % of benefit paid based on % of income lost

Taxation of benefits (important)• Individual premiums are not tax deductible, therefore, tax free

benefit• Group premiums, depends on taxability of premiums:

If Taxed on Premiums (typically EE paid): Benefit Tax Free If Not Taxed on Premiums (typically ER paid): Benefit Taxable

Integration with Social Security• Individual DI benefit reduced for SS benefits received.

Termination of benefits• End of specified DI period or when considered no longer

disabled.



Estimating Disability NeedsEstimating Disability Needs

Disability Income Goal: - Replace 60% - 80% of income (can’t insure all

income)- Pre-Tax vs. After-Tax Premium (affect on benefits)- Typically want to get as much as possible- Can potentially buy individual coverage in

conjunction with a group policy, but can never fully cover pre-disability earnings



Health, Disability Policy ProvisionsHealth, Disability Policy Provisions

• Preexisting condition• Grace period• Reinstatement (preexisting clause)• Incontestable clause for noncancelable or

guaranteed renewable contracts• Renewability

Guaranteed renewable: until age X, premiums may increase

Noncancelable: until age x or x years, no premium increase

Conditionally renewable: annual basis, company may cancel IF conditions met

Optionally renewable: at insurer’s option on an annual basis, company may cancel



Group Health InsuranceGroup Health Insurance

Eligibility• Qualifying member of group• Met probationary period• At work the day coverage begins

Characteristics



Group Health Insurance(cont.)Group Health Insurance(cont.)

Basic and major medical

Health care reimbursement arrangements (HCRA)

• Employer funded, often in conjunction with HDHP, tax free to the employee, balance carry over from year to year

Dental and vision

Disability income



Group Health Insurance(cont.)Group Health Insurance(cont.)

Health insurance & managed care: HMO, PPO, POS, CDHP, or HDHP + HCRA or HSA

• HMO

• PPO

• http://www.bcbsm.com/index/health-insurance-help/faqs/topics/how-health-insurance-works/difference-between-hmo-ppo.html

• Coverage for retirees Can potentially continue group HI into retirement as opposed

to purchasing a separate Medicare supplemental policy.

Coverage for elderly employees (age 65+ & Medicare)



Group Health Insurance (cont.)Group Health Insurance (cont.)

Coordination of benefits (if multiple plans – no double benefit)

Termination of employment & benefits (31 days for replacement coverage)

COBRA – applies if employer has 20 employees• Must have a qualifying event to be eligible • Length of coverage varies with the qualifying event• EXPENSIVE!

HIPAA (Health Insurance Portability & Accountability Act) – portability of benefits

• Protection from pre-existing condition exclusions (when changing employers)

• Still applicable to “grandfathered” plans continuing under ACA• Creditable coverage of at least 12 months and a coverage lapse of

<63 days – then no pre-existing exclusion



Taxation of Group Health BenefitsTaxation of Group Health Benefits

Pretax health premiums if paid by employee or itemized tax deductible expense (Schedule A)

Employer paid health premiums not taxable to employee, tax-deduction for employer

Employer paid disability premiums are not taxable to the employee (in some cases they can be); benefits are taxable income

Employee paid disability premiums not tax deductible; benefits NOT taxable income

Employee and employer pay disability premium; % of benefits taxable to employee



Business Uses of Life Insurance and Other Employee Benefits Business Uses of Life Insurance and Other Employee Benefits

Buy-sell agreements

Nonqualified plans

Key person life insurance

Disability overhead expense insurance

Other employee benefits

NOT COVERED ON THE EXAM



Cafeteria or Section 125 PlanCafeteria or Section 125 Plan

Employer can offer EE’s an option of cash or nontaxable (excluded from income) qualified benefits:

• Health care• Dental & vision care• Accident & health insurance• Group term insurance• Adoption assistance

• Flexible spending accounts (FSAs) for health or dependent child care

• Other Fringe Benefits (meals/lodging, ed assistance, etc)

• Excludable from Gross Income and no FICA/FUTA tax



SummarySummary

• Life, health, and disability insurance are critical to the client’s financial success

• LTC may be critical

• Important to thoroughly assess the client’s situation and match to the risk management tools needed –whether available from the employer or as an additional purchase

insurance ch.9c

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