Chapter 9

CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

1.
2.
3.
4.
5.

Life Insurance
Annuities
Health Insurance & HSAs
Long-Term Care
Disability

2007 DF Institute, Inc.

Individual Health Insurance

Purpose:

CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

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

2007 DF Institute, Inc.

Affordable Care Act (ACA), 2010

CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

Health Care Exchanges

https://www.youtube.com/watch?feature=player_embedded&list=PLUslxKz-YuCjD-9V
RKOQkd4GHoZDrbMaV&v=
2Rrq8GzWxs8

Great Overview
http://youtu.be/n4hpyk2Cfo4

Other Helpful Videos

http://www.healthinsuranceexchangeenvoy.com/exchange-related- videos.aspx

2007 DF Institute, Inc.

Affordable Care Act (ACA), 2010

CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

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

2007 DF Institute, Inc.

Major Medical Insurance (Individual)

CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

Purpose: Broad coverage for expenses associated

with an illness or injury.
Stand alone or in conjunction with basic coverage
Comprehensive: hospitalization, physicians and
surgeons, drugs/supplies
Typical exclusions: elective cosmetic, self-inflicted, warrelated
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.
2007 DF Institute, Inc.

Medical Expense Insurance (Individual)

CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

Three broad coverages:

Hospital expense (expenses incurred in a

hospital)

Surgical expense (can cover surgery outside of

a hospital)

Physicians expense (nonsurgical care

regular care)

2007 DF Institute, Inc.

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

HSAs & HDHPs

CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

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/filebenefits-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
2007 DF Institute, Inc.

HSA: Distributions
CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

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_pu
blink1000204081
http://www.irs.gov/publications/p502/ar02.html#en_US_2013_pu
blink1000178885

Must report distributions to IRS on annual tax form

If not after age 65, disability, or death, non-qualified
distributions taxed + 20% penalty
2007 DF Institute, Inc.

HSAs & HDHPs

CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

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-insurancehelp/faqs/topics/how-health-insurance-works/differencebetween-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)

pocket
2007 DF Institute, Inc.

maximum out-of-

Other HSA Rules

CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

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

2007 DF Institute, Inc.

HSA Advantages/Disadvantages
CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

+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
2007 DF Institute, Inc.

Flexible Spending Acct (FSA) (p.

(p. 372)
372)
CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

Employer established savings plan funded with pretax 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
2007 DF Institute, Inc.

LTC Insurance Coverage (7 types)

CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

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
2007 DF Institute, Inc.

Need for LTC Insurance?

CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

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 clients 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

2007 DF Institute, Inc.

Rules of Thumb
CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

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 nonfinancial 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).

2007 DF Institute, Inc.

Long-Term Care Insurance

(cont.)
(cont.)

CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

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

2007 DF Institute, Inc.

LTC Insurance & Taxes

CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

Tax qualified TQ LTC insurance

Tax deductible premiums and tax-free benefits

(regardless of who pays the premium)

Qualified LTC services: medically necessary, maintenance

or personal care services for the chronically ill & prescribed
by medical provider

Non-tax qualified NTQ LTC insurance

2007 DF Institute, Inc.

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

Premiums not tax-deductible, benefits may not be tax-free

Fewer restrictions on qualification for coverage, type of care,
and providers of care

Disability Insurance
CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

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

2007 DF Institute, Inc.

Disability Income Insurance

CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

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.
2007 DF Institute, Inc.

Disability Insurance Features

CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

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
2007 DF Institute, Inc.

Disability Income Insurance

(cont.)
(cont.)

CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

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.
2007 DF Institute, Inc.

Estimating Disability Needs

CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

Disability Income Goal:

- Replace 60% - 80% of income (cant 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

2007 DF Institute, Inc.

Health, Disability Policy Provisions

CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

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 insurers option on an annual basis,
company may cancel
2007 DF Institute, Inc.

Group Health Insurance

CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

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

Characteristics

2007 DF Institute, Inc.

Group Health Insurance

(cont.)
(cont.)

CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

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

2007 DF Institute, Inc.

Group Health Insurance

(cont.)
(cont.)

CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

Health insurance & managed care: HMO, PPO, POS,

CDHP, or HDHP + HCRA or HSA
HMO
PPO
http://www.bcbsm.com/index/health-insurancehelp/faqs/topics/how-health-insurance-works/differencebetween-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)
2007 DF Institute, Inc.

Group Health Insurance

(cont.)
(cont.)

CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

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
2007 DF Institute, Inc.

Taxation of Group Health Benefits

CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

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
2007 DF Institute, Inc.

Business Uses of Life Insurance and

Other Employee Benefits
CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS
Buy-sell agreements
Nonqualified plans
Key person life insurance
Disability overhead expense insurance
Other employee benefits

NOT COVERED ON THE EXAM

2007 DF Institute, Inc.

Cafeteria or Section 125 Plan

CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

Employer can offer EEs 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)

2007 DF Institute, Inc.

Excludable from Gross Income and no FICA/FUTA tax

Summary
CHAPTER 9: MANAGING LIFE, HEALTH, AND DISABILITY RISKS

Life, health, and disability insurance are critical to the

clients financial success
LTC may be critical
Important to thoroughly assess the clients situation
and match to the risk management tools needed
whether available from the employer or as an
additional purchase

2007 DF Institute, Inc.