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HRMG 3400 > Insurance and Benefits > Flashcards

Insurance and Benefits Flashcards

1
Q

What is “risk?”

A

Uncertainty about financial loss.

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2
Q

What are the two types of risk?

A

1) Speculative Risk:
- Win, lose, or no change
- Risk is taken on by choice
- Normally not insurable
- Example: betting or speculating, for instance, on the stock market
- How to avoid: don’t take part in this type of risk

  • *2) Pure Risk:
  • Events beyond one’s control
  • Outcome: loss - quantified in $
  • Insurance covers pure risk
  • **Allows for protection against loss, but does not allow for possibility of gain
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3
Q

What are the four risk management techniques?

A

1) Risk Avoidance
2) Loss Control
3) Risk Retention
4) Risk Transfer

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4
Q

Describe Risk Avoidance

Risk Management Technique

A
  • Elimination (of a source of risk - a thing or an activity)
  • Substitution (of a thing)
  • Seperation (of things)
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5
Q

Describe Loss Control

Risk Management Technique

A

Reduce the possibility of a loss, or reduce the size/scale of a loss.

  • Loss Prevention: before the fact - stop something from happening (or reduce likelihood)
  • Loss Reduction: after the fact - once a loss has occurred, reduce the size/severity of the loss
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6
Q

Describe Risk Retention

Risk Management Technique

A

“Self-Insure” against certain types of risk (taking the risk on yourself). These include:

  • High frequency, low severity losses
  • Losses that are so unlikely to occur that no one would not be likely to spend money to insure against that risk
  • Example: We are all self insured against war. War is not likely to happen; therefore, it would be hard to get someone to sell insurance for it to you
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7
Q

Describe Risk Transfer

Risk Management Technique

A
  • Non-Insurance transfer - liability waiver (company transfers risk to you and must inform customer of it beforehand)
  • Insurance transfer
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8
Q

What is Risk Pooling?

A

Group sharing of losses - transfers risk from one to everyone in a group or “pool”
- Sharing risk amongst a large group of people

Note: Risk pooling applies to all insurance, not just group insurance.

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9
Q

What is The Law of Large Numbers?

A

Using probability and large numbers of people, that which is unpredictable for an individual becomes predictable for the group.

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10
Q

What is insurance?

A

The undertaking by one party to protect another party against loss (personal or property) or liability (i.e., specific risks)

In the event of a loss, one party promises to pay a sum to the other party.

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11
Q

What are the characteristics of insurable risk?

A

1) Must be a random chance event
2) Loss must be definite - in time and in $$ amount
a) Contract of Indemnity - covers actual amount of loss
(sometimes to a stated maximum)
b) Valued Contract - amount payable is fixed and
known
3) Loss must be significant - e.g., cannot insure glasses in a restaurant
4) Rate of loss must be predictable
5) The loss must not be too large for the insurer to bear

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12
Q

What are some typical group insurance benefits?

A
  • Life (whole life, term life, universal life)
  • Accidental Death and Dismemberment (AD&D)
  • Short-term disability - A.K.A. Weekly Indemnity (WI)
  • Long-term disability
  • Critical illness (newer)
  • WCB (legal requirement)
  • Employment Insurance (legal requirement)
  • Dental
  • Extended Health
  • Travel - most employees don’t know they have this
  • Provincial MSP - employers typically pay this
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13
Q

What is life insurance?

A

People deposit premiums into a pool of funds, and their beneficiaries receive a tax-free cash benefit upon their passing.

From https://www.alliancefinancial.ca/products-and-services/life-insurance-term-whole-life-and-universal-life

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14
Q

What is term life insurance?

A

Term life insurance is used to insure oneself for a fixed amount of time. It is useful in various situations including:

  • Mortgage Insurance: To pay off your mortgage balance if
    death occurs.
  • Family Income Protection: Replacement of income earned
    by the deceased parent.
  • Small business owners: Insure an employee or pay off
    creditors, key person insurance, partnership insurance.

Some of the benefits of term insurance:

Renewable. There are many options available including renewable coverage meaning that you can renew the term with no additional health assessments.

Guarantee. For the duration of the term, your sum insured and premiums will not fluctuate.

Cost. Term insurance is the least expensive form of insurance available.

Convertible. Many term contracts can be converted into permanent insurance.

Flexibility. You can choose the length of your term. Common terms include 10 or 20 years.

FROM: https://www.alliancefinancial.ca/products-and-services/life-insurance-term-whole-life-and-universal-life

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15
Q

What is whole life insurance?

A

Whole life insurance insures an individual for their entire life (form of permanent insurance) and also offers a guaranteed cash surrender value including dividends in some cases (an amount that is paid out in cash should the individual decide to cancel their policy before expiration).

Key features and advantages:

Premiums, face value, and surrender values are all guaranteed under whole life. Your cash value and death benefit can never decrease in value unless you start withdrawing the cash value from the policy.

Limited Pay Options - You can choose the duration of your premiums (10, 15, 20, or 30 years, up to 65 or 100 years of age) based on your evolving priorities.

You have the ability to insure multiple individuals under the same contract.

FROM: https://www.alliancefinancial.ca/products-and-services/life-insurance-term-whole-life-and-universal-life

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16
Q

What is universal life insurance?

A

With universal life insurance, an individual can pay premiums above the original cost of insurance. The extra premiums are invested into funds of your choice with the assistance of an advisor. In essence, you have a product that consists of both insurance and investments.

Key features and advantages:

  • A hybrid of a permanent insurance policy and a tax
    sheltered savings account.
  • You can make partial withdrawals as needed.
  • You have the ability to insure multiple individuals under the
    same contract.
  • You can temporarily halt premium payments if you are
    unable to make them.
  • Very flexible in terms of amount of insurance, cost,
    frequency of payments, etc.

Universal life insurance is useful for a number of instances including:

  • Individuals/families wishing to accumulate additional
    savings (i.e. for retirement).
  • High-income individuals who would like extra tax
    sheltered savings or would like to leave a investment to a
    beneficiary tax free.
  • Business people wishing to insure specific employees or
    wishing to finance a shareholders’ agreement.

FROM: https://www.alliancefinancial.ca/products-and-services/life-insurance-term-whole-life-and-universal-life

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17
Q

What is Accidental Death & Dismemberment insurance?

A

Provides extra financial protection if you or your dependents suffer from a covered accidental injury or accidental death.

FROM: http://www.sunlife.com/us/For+individuals/Types+of+insurance/Accidental+Death+and+Dismemberment?vgnLocale=en_CA

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18
Q

What is short-term disability insurance? What is the other name for it?

A

A.K.A Weekly Indemnity (WI)

Compensates an employee for income lost as a result of short-term absences from work from an accident or illness.

FROM: http://www.groupbenefits.ca/std_wi.aspx

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19
Q

What is long-term disability insurance?

A

Protects an employee from loss of income in the event that he or she is unable to work due to illness, injury, or accident for a long period of time. Employees receive a portion of their salary (usually 50%-70%). Long-term disability begins when short-term disability ends (generally after 3-6 months).

FROM: http://humanresources.about.com/od/glossaryl/g/long-term-disability-insurance.htm

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20
Q

What is critical illness insurance?

A

Employee receives a lump sum amount to cover their medical or other associated costs if they are diagnosed with one of the critical illnesses covered by their insurance provider.

FROM: https://www.sunlife.ca/ca/Insurance/Health+insurance/Critical+illness+insurance?vgnLocale=en_CA&sf=true

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21
Q

What is WCB?

A

Workers’ Compensation programs protect employees from the financial hardships associated with work-related injuries and occupational diseases.

FROM: http://www.labour.gc.ca/eng/health_safety/compensation/index.shtml

22
Q

What is Employment Insurance (EI)?

A

An unemployment insurance program in Canada that allows individuals who have recently lost a job to receive temporary financial assistance. Employment insurance can also be extended to individuals who are unable to work because of illness or who are caring for a young child or a seriously ill family member. In additional to financial assistance, the program assists the unemployed with job search services.

FROM: http://www.investopedia.com/terms/e/employment-insurance.asp#ixzz49MrtxwWq
Follow us: Investopedia on Facebook

23
Q

What is dental insurance?

A

Dental insurance is designed to pay a portion of the costs associated with dental care.

FROM: https://en.wikipedia.org/wiki/Dental_insurance

24
Q

What is extended health insurance?

A

Additional benefits typically not covered under government medical plans. For example, prescription drug costs, hospital and medical costs outside of Canada, vision care,, etc.

FROM: https://www.clhia.ca/domino/html/clhia/clhia_lp4w_lnd_webstation.nsf/resources/Consumer+Brochures/$file/Brochure_Guide_To_Health_ENG.pdf

25
Q

What is travel insurance?

A

An insurance product designed to cover the costs and reduce the risk associated with unexpected events during domestic or international travel. Travel insurance usually covers the insured in two main categories: costs associated with medical expenses and trip cancellations.

FROM: http://www.investopedia.com/terms/t/travel-insurance.asp#ixzz49MuLXS8t
Follow us: Investopedia on Facebook

26
Q

What is Provincial MSP?

A

The Medical Services Plan pays for medically required services of physicians and surgeons and for dental or oral surgery when medically required to be performed in a hospital. MSP also provides coverage for other health benefits. MSP is administered by Health Insurance BC (HIBC).

FROM: http://www2.gov.bc.ca/assets/gov/health/health-drug-coverage/medical-services-plan/bc-residents/msp-brochure.pdf

27
Q

What is the purpose of life insurance?

A 
Death benefit:
- Last expenses
- Mortgage fund
- Dependancy period income (until youngest child turns 18
  or 19)
- Emergency fund
- Spousal income
NOTE: death benefit = non-taxable
28
Q

What are some examples of death benefits?

A
  • Employee life insurance (flat amount, 2x annual earnings, spousal, child benefits)
  • Individual (fill out form about you)/ Optional (can buy some more options. Limiting risk by only letting you buy a certain maximum amount) vs Mandatory Group Life Insurance
  • AD&D
  • Retirement plans
  • Canada Pension Plan (death benefit with this but not much , e.g., enough to cover funeral expenses)

Typically insurance companies stipulate that everyone in the company needs to be part of the group insurance plan. Otherwise, older employees might get it and use it, which drives up premiums and younger workers who think they will not need it, do not get it because they want things they think they will use more of.

29
Q

What are some advantages of group insurance?

A
  • All employees covered (minimum participation rates, adverse selection)
  • Low cost - spreading cost amongst group & also an administrative benefit because likely do not need to spend $ for a nurse to test people because we know the aggregate
  • Efficient premium collection
  • Wide range of options
30
Q

What are some examples of group life insurance plans?

A
  • Employee life insurance (group term life, and group universal life)
  • Accidental death and dismemberment
  • Dependent life
  • Survivor income
31
Q

What is dependent life insurance?

A

A group life insurance benefit providing death protection to the dependents of an employee covered under the plan.

Read more: http://www.businessdictionary.com/definition/dependent-life-insurance.html#ixzz49N8Exukr

32
Q

What is survivor income?

A

The payment made to a beneficiary from an annuity or policy when the policyholder dies. also called death benefit.

Read more: http://www.investorwords.com/4834/survivor_benefit.html#ixzz49N98hYT0

33
Q

What needs to be taken into account when implementing a group insurance plan?

A
  • Eligibility - who is eligible?
  • Group size specification
  • Benefit schedule - what are the payouts/benefit if something happens?
  • Group selection
  • Financing - how will it be financed?

**Note: benefit is tax free, so it’s easier if the employer pays it

34
Q

How are group insurance plans financed?

A

Non-contributory (employer pays 100%)
- Less administration, everyone covered
- Economy of installation, no solicitation
- Employer tax advantages, control over plan
Contributory (Employee pays part of premium)
- More effective use of employer contributions
- Greater employee control, interest, appreciation

35
Q

What are some characteristics of group life insurance?

A
  • Duration of coverage - 1 year renewable
  • Waiver of premium - in case of disability, may involve a waiting period
  • Conversion privilege - ability to convert a policy to a private, individual policy when employee leaves company. Usually 30-60 days to convert, subject to any constraints
  • Pre-existing conditions - insurance company may not cover this
  • Non-medical evidence maximum - medical evidence. Group insurance is always non-evidence (no testing before). Maximum insurance you can get without testing. If you want more, may need to do testing.
  • Benefit schedule
36
Q

What are the characteristics of AD&D?

A
  • Insurance for accidental death/ injury
  • Lump-sum payment in event of death
  • Pct. of death benefit for injury
  • “Meat charts”
  • Features: rehab, repatriation of deceased, family transportation, spousal retraining, home alterations, vehicle modification, day care benefits
  • Exclusions: war, terrorism, other
37
Q

What are the characteristics of Dependent Life insurance?

A
  • Lump-sum benefit on death of spouse/ child
  • One election, or independent options
  • Coverage on flat dollar amounts
  • Usually on a contributory basis
  • Premiums taxed, benefits tax-free
38
Q

What are the characteristics of survivor income?

A
  • Rare
  • Monthly payments to dependents
  • Benefits of either flat amount or pct. of pay
  • Different amounts for spouse/ children
  • Coverage usually on a contributory basis
  • Remarriage clause - when spouse of deceased worker remarries, he/she is no longer covered under survivor income.
  • Long-term obligation for insurance companies. They do not like this and thus, it is rare. More likely to get a lump-sum
39
Q

How is life and AD&D insurance rated?

??? CHECK NOTES FOR THIS

A

Rating = pricing
Expressed in $ per $1000 of coverage

E.g., Getting $100,000 of life insurance. $1.50 x 100 = $150 premium???? CHECK NOTES

40
Q

What are some exclusions and limitations of insurance and benefits?

A
  • Act of war, and while active in military service
  • Law requires they be clearly written, specific
  • Courts adopt narrowest, most restrictive interpretation (from employer point of view)
41
Q

What is underwriting?

A
  • Designed to help categorize, properly price or eliminate serious risk cases
  • Ensures fair treatment of policyholders and beneficiaries
42
Q

What is the formula for premiums (group life underwriting)?

A

Premiums = Claims Paid + Retention (+ Refund)

Retention to cover:
Taxes, commissions, contingency
Operating expenses of insurance carrier, profit

Excess amount is refunded to the employer, if experience rated. Amount is usually rolled over into next contract.

43
Q

What are some underwriting methods?

A
  • Fully pooled - not experience rated
  • Fully experience rated
  • Experience rated with pooling limit
  • Experience rated with annual stop-loss
  • Non-insured death benefits
    • First $10,000 is tax free in hands of beneficiary
44
Q

Define Fully Pooled (underwriting method)

A
  • Not experience-rated
  • Claims, costs allocated to pool
  • Premiums based on experience of policy holders with similar characteristics (auto insurance)
  • At year-end, no premium is returned, even if experience is lower than expected
45
Q

Define Fully Experience Rated (underwriting method)

A
  • Underwritten on plan’s past experience
  • Claims, costs charged to policy, rest refunded

Useful for companies to have wellness program so they have less claims from employees. Refund for employers if claims experience is good. Experience rated with limits in place to a certain $ maximum. If claims go beyond a certain point, it becomes pooled –> keeps costs low for employer

46
Q

What are some issues and developments (past and future) of insurance and benefits?

A
  • Asset management focus
  • Critical illness insurance
  • Asset management and performance
    Environmental factors:
  • Terrorism, war, bird flu/ super bug situations
47
Q

Define Critical Illness Insurance

A
  • Insurance for a specified medical condition - spelled out in policy
  • Lump-sum payout upon diagnosis
  • Design options:
    • Standard policy
    • Group life add-in
  • Coverage
    • Subject to plan definition of “critical”
    • Certain treatments are not acceptable to carrier
  • Taxation
    • Premiums are taxable, lump sum payments are not
48
Q

Define Living Benefits

A
  • A.K.A. Compassionate assistance
  • Payment of Life insurance proceeds to terminally ill individuals
  • Like a loan
  • Interest is charged
  • Limited to a percentage (e.g., 50%) of value of policy
49
Q

Define Self-Insurance

A

Risk management approach in which an entity sets aside a sum as a protection against a probable loss, instead of transferring the risk by purchasing an insurance policy. This term is a misnomer because no insurance is involved. Properly called risk retention.

FROM: http://www.businessdictionary.com/definition/self-insurance.html#ixzz49NgwJf8X

Why?
Lower Cost of Administration

Employers find that administrative costs for a Self-insured program administered through a TPA (third party administrator) are significantly lower than those included in the premium by an insurance carrier.

Elimination of Most Premium Tax

There is no premium tax on the self-insured claim expenditures. Premium tax is applied only to the stop-loss premium, which is a fraction of a fully insured premium.

Profit Margin Eliminated

The profit margin and risk charge of Carrier insurance is eliminated for the bulk of the plan.

Claims/Administration

Fast, efficient claims service. Claims are paid in three to four business days. Drug card and direct billing are available with most all vendors.

Customer Service

The employee has access to a toll-free telephone number and a dedicated customer service team. Claims forms are available over the Internet.

Cash Flow Benefit

The employer’s cash flow is improved when money, formerly held by the Insurance carrier in the form of reserves, for unreported and pending claims, is freed for use by the employer.

Reporting

Reports are available immediately upon request to employers and employees. The reports comply with privacy regulations.

Control of Plan Design

The employer has complete flexibility in determining the appropriate plan design to meet the needs of the employer and employees. The employer can redesign its plan at any time that complies with CRA guidelines.

FROM: http://dcmbenefits.com/our-products-services/self-insuring/

Risk:

  • Employer has 100% of the risk
  • Obligation to make claims determinations falls upon the Plan Administrator, which is most commonly the employer

FROM: https://en.wikipedia.org/wiki/Self-insurance#Benefits_and_Risks

50
Q

What are some ways people commit insurance fraud?

A
  • On application (e.g., pre-existing conditions)
  • In making claims (false claims)
  • In details of claims (scope and scale of losses)
  • Conspiracy to defraud

Examples: orthotics case, Japanese pensions case

HRMG 3400 (2 decks)

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