Life, Health and Disability (L2) Flashcards
Why purchase life insurance?
- Income replacement in the event of the death of the family primary wage earner
- Income for readjustment period after the death of a loved one.
- Financial support for dependents or elderly parents of the primary care giver
- To fund children’s education after the death of the parent and/or guardian
- Paying off debts such as mortgage, care or other debt for surviving family
- Providing income for the surviving spouse
Approaches to Providing Adequate Protection
Needs Approach
Human Life Approach
Term Life Insurance
Needs Approach
○ Evaluates the income replacement and lump-sum needs of survivors in the event of an income producer’s ultimately death
○ MOST COMMON needs include:
§ Lump-Sum Cash Need
§ Final Expenses
§ Debt Repayment
§ Education Expense Needs
§ Emergency Expense Needs
§ Income Needs
§ Readjustment period Needs
§ Dependency Period Needs
§ Spousal Life Income Needs
○ Any Future cash or income needs should be discounted using the PV of Future CFs
Human Life Approach
○ Uses projected future Earnings LESS self-maintenance costs as the basis for measuring the life insurance need
○ IMPORTANT ITEM ==> Include the individual’s current earnings, future growth rate of earnings, # of working years remaining, Cost of self-maintenance, and the capitalization rate (Discount Rate)
Term Life Insurance
- Pure insurance protection which pays a predetermined sum if the insured dies during a specified period of time
- Protection ceases at the end of the term unless renewed
- Premium pattern may be level or increasing on an annual or set period basis
- Face amount maybe level or decreasing
- There is no cash value, savings component, or investment component
- Very inexpensive at a young age
- Term Life Insurance - Provisions
○ Renewable (without evidence of insurability)
○ Convertible
○ Waiver of Premium (if insured becomes disabled) - Term Life Insurance - Limitations
○ Exponentially increasing premiums for older age
entry or renewal
○ Term policies may NOT need permanent insurance
needs.
§ Permanent insurance needs would be if the
insured requires life insurance throughout their
lifetime
Term Life Policies
- Annual Renewable Term (ART)
○ Premium INCREASE ANNUALLY
○ NO cash value
○ FIXED Death benefit (at face amount of the policy)
○ ADVANTAGES:
§ Pure death benefit protection that is
INEXPENSIVE
§ Insured receives a maximum death benefit for
each dollar in premiums
§ ART can be converted to a permanent policy
without proving insurability
○ DISADVANTAGES:
§ ART may become too costly at older ages
§ No savings component
§ Premiums increase every year - Level Term
○ Premiums are level for a period of time such that
the insured prepays some of the later, more
expensive premiums earlier in the policy
○ NO CASH VALUE
○ FIXED Death Benefit
○ ADVANTAAGES
§ Level premiums
§ Pure death benefit protection that is
inexpensive
§ Insured receives MAX death benefit dollar for
dollar in premiums
§ Can be converted to a permanent policy
without proving insurability
○ DISADVANTAGES:
§ Insured overpays premiums initially
§ No saving component - Decreasing Term
○ Premiums are level for a decreasing term policy
○ No cash value
○ Death Benefit DECREASES over the term of the policy
Appropriate Use of Term Life Policies
- Temporary Needs:
○ Education funding
○ Paying off debts
○ Cover expenses during the grieving process - Decreasing Term
○ Most appropriate use for decreasing term is to pay off mortgage
Whole Life Insurance OR Permanent Life Insurance
- Whole Life policies provide lifetime protection if premiums are paid as agreed
- Pre-fund future higher mortality costs using PV analysis
- Premiums can be Single Premium, Level Premium over a fixed term, OR Level Premiums for life
- Have a savings or investment component with earnings accruing on the residual of the premium less the cost for the year plus any previous savings balance
- CASH VALUE can be used for loans or may be received if the policy is surrendered
- CASH VALUES have a minimum guaranteed rate of interest
- ADVANTAGES
○ Provide tax deferred growth of cash value
○ Permanent protection until age 120 - DISADVANTAGES
○ Premiums are expensive and there is NO FLEXIBILTY with the premium PMTs
○ Cash values frows gradually
○ Insured may NOT be able to purchase as much protection
Types of Whole Life Insurance
Ordinary Life
Limited Pay Life
Variable Life
Current Assumption Whole Life (CAWL)
Ordinary Life
○ Insured pays premiums until age 120 or death
○ Cash value increases to face value at age 120
○ Death benefit is level throughout the term of the policy
Limited Pay Life
○ Premiums are HIGHER than ordinary life because the insured only pays premiums until a certain age
Variable Life
○ Cash Value is invested in stock, bond, and money market mutual funds. An opportunity for higher returns on cash value
○ Death benefit and Cash Value fluctuate based on investment performance
Current Assumption Whole Life (CAWL)
○ Insurer uses new money rates and new mortality rates to establish premiums
○ In the event that interest rates turn out to be too high and premiums too low, the insurer reserves the right to adjust the premium once, usually at the 5-year mark.
○ Lo CAWL
§ Low premium assuming higher interest rate for crediting
○ Hi CAWL
§ Assumes lower interest rate and higher premium with the possibility of a one-time downward adjustment at year 5
○ Interest Sensitive Insurance (Lo CAWL) is designed to create demand due to lower premiums
Appropriate Uses of Whole Life Insurance
- Anyone with lifetime or permanent need
- Estate planning purposes to provide liquidity to pay transfer taxes
- Insured has a need for investment life performance/returns
Individual Life Insurance Policies
- First-to-Die
○ Provides Death Benefit when the first insured dies.
○ First-to-Die Life Expectancy < Single Life Expectancy - Second OR Last-to-Die
○ Provides DB when second or last insured dies
○ Appropriate to pay for estate taxes and provide
liquidity
○ Second-to-die life expectancy > either individual
life expectancy
Dividend Options
- Nonparticipating
○ Whole Life policy DOES NOT pay dividends - Participating
○ Whole Life Policy WILL pay dividends - Dividend Options (CRAP-O)
○ CASH
○ Accumulate at Interest
§ Company invests the dividends and are tax
free up to the client’s basis in the policy
§ Interest paid on dividends is taxable
○ Reduce Premiums
§ Decrease the out of pocket expenses for
premiums
○ Paid-Up addition
§ Purchase additional insurance each year for
the insured regardless of the health or
occupation
○ One-year term
§ Adds term insurance each year to the policy
face amount EQUAL to cash value of the policy
§ AKA the “5th dividend option” on the CFP
EXAM!
Settlement Options for Life Insurance
- Lump Sum Payment
- Interest ONLY
○ Periodic PMTs of interest on the policy proceeds - Annuity PMTs from Life Insurance
○ FIXED Amount○ Life Income
§ Converts the DB into an annuity contract for
the life of the beneficiary○ FIXED Period
§ Death benefit proceeds may be used to
purchase an ANNUITY CERTAIN (an annuity that
will make payments for a specified # of periods,
usually years)○ Life Income with Period Certain
§ Combines the benefits of life income method
with the benefits of the fixed price method.
§ Transforms the DB into a life annuity contract
based on the age and health of the
BENEFICIARY, yet promises to make a specified
number of PMTs under the contract○ Joint and Last Survivor Income
§ Annuity payments are made over the joint
lives of two individuals.
§ When one of the joint annuitants dies –> the
survivor will receive a REDUCED payments for
the rest of his or her life
Life Insurance Nonforfeiture Options (remember)
- Cash Surrender Value
○ Insured receives the accumulated cash value when
terminating the life insurance policy.
○ The cash surrender value is the cash value LESS
surrender charge. - Reduced Paid-up Insurance
○ Insured received the cash value in the form of a
paid-up policy with a smaller fee amount - Extended Term Insurance
○ The insured receives the cash value in the form of
a paid-up term policy for specified duration, with the
same face amount as the original policy.
Accelerated Death Benefits
- If an insured becomes terminally ill, the insured may take an accelerated death benefit
- May be in the form of a lump sum OR monthly income
- Any payments are deducted from the policy’s face value
- Life expectancy must be 24 months or LESS
- Income is NOT TAXABLE to the insured
- NO RESTRICTIONS on what the accelerated death benefit can be used for..
Universal Life Insurance
- Insured MAY ADJUST:
○ Premiums paid
○ Face value
○ Cash value - Insured does not direct the investment options of the cash value
- Cash value can be used to actually pay the policy premiums
Universal Life A
○ FLEXIBLE PREMIUM
○ ADJUSTABLE DEATH BENEFIT
○ UNBUNDLED Life Insurance Contract
○ If the Cash Value gets high enough, the death benefit will INCREASE
○ Normally, the amount of insurance purchased DECLINES as the cash value RISES.
§ Keeps the total death benefit LEVEL
Universal Life B
○ Same as “Universal Life A” EXCEPT that DBs vary directly with the cash values
○ MORE EXPENSIVE that Universal Life A
§ The DB is EQUAL to a specified amount of
insurance PLUS the cash value
§ Typical DB will INCREASE.
Variable Life Insurance
○ A product with investment options (stocks, bonds, and money market mutual funds)
○ NO MINIMUM guaranteed rate of return OR interest
○ Cash Value is invested in SEPARATE ACCOUNTS (not the insurers general account)
○ Cash Value is not guaranteed, BUT in the event of the insurance company failure the separate account will not be treated as an asset of the insurance company
Non Direct Recognition Program
Approach does not adjust the dividends paid on a policy when there is an outstanding loan against the cash value of the policy
Direct Recognition Program
Dividends are REDUCED by any outstanding loan against the policy
Life Insurance Policy Provisions
- Grace Period
○ 31-61 days after the premium due date in which
the policy remains in force
○ If the insured dies during the grace period
§ Insurer assumes insured would have renewed.
§ The insurer will pay the death benefit and
deduct the premium - Misstatement of Gender or Age
○ YOUNGER PERSONS and WOMEN pay LESS for life
insurance
○ Misstatement of age on an application will not void
the contract
○ The DB will be paid, BUT REDUCED by what
premiums would have been if age was accurately
stated - Suicide
○ Coverage is EXLUDED if committed within 1-2
years of purchasing the policy
○ If committed within the EXLUSION PERIOD
§ Premiums are returned - Disability Waiver of Premium
○ Whole Life
§ Insurer will waive all premiums after disability
○ Universal and Variable Universal
§ Insurer will waive charges related to mortality
and administration OR waive the entire
premium
Assignment
- Absolute assignment
○ The owner transfers all policy ownership rights - Collateral Assignment
○ Used for collateral on debt (only assigns limited
ownership rights)
○ Automatically terminates when the debt is satisfied
○ Most participating whole life policies use DIRECT
RECOGNITION
§ Reduces dividends and interest for the portion
of the cash value used as collateral for loans
Group Life Insurance
- Group Term Insurance
○ Most Common form of insurance offered by
Employers
○ Premiums up to $50,000 in coverage = TAX FREE
○ Premiums paid by the EmployER = Tax
DEDUCTIBLE
○ Premiums paid by the EmployEE = AFTER TAX
DOLLARS
○ Income must be imputed based on the coverage in
excess of $50,000 - Group Whole Life Insurance
○ Allows EEs to accumulate savings for retirement
through the cash value policy
○ If there are premiums paid by the ER, they are
TAXABLE INCOME to the EE.
○ ER allows premium savings from the group rate to
pass to the EE.
Life Annuity Contracts
- Immediate Annuity
○ PMTs to annuitant begin IMMEDIATELY
○ Purchased with ONE SINGLE LUMP SUM - Deferred Annuity
○ PMTS being at some future date
○ Usually in the form of a retirement annuity that
accumulates interest until retirement age
○ Can be purchased either in a LUMP SUM or
PERIODIC INSTALLMENT PMTs - Flexible Premium Deferred Annuity (FPDA)
○ Allows insured to vary the premiums paid
○ Retirement income is a function of total premiums
paid - Single Premium Deferred Annuity (SPDA)
○ A lump sum payment of Premium
○ Earning accumulate tax free until distributed
○ Proceeds from life insurance policy can be used to
purchase a SINGLE PREMIUM ANNUITY - Fixed Annuity
○ Annuity accumulates a fixed interest rate over a
period of time
○ Provides the owner with more security than a
variable annuity contract - Variable Annuity
○ Owner may invest in stock or bond Mutual Funds
that are held in “sub-accounts”
○ No guarantee of a return on investment
○ Owner accepts more investment risk
○ VA is appropriate if the client wants to keep pace
with inflation - Equity Indexed Annuity
○ Form of FIXED ANNUITY (linked to an index)
§ Immediate –> benefit is linked to the index
§ Deferred –> credited interest rate is linked to
index
§ Index is most often the S&P 500○ Limits downside risk of index
§ Offset modest upside potential
§ Indexing method and participation are critical
§ Guaranteed Minimum interest rate (LOW)
Equity Indexed Annuity
○ Participation Rate
§ % of index increase that affects credited interest
□ If participation rate is 70% and index rises
10%, then credit interest is 7%
§ May vary from term to term or could be
guaranteed
○ Cap Rate
§ MAX Rate of credit interest
○ Floor Crediting Rate (NOT in all annuities)
§ Typically 0% (no loss allocated to the contract)
○ Indexing Method
§ Annual Reset
□ Ratcheting Method
□ Index Linked rate calculated each year
(beginning vs end of year)
□ Interest added each year and protected from
future decreases
□ Generally, has LOWER Participation rate &
may
use averaging over time
§ High Watermark Approach □ Compares HIGHEST anniversary index to initial index □ Beneficial if index DECLINES near the end □ Interest in ONLY credited at the END □ May have LOWER Participation rate or use a cap rate § Point to Point Method □ Compares index at end of term (typically 6-7 years) to beginning of term, paying interest at the end of term □ May have higher participation rate
Timing of Annuity Payments
- Pure Life Annuity
○ PMTs are made to the annuitant over his lifetime
○ PMTs stop at death of annuitant
○ Primary risk is receiving one PMT, then dying - Life annuity with Guaranteed Minimum PMTs
○ PMTs continue for a minimum term and PMTs are
payable to the annuitant’s beneficiary if death occurs
PRIOR to expiration for the minimum term OR until
death of annuitant if annuitant’s lifetime EXCEEDS
the minimum term.
○ Payout is LESS under this method than a pure life
annuity - Installment Refund Annuity
○ It total PMTs to the annuitant are LESS than the
premiums paid for the policy at the owner’s death
○ The policy will payout the difference between
premiums paid and what has already been paid out - Joint and Survivor Annuity
○ An annuity is paid out over the life of 2 annuitants
(Husband and wife)
○ PMTs are LOWER than a Pure Life Annuity
Taxation of Life Insurance
- DBs are generally EXLUDABLE from taxable income
○ EXCEPTION –> the transfer for value rule - Dividends earned on cash value are NOT TAXABLE UNTIL WITHDRAWN
- Cash Value is NOT TAXABLE if withdrawn at death
- Loans against life insurance = TAX FREE
○ EXCEPTION –> Modified Endowment Contract
(MEC)
§ Any loans or withdrawals will be treated LIFO
method - Exchanges for one life insurance policy to another or for an annuity, DOES NOT create a taxable event
○ Annuity for a life insurance = Taxable Event
Taxation of Benefits Received During Life
- Dividends
○ Not taxable
○ Considered a return on basis (or premiums)
○ If dividends EXCEEDS premiums, the dividend = TAXABLE - Withdrawals
○ Considered a return of principal until accumulated
premiums have been distributed = TAXED AT
ORDINARY INCOME
○ MEC are subject to 10% penalty if withdrawn
before 59 1/2
○ Policy = MEC, if it FAILS the “7 pay test”
§ Fails if the cumulative premiums paid EXCEED
the premiums due for the time period being
considered
○ MEC withdrawals or loans = LIFO
○ MEC status only affects loans, not the taxation of
proceeds at death - Surrender policy PRIOR to death
○ The insured may surrender the policy prior to
death and take cash value as:
§ LUMP SUM
□ Amount ABOVE premiums paid = ordinary
income
§ Interest Only
□ Interest is taxable as ordinary income
§ Installment PMTs
□ Portion is return of principal and interest
□ Interest portion is taxed as ordinary
income - Premiums
○ Premiums paid by insured are NOT tax deductible
by the insured
○ Group Life Insurance premiums paid by ER are
deductible by the ER
○ Premiums paid by the ER are Taxable Income to
the EE
○ The 1st $50,000 of coverage are not taxble to an EE
§ An EE must impute taxable income for
benefits in excess of $50,000
§ The imputed income is a function of age and
amount of benefit per $1,000 in excess of
coverage
Transfer of Policy for Value
○ DBs are taxable to the transferee to the extent proceeds exceed basis
○ EXCPETIONS to the Transfer-for-Value Rule:
§ Transferred to the insured
§ Transferred to a business partner of the insured
§ Transferred to a partnership of the insured
§ Transferred to a corporation in which insured is a
shareholder or officer
§ Transfer that results in carryover basis for
TRASNFEROR to transferee
○ Varying treatment of the proceeds received depending on health
§ Terminally or Chronnically ill –> TAX FREE receipt
§ NOT Terminally or Chronically ill (life settlement) ->
TAX FREE return of basis, ordinary income on cash
surrender value over basis, and capital gains on the
remainder
Taxation of Installment Option of Life Insurance Proceeds or Annuity PMTs
○ Taxable Income is calculated using the exclusion/inclusion ratio
§ Monthly PMT x 12 months x Life expectancy =
TOTAL PMTs
§ (Basis/Total PMTs) = EXCLUSION RATIO
§ (Exclusion Ratio x Monthly PMTs) = AMOUNT
EXLUDED from MONTHLY INCOME
○ Any PMTs received beyond the life expectancy are 100% included in taxable income
§ After recovering your entire basis, the remainder is
taxable
○ Any basis NOT recovered before the death of the annuitant is DEDUCTIBLE on his final return as MISC itemized deduction NOT subject to 2%
○ Life Insurance DBs paid as annuities retain the exclusion ratio INDEFINITELY
○ The beneficiary of an annuity from a life insurance settlement is NOT permitted to recover any basis left at death
Taxation of Viatical Settlements and Accelerated Benefits
○ Some life insurance companies allow insured who are terminally or chronically ill to receive an accelerated death benefit under the contract
§ The owner surrenders the life insurance contract in return for a PMT that is LESS THAN the DB (and greater than the Cash Value) and the proceeds are typically used to pay for the medical care of the insured § Amounts received may be EXCLUDED from gross income □ For Chronically ill individual, the nontaxable portion is limited to the amounts incurred by the payee (that are not reimbursed by insurance) for qualified LTC services provided by the insured
§ Viatification
□ Income tax exclusion in the IRC applies to sales of
life insurance by chronically/terminally ill person to a
QUALIFIED VIATICAL SETTLEMENT PROVIDER
□ Prior to accepting accelerated DB, it would be wise to determine if selling the policy would provide more income
Chronically ill person
□ NOT terminally ill
□ Certified by licensed health care provider as being unable to perform, without assistance, at least 2 ADLs for at least 90 days:
® Eating
® Toileting
® Transferring
® Bathing
® Dressing
® Continence
Activities of Daily Living (ADL)
® Eating
® Toileting
® Transferring
® Bathing
® Dressing
® Continence
Terminally ill person
Certified by licensed health care provider with expectation of death within 24 months
Taxation of Annuities
- Withdrawals PRIOR to start of the annuity
○ LIFO (earnings before basis)
§ Premature withdrawals
§ Annuities after 1982 - Exchanging one annuity contract for another DOES NOT create a taxable event (1035 exchange)
- Exchanging one annuity contract for a life insurance contract = TAXABLE EVENT
Health Insurance
- Traditional medical expense insurance is divided into 4 MAJOR CLASSES
○ Hospital Expenses
§ Covers expenses associated with
hospitalization such as room and board charges
§ DOES NOT cover physician fees○ Surgical Expenses
§ Surgeon fees whether in the hospital or
outside of the hospital○ Physician Expenses
§ Covers all nonsurgical expenses○ Major Medical
§ Covers hospitalization, physician and surgeon
fees, physical therapy, and prescription drugs
§ Health plans AFTER 9/2010
□ Lifetime limit cap on new health policies
has been eliminated
§ Eye exams and dental care = EXCLUDED
§ Usually an 80/20 coinsurance clause
□ Insurer pays 80% of expenses above the
deductible
□ Insured pays 20% of expenses above the
deductible
§ Each family member must satisfy a deductible
with typically maximum of 3 deductibles per
family
§ The coinsurance portion also applies to each
family
Group Hospitalization and Major Medical
○ Insured ONLY pays the out-of-pocket
○ Affordable Care Act –> all policies should now use the “out-of-pocket” approach
Patient Protection and Affordable Care Act (PPACA)
○ Requires most US citizen and legal residents to have health insurance
○ Those WITHOUT COVERAGE
§ Pay a tax penalty of the greater of $695 per year up
to a maximum of 3x that amount ($2,085) per family
OR 2.5% of household income above the filing
threshold, WHICHEVER IS GREATER
○ Creates Exchanges through which individuals and small business can purchase coverage, with premium and cost sharing credits available to individuals/families with income between 133-140% of the federal poverty level.
○ ER Requirements
§ Assess ERs with 50 or more full-time EEs that do
NOT offer coverage a fee of $2,000 per full-time EE,
EXCLUDING the first 30 EEs from the assessment
□ Requires ERs with more than 200 EEs to
automatically enroll EEs into health insurance
plans offered by the ER. EE may opt out of
coverage
□ Exempts EEs with up to 50 full-time EEs from
above the penalty
○ Requires guarantee issue and renewability (with no pre-existing condition clause) and allows rating variation based only on age, premium rating area, family composition, and tobacco use
○ Provides dependent coverage for children up to age 26 for all individual and group policies
○ Prohibits lifetime limits (2010) and annual limits (2014) on the dollar value of coverage
PPACA - 4 Categories
§ Must provide essential benefits plus a separate catastrophic plan to be offered through the Exchange, and in the individual and small group markets:
□ BRONZE
® Minimum allowable coverage
® Covers 60% of the benefit cots of the plan
® Out of pocket limit = HSA Limit
□ SILVER
® Covers 70% of the benefits costs of the plan
® HSA out of pocket limits
□ GOLD
® Covers 80% of the benefits costs of the plan
® HSA out of pocket limits
□ PLATINUM
® Covers 90% of the benefits costs of the plan
® HSA out of pocket limits
□ Catastrophic Plan
® Available to those up to age 30 OR to those who
are exempt from the mandate to purchase coverage
and provides catastrophic coverage only with the
coverage level set at the HSA law levels EXCEPT that
prevention benefits and coverage for 3 primary care
visits would be exempt from the deductible.
® ONLY available in the individual market
Health Maintenance Organization (HMOs)
- Delivers comprehensive health care for a periodic PMT (Premium)
- Care is managed by a primary care physician (gatekeeper) who determines what care is received
- Primary Disadvantage –> NO COVERAGE OUSTIDE of the HMO
- Structural Models
○ Staff Model
§ HMO is a corporation
§ Medical staff members are EEs of the HMO
○ Group Model
§ “network model”
§ HMO contracts with groups of medical
providers to care for insured plan subscribers
○ Individual Practice Association
§ Made up of physicians who have their own
office locations, but contract out of the HMO on
a fee-for-service basis
Preferred Provider Organization (PPO)
- Network of healthcare providers with whom an ER or insurance company contracts
- Provider offers a discount on services
- Insured receives a high rate of reimbursement when using providers within the organization
- Insured may seek care elsewhere, but will suffer a penalty in the form of increased deductibles and coinsurance
- A PPO preserves EEs option to choose a provider outside of the network
Managed Care (Primary Care Physician - PCP)
- Insured accesses care via a primary care physician who provides services or refers to a specialist
- Physicians need approval to perform certain procedures and it may reduce a patient’s options for care if not approved
- The consumer pays a small copayment or other deductible
- Health care providers agree to accept compensation provided under the plan
Health Savings Account (HSA)
- Replaces MSAs
- Provide EEs and individuals seeking health care a tax deduction for amounts contributed to their accounts as well as use of the money and earnings tax-free for qualifying medical expenses
- The ER and EE (or both) may make contributions
- To be eligible, the individual must have medical insurance under a high deductible health plan (HDHP)
- RULES that DISQUALIFY ELIGIBILITY:
○ If NOT covered by HDHP
○ General Purpose HRAs and health FSAs count as
other health insurance coverage and can disqualify a
taxpayer from using a HSA
§ HRA = Health Reimbursement Accounts
provided by an ER ad a fringe benefit for
qualified medical expense reimbursement
○ Medicare participation
○ Individuals who may be claimed as a dependent
on another’s return - HDHP premiums are LOWER
○ The deductible is much higher than with
traditional prices - Contributions are deductible
○ For EEs who contribute
○ For the ER who contribute
○ For any eligible family members who receive
contributions on their behalf - NO REQUIREMENT for an individual with an HSA to use those funds for qualified medical expenses in the current year
○ Allows high income individuals the ability to save
on a tax-deferred basis for medical expenses in
retirement - Distributions for qualified medical expenses = TAX FREE
○ Over-the-counter drugs ARE NOT PERMITTED
unless the taxpayer has a prescription - Health insurance premiums are NOT PERMITTED as qualified medical expenses UNLESS the premiums are for:
○ LTC premiums
○ COBRA premiums
○ Health care coverage while receiving
unemployment compensation under federal or state
law
○ Medicare and other health care coverage (not
including medigap) if you were 65 or older
○ Dental (including orthodontics) and vision care
○ NOTES–> cosmetic surgery costs are NOT qualified
expenses. OTC drugs are NOT permitted unless the
taxpayer has a prescription and copays - Distributions for non-qualified medical expenses are subject to income tax and 20% penalty if taken before age 65
- Distributions for non-qualified medical expenses are subject to income tax only at 65 or older
- MSAs are only permitted for the self-employed and EEs of small businesses (less than 50 EEs)
○ The distribution rules are the same for the HSAs as
discussed above
○ ONLY the ER or the EE (not both) may make
contributions to the MSA
HDHP/HSA Limits
Health Insurance Provisions
- Individual health insurance have provisions regarding the insurance company’s right to continue or discontinue the policy
- Noncancellable policies
○ Policies are continuous and guarantee and insured
the right to continue or discontinue the policy
○ Insurer CANNOT raise premiums and CANNOT
cancel the policy - Guaranteed Renewable policies
○ The right the renew is guaranteed until a specific
age or state number of years
○ Insurance company CANNOT cancel the policy
§ They can raise premiums as long as the
premiums are raised for an entire group or class
of policyholders
○ All policies must now be guaranteed renewable
under provisions of the PPACA
Group Health Insurance
- ER provided health insurance = NOT TAXABLE INCOME to the EE
- Coordination and Benefits clause PROHIBITS insured collecting more than 100% of actual expenses incurred
Health Insurance Portability and Accountability Act (HIPPA)
- HIPPA was enacted to protect workers ability to obtain health insurance when changing jobs, being laid off, or retiring
- Allows for individuals to obtain coverage WITHOUT restrictions on preexisting conditions if switching from one group plan to another group plan
○ HIPPA does not apply if switching from a group
plan to an individual plan OR individual to individual
plan - 12-month EXCLUSION WINDOW
○ 18 months for late enrollment
§ Any enrollment other than the first period in
which the individual is eligible to enroll
○ For new EEs, which is reduced for each month of
“creditable coverage” before enrolling - “creditable coverage”
○ Any health coverage held immediately prior to
applying in the new plan and after any significant
breaks (63 or more days) in coverage
○ PPACA no longer allows the imposition of pre-
existing condition clauses
Consolidated Omnibus Budget Reconciliation Act (COBRA)
- Extension of group health insurance with the same coverage
- ER may charge 2% for admin expenses (total expenses to the EE is 102% of actual insurance cost)
- Applies to loss of coverage for the covered EE, EEs spouse and/or dependent children
- To be ELIGIBLE for COBRA, group coverage must terminate because:
○ Covered EEs dies
○ EE is voluntary or involuntarily terminated
○ Hours are reduced from full-time to part-time
○ Covered EEs separates from spouse
○ EE becomes eligible for Medicare
○ A dependent child is no longer eligible for
coverage (age, married, left school) - COBRA ONLY APPLIES to ERs who offer a group health plan and have at least 20 EEs.
○ An ER with fewer than 20 EEs is NOT REQUIRED to
offer COBRA
○ Both full-time and part-time EEs count towards the
20, but part-time EEs count as a fraction of EE based
upon on their house worked
§ The Fair Labor Standard Act (FLSA) DOES NOT
define full time employment or part time
employment.
□ Determined by the ER - A qualified beneficiary for COBRA is generally any individual covered by group health plan on the day before a qualifying even who is either an EE, the EEs spouse, or an EEs dependent child
- The ER must have a group health plana and continue that group health plan in order for beneficiaries to receive COBRA
- The ER must offer coverage for a specific period of time based on the following qualifying events:
○ 18 months for reduction in hours or normal
termination
○ 36 months for death
○ 36 months for divorce
○ 36 months for Medicare eligibility
○ 36 months for loss of dependency status by
children of EE
○ Up to 29 months if EE meets Social Security
definition of disabled - EEs HAVE 60 DAYS TO MAKE COBRA ELECTION
- COBRA continuation coverage MAY BE TERMINATED before the designated term ends if:
○ The ER terminates its health plan for all EEs as a
result of the company going out of business
○ The EE or beneficiary fails to make premiums PMTs
○ If the EE becomes covered under any other plan
providing medical care
Medicaid
○ Available to the nation’s poor
○ Benefits can be paid by the government at either the state or federal levels or a combination of these two
○ Eligibility is determined based on the persons assets
○ ACA expended Medicaid coverage
○ Individuals entering a nursing home can apply for Medicaid and are eligible for Medicaid assistance once assets are spent down (subject to state limits)
§ There may be a penalty period based on the
amount of assets gifted in the 5 years (60 months)
prior to entering the nursing home
□ Any gifted assets (direct or to trusts) will be
assessed in the formula
□ If the nursing home costs $5,000 a month, and
$15,000 was gifted in the prior 5 years, the
penalty period would be 3 months of no
Medicaid coverage once assets were spent
down
Medicare
○ Benefits are available to those eligible for Social Security
○ Benefits under Medicare are EXTREMELY RESTRICTIVE
○ Only pays if the patient is capable of realizing an improvement in his or her condition
Continuing Care Retirement Communities (CCRC)
○ A retirement community that offers several levels of health care on site:
§ Independent living
§ Assisted living
§ Memory care
§ Skilled nursing and Rehabilitation
Long Term Care (LTC)
- Private LTC Policy
○ Provides coverage for nursing home stays and
other types of care NOT COVERED by health
insurance○ 7 types of coverage
§ Skilled nursing
□ Traditional nursing home, physician
ordered
§ Intermediate nursing
□ Occasional nursing care, physician
ordered
§ Custodial Care
□ Assistance with eating, dressing, bathing,
etc
§ Home Health Care
□ In-home nursing or necessary assistance
§ Assisted living
□ Apartment style living with healthcare
services
§ Adult Day Care
□ Daily assistance while a spouse or family
member works
§ Hospice Care
□ For terminally ill, at home, hospital or
nursing facility
○ ELIGIBLITY
§ Must be chronically ill OR suffer from substantial
cognitive impairment
□ Substantial cognitive impairment
® Behavior threatens own/others health
and safety
- LTC Insurance Partnership Program
○ Establishes eligibility rules for a partnership
between Individual LTC Insurance and Medicaid
○ Individuals use LTC policy to pay the first portion of
LTC and then qualify for Medicaid WITHOUT the
spend down requirement
○ A partnership qualified policy included an “asset
disregard” for Medicaid to the extent of the total
amount of benefits received under the LTC policy
LTC - TAX BENEFITS
○ Premiums = TAX DEDUCTIBLE and Limited based upon age of the insured
○ Benefits are TAX FREE as long as a policy is “qualified” with the following provisions:
§ A person is expected to need care for at least 90
days
§ Unable to perform 2 of the 5 ADLs
□ OR person suffers substantial cognitive
impairment
○ A LTC policy DOES NOT contain a SURRENDER VALUE
§ Limited to a qualified LTC services
§ Uses dividends to reduce future premiums OR
increase benefits
§ Meets consumer protection laws
§ DOES NOT pay for expenses covered by Medicare
Disability Income Insurance
- Provides income to the insured in the event the insured is UNABLE to work because of illness or injury
- Policy Issues:
○ Coverage (sickness and accident)
○ Term (to retirement or to death)
○ Elimination period = 0-180 days
○ Taxability of Benefits (depends on Payor)
○ Amount of benefits (60-70% of GP)
○ Definition of disability (own occupation, etc.)
○ Residual benefit
○ Probation period - Definition of Disability
○ Any Occupation
§ Considered disabled if insured cannot perform
the duties of “any occupation”
§ Provides the least expensive premium
○ Modified Any Occupation
§ Consider disabled if unable to perform duties
of gainful occupation they’re reasonable fitted
by education, experience, training and prior
economic status
○ Own Occupation
§ Considered disabled if insured CANNOT
perform the duties of his “own occupation”
§ More expensive, ideal for specialized, high
paying fields
○ Split Definition
§ Begins with own occupation, and moves into
modified any occupation after a year or two
under the own occupation definition - Benefit Period
○ Short Term –> coverage for 2 years or LESS
○ Long Term –> coverage is until normal retirement
age, death or for a specified period of time - Elimination Period
○ Amount of time until benefits begin
○ During this time, PREMIUM IS WAIVED
○ Serves as a DEDUCTIBLE - Taxation of benefits
○ If the EE pays the premium with AFTER TAX dollars
§ NOT deductible
§ Benefits = TAX FREE
○ If the ER pays the premiums
§ DEDUCTIBLE to the ER
§ BENEFITS = TAXED (to EE)
○ If the EE pays the premiums with PRE TAX dollars
§ Benefits = TAXED (to EE) - Disability Insurance Characteristics
○ Cost of living rider
§ Benefits received will adjust for inflation
○ Residual Benefits
§ If insured goes back to work at less pay, then
the policy will pay the difference between
current income and income prior to disability
○ Integrating with Social Security
§ Any disability benefits received by Social
Security will REDUCE the amount of disability
benefit paid by the insurer
○ Probation Period
§ The time the insured must wait after the policy
is issued, before specified conditions are
covered (typically 15-30 days after inception)
Health and Disability Insurance Policy Provisions
- Grace Period
○ Period beyond the due date of the premium
○ Coverage remains if premiums is paid during grace
period - Reinstatement
○ What needs to occur if policy lapses - Guaranteed Renewable
○ Insurer is required to renew, but may increase
premiums if increased on the entire group
○ Renewal is up to the insured - Noncancellable
○ Insurer must renew and CANNOT raise premiums
