Module 5 - Life and Health Insurance Flashcards
Darius has 10-year term insurance and he forgot to pay the premium due July 7. It is now July 20 and he calls you to set up new insurance, since he thinks the term policy has lapsed.
In addition, Darius figures he can change his listed beneficiary, his mother, since she passed away last year. What can you tell Darius about his insurance situation?
You can tell Darius that his policy has a grace period of 30 days and if he pays by August 7, he can keep his term policy in force. In addition, it is important to keep beneficiary information up to date and he should immediately contact the insurance company to change
beneficiaries when needed.
What is the fifth dividend option with participating life insurance policies?
The “fifth dividend option” is that insurance dividends can be used to fund term insurance.
Medicare is available to retirees only at age 65. If Roni, who is single and presently covered for health insurance by his employer, wants to retire at age
62 and collect Social Security, how will his health insurance needs be covered?
Roni could do COBRA for 18 to 36 months after leaving employment, but this is often more expensive than getting health insurance through an ACA health care exchange and would not extend to the three years of health care coverage needed before Medicare would be available.
Research is necessary to compare costs between the two health care options. If the client was married, it might be possible to be covered by his spouse’s health care, if that insurance allowed it.
What are two similarities between an FSA and an HSA account?
- Both accounts allow employees with health insurance to set aside money for health care costs considered by the IRS.
- Employers may contribute to either of these accounts.
- A debit card is usually used to pay for qualifying expenses for both accounts.
- Contributions are often taken out of pay pretax.
What are two differences between an FSA and an HSA account?
- To qualify for contributing to an HSA, the account owner must have a high deductible health plan (HDHP), usually Bronze or Silver. Everyone with a health plan is eligible for an FSA, including HSA account owners (though this would be a limited use FSA).
- There are different contribution limits.
- HSA account owners may change contribution amounts at any time, while FSA account owners may only make contribution amount decisions at enrollment or with a change in employment or family status.
- Unused balances of an HSA roll over into the next year and accrue interest. FSAs are generally only for one year and any unused balance is not retained.
- An HSA can be held even if employment changes. For an FSA, in most cases, it is lost with a job change (though an FSA might have an option to be held if COBRA is used after leaving employment).
- Contributions to an HSA not taken from an employee’s pay may be deducted as an adjustment to income on the employee’s tax return. (In this situation, the employee loses out on the payroll tax savings.)
List the disability descriptors from most restrictive to most generous:
- Any occupation: In order to be considered disabled under this descriptor, you must not be able to work in any occupation. It is the most restrictive to participants.
- Modified any occupation: This is structured to consider whether the insured can work at any occupation for which they might be qualified. It is somewhat less restrictive than any occupation in
that it puts a limit on the types of work a person might be expected to do to be considered disabled or not. - Own occupation: This descriptor says that a person will be considered disabled if they are unable to work at their own prior occupation. This coverage, if available, would be the most generous and most expensive.
What are two government programs for disability and at least one disadvantage of each?
Social Security and workers’ compensation are two government disability programs. Social Security has restrictive parameters (especially age and quarters of work required) for qualification. Qualification for workers’ compensation is determined through an
accident at work, but does not usually provide adequate benefits to maintain an acceptable lifestyle.
What are similarities between Medicare and Medicaid?
- Both Medicare and Medicaid are government medical programs.
- Both Medicare and Medicaid provide some long-term care (LTC), although for Medicare the LTC is very limited (available only if the participant will improve).
What are differences between Medicare and Medicaid?
- Medicare is a federal program that provides health coverage if you are 65 or older or have a severe disability, for eligible participants of any income level. Medicaid is a state and federal program that provides health coverage if you have a very low
income. - Medicare is an insurance program paid from trust funds supplied by workers. Medicaid is an assistance program paid by states, though some federal funds are given to states to help with payments.
- Patients pay part of Medicare costs through deductibles for hospital and other expenses, and small monthly premiums for non-hospital coverage. With Medicaid being an assistance program, patients usually pay no part of costs for covered medical
expenses, although a small co-payment is sometimes required.
What is at least one characteristic of each of the following attributes of
annuities?
1) Single premium
2) Fixed premium
3) Flexible premium
4) Immediate annuity
5) Deferred annuity
6) Individual annuitant
7) Joint and survivor
8) Pure life annuity
9) Life and period certain
10) Refund annuity
11) Fixed annuity
12) Variable annuity
1) Single premium
- For type of annuity the owner pays up front one payment and does not have any other payments to make. Think single: one payment
2) Fixed premium
- This type of annuity has a defined payment that the owner must make on each scheduled premium due date. Think fixed: payments of a fixed amount.
3) Flexible premium
- Though flexibility in payments is desirable, this annuity has some minimum payments due to avoid lapsing the benefit. Think flexible: premium amounts can be adjusted.
4) Immediate annuity
- This is like the single payment (paying up front), with the addition of distributions occurring usually within six months; hence immediately. Think immediate: the annuity benefits start very soon after establishing.
5) Deferred annuity
- Income payments will not start until a later date, usually a year or more into the future. Individuals purchase deferred annuities in order to take advantage of the tax-deferred growth available with
annuities. Think deferred: the annuity benefits will not start until later, not immediately.
6) Individual annuitant
- Income payments are made to one person.
7) Joint and survivor
- Income payments are made while both annuitants are alive, and some payment is received by the survivor after the death of the other annuitant.
8) Pure life annuity
- Income payments last for the lifetime of the annuitant. Once the annuitant dies the payments stop. Think pure: annuity is only for the annuitant.
9) Life and period certain
- Income payments last for the lifetime of the annuitant, with a minimum specified payment period guaranteed. Think life and period certain: annuity payments for life with a guaranteed amount of time specified.
10) Refund annuity
- If the value of the income payments over the life of the annuitant does not equal the value of the annuity at the date of annuitization, the balance is paid to the beneficiary either as continued payments or a lump sum. Think refund: beneficiaries may get payments from this annuity.
11) Fixed annuity
- The interest rate on invested dollars has a guaranteed minimum rate that may be increased if insurance company general account investments experience a higher rate of return. Think fixed: annuitant is guaranteed a fixed amount.
12) Variable annuity
- The internal value of the annuity is invested, at the direction of the annuity holder, in various separate accounts that are similar to mutual funds. Think variable: the value of the account varies (both up and down) with the market.
What is the most common type of group life insurance?
Group term life insurance. An employer can provide up to $50,000 (face amount) of group term life coverage on an employee without income tax consequences to the employee. Anything over $50,000 is taxable to the employee
What is life insurance designed to do?
Protect against the risk of untimely death
What kinds of insurance are designed to protect against the risks associated with illness and injury?
Health, disability, and long-term care insurance
What is the most common type of life insurance policy? And how much can an employee offer without tax implications to the employee?
Group term life insurance
An employer can provide up to $50,000 (face amount) of group term life without income tax consequences to the employee. Anything over $50,000 will be taxable to the employee.
Company A offers $100k term life insurance, with $350 an annual premium cost of $350 per year.
- $50k will be taxable to the employee; so to annual premiums associated with that $50k.
So - $175 (half of the premium) is added to the employee’s taxable income for the year. He will pay taxes on $175, even though he doesn’t receive the money directly.
How are individual life insurance policies categorized?
Permanent or Temporary
Permanent life is designed to continue for one’s entire lifetime
- Traditional permanent life includes whole life
- Nontraditional permanent life includes variable life, universal life, variable universal life, and joint life.
Temporary (also known as “term”) life is structured to last for a period of years only.
What is the purest / simplest form of life insurance?
Term life insurance
- Protection against the risk of financial loss due to the peril of death occurring during a specified period of time.
- The policy pays the face amount of the contract if the insured dies within a given coverage period.
- Does NOT build up cash value. All premium dollars go towards the insurance protection / no cash coming back to the insured
Describe features of health care plans under the Affordable Care Act
- a website was developed to help people evaluate their insurance options
- adult dependents (up to age 26) could remain on their parents’ health insurance
- lifetime limits on group health plans was eliminated
- policies can’t be revoked or cancelled except in cases of fraud
- can’t be denied for preexisting conditions
- certain preventative care services must be provided with no cost-sharing (annual check ups, mammograms, prostate tests, wellness care for children)
- individual coverage is easier to obtain
- individuals with qualifying life events can enroll / change plans outside enrollment windows
- health insurance exchanges offer insurance options that are guaranteed without medical underwriting (preexisting conditions are covered) and premiums can only be based on age, family size, smoking status, and geography
Describe annually renewable term insurance
Covers the insured against death for one year. At the end of the coverage period, the owner is guaranteed the right to renew for another year or allow it to terminate.
- Premium costs increase each year the policy is renewed, while the face amount of coverage remains the same.
Describe decreasing term insurance
The premium stays the same while the face amount coverage decreases.
- Typically used as insurance for loan repayment (like mortgages)
- As the loan is repaid, the amount of coverage decreases to match the amount remaining to be paid.
How are individual life insurance policies categorized?
Permanent or Temporary
Permanent life is designed to continue for one’s entire lifetime
- Traditional permanent life includes whole life
- Nontraditional permanent life includes variable life, universal life, variable universal life, and joint life.
- taxes are deferred on $$ that accumulate inside the policy - no income taxes are paid on accumulated $$ over total premiums paid.
Temporary (also known as “term”) life is structured to last for a period of years only.
How does an insurance company determine what to charge as a premium for life insurance coverage?
Three main elements are calculated:
1) mortality - the risk to the company of death occurring (odds of dying at a given age)
2) expense charge - admin fees and other costs of running the firm
3) credited interest - return on the firm’s investment of premiums
What is the primary difference between term and whole life insurance?
Whole life has a cash value (also known as a “savings element”) built into the policy, which results in higher initial premium costs than term insurance.
List life insurance policies in “permanent life” category
- limited payment life
- universal life
- variable life
- adjustable life
- variable universal life
List life insurance policies in “permanent life” category
- limited payment life
- universal life
- variable life
- adjustable life
- variable universal life
Define and describe whole life insurance
- also known as “straight life” / “ordinary life”
- premiums remain level throughout the term of the contract and payments are made for life
- can work well for individuals who have trouble saving since the premiums must be paid to keep the policy in force; over time a cash value is built up that can be borrowed against or received outright if the policy is terminated
What does it mean when a policy “endows”
The cash value equals the face amount of the policy
- you do not receive the face value + the cash value
Bob took out a whole life policy for $250,000 20 years ago. He borrows $40,000, but dies with $36,000 remaining unpaid. How much will his wife receive?
She would receive $214,000 ($250k - $36k)
Define and describe limited payment life insurance
Variation of whole life
- premiums are paid until age 65 (at the latest) and then the insured has a “paid-up” policy for the rest of their life.
- higher premium than whole life
- cash value is built up
Define and describe universal life insurance
- also known as “flexible premium adjustable life”
-
Define and describe universal life insurance
- also known as “flexible premium adjustable life”
- all components (mortality charge, expense charge, and interest) are “unbundled”. they aren’t combined, but shown separately on an annual statement.
- real distinction from traditional products is the flexible premiums (or “target premium”). Premiums can be increased or decreased by the policy owner (though adequate payments do need to be paid on a regular basis)
- target premium is the estimated amount needed to keep the policy in force, based on assumed expense and investment return rates
- BE VERY CAREFUL to make sure illustrated premiums are based on realistic assumptions
- additional features: policy amount can be increased / decreased based on holder’s needs
Define and describe variable life insurance
- designed to combine traditional protection and savings functions of life insurance with growth potential of investment securities.
- “variable” in the context of life insurance means that stock investments are involved and that cash value is less certain.
- includes a guarantee that the death benefit in any given year will never be less than the initial face amount of the original policy, all while providing the guarantee of fixed premiums
- face value of the policy will always be there as long as the premiums are being paid, but the cash value will move up and down with the market, and it can lose money
Define and describe variable life insurance
- designed to combine traditional protection and savings functions of life insurance with growth potential of investment securities.
- “variable” in the context of life insurance means that stock investments are involved and that cash value is less certain.
- includes a guarantee that the death benefit in any given year will never be less than the initial face amount of the original policy, all while providing the guarantee of fixed premiums
- face value of the policy will always be there as long as the premiums are being paid, but the cash value will move up and down with the market, and it can lose money
- investment choices are made by the insured, not the company
- funds in variable life separate accts do NOT mirror structure, components, investment instruments, or performance of similarly named mutual funds in existence outside the variable life policies!
Define and describe variable universal life insurance (VUL)
- also known as “flexible premium variable life”
- combines characteristics of universal life with variable life. Combines the unbundled flexibility (universal life) with the insured making the investment selection (variable life)
- NOT simple
Define and describe joint life insurance
- first to die / second to die policy - also known as “survivorship policies”
- traditionally are whole life contracts
First to die
- used in both personal or business and promises to pay the face amount on the death of the first of covered persons
- the contract is terminated upon paying the death benefit on the first to die.
- premiums tend to be more than the cost of a single policy, but less than the cost of two policies
Second to die
- pays when the last covered person dies. this is especially attractive in estate planning to either pay estate taxes for large estates / provide inheritance to children
- very rarely would you need this as most estates aren’t large enough for estate taxes
- premiums are generally lower than the cost of two separate policies and is advantageous in situations where one person is older
