Risk Management & Insurance Flashcards
If eligible under a _______ on the first day of the last month of the tax year, tax payer may fund an HSA for the max allowed for the full year.
High deductible health plan (HDHP)
Advantages of an HSA
1) Pre-tax contributions
2) Tax-deferred earnings
3) Tax-free distro
4) Balance not subject to use-it-or-lose-it
5) May use for OTC drugs, dental, vision, LTC insurance
6) Most employers also contribute
7) Cannot fund once enrolled in Medicare
8) Upon death, HSA will be includes in gross estate, but avoid probate with named beneficiaries
Medicare and Long Term Care
Medicare does not pay for long-term custodial care
Long Term Care - rank order of locations
“FCH”
Facility: Nursing home care & Assisted Living Facility (Residential, higher care, personal care, rehab, meds, 24-hour support)
Community: Adult Day Health Care (Residential or day, may include med mgmt,
Home: Home Health Aide Services & Homemaker Services. (Personal care, non-medical)
Long Term Care - Features & Benefites
“Dials to influence premiums”
1) Benefit Period
2) Elimination Period
3) Daily Benefit
4) Riders
5) Waiver of Preimum
6) Renewability
Medicare pay schedule of skilled nursing care
Day 1 - 20: Zero $ co-pay
Day 21 - 100: Patient pays $194.50 co-insurance per day
Day 101+: Patient pays all costs
Employee count requirement for COBRA
20
COBRA, what does it cost?
Cost cannot exceed 102% of the costs paid by the employee and employer originally
COBRA - max period of continuation coverage
Termination other than gross misconduct or reduction of hours; 18 months (includes employee)
Employee/qual’d bene meets SS definition of disability; 29 months (includes employee)
Employee enrollment in Medicare; 36 months
Divorce or legal separation; 36 months
Death of employee; 36 months
Loss of dependent child status; 36 months (dependent child only)
Qual’ed Long-Term Care Insurance requirements and features
Benefits payable only for qual’ed l/t care services
Contract must be guaranteed renewable
Contract does not pay or reimburse expenses reimbursable under Medicare
Contract does not provide for a cash surrender value
Policy dividends must be applied as a reduction in future premiums or increase future bene’s
Limitations and exclusions are prohibited (except pre-existing w/in 6 months of application)
Contract cannot provide for skilled nursing care only or require prior hospitalization
Contract must have 2-yr incontestable clause for misrepresentation
LTCI tax benefits
Bene’s are tax-free
Premiums paid are qual’d medical expense for itemized deduction (Skd A - itemized deductions; greater than 7.5% of AGI)
Premiums can be paid from HSA
Premiums paid by employers are tax-free to employees and benefits remain tax-free
LTCI benefit triggers
2 of 6 ADLs, or
Substantial cognitive impairment (e.g. dementia)
What are the ADLs?
“BED COT”
Bathing
Eating
Dressing
Contintence (ability to control bowels)
On - off toilet
Transferring (ability to move to-from bed or wheelchair)
Disability Income Insurance - Policy Types
Any-occ
Own-occ
Modified own-occ
Social Security Disability
Presumptive Disability Clause
An insured is always considered totally disabled, even if he is at work, if sickness or injury;
(1) results in the loss of sight of both eyes
(2) hearing in both ears
(3) ability to speak, or
(4) use of any two limbs
If employer paid premiums for disability insurance, benefits are ________.
Taxable
If employee paid disability insurance premiums with after-tax dollars, benefits are _____________.
Tax-free
If employee paid disability insurance premiums with pre-tax dollars, benefits are __________.
Taxable
Section 162 arrangement; Disability insurance
If the employer pays the premium but reports the payments as compensation to the insured, benefits are tax-free to the insured. It’s as if the employee paid the premiums with after-tax dollars.
Types of Life Insurance
Term Life
Universal Life
Option A
Option B
Whole Life
Universal Life Insurance Option A
Death benefit remains level
Universal Life Option B
Death benefit is face amount PLUS cash value
Universal Life Policies
Fixed Universal Life: Premiums stay the same; fixed interest rate; least riskiest of UL;
Variable Universal Life: Variable interest rate, cash value is invested in mutual funds that can increase or decrease
Indexed Universal Life: Cash value account has a min & max guaranteed interest rate based on an index
Life Insurance Non-Forfeiture Options
(1) Cash Surrender Value
(2) Extended-Term Option
(3) Reduced Paid-Up Insurance
LI | Cash Surrender Value
Insurance co pays the cash value to the policy owner as a lump sum and contract ends
LI | Extended-Term Option
Policy owner uses the cash value from their policy to place the policy on extended term insurance. The cash value serves as a single premium to pay for term life insurance for as long as the cash value will support the stated death benefit at the insured’s current age. The option has no residual cash value. The insurance co may allow reinstatement of the permanent policy if the extended term has not expired.
Maintains the original death benefit but may not last to life expectancy.
LI | Reduced Paid-Up Insurance
The policy’s cash value is used to buy a paid-up policy of the same type as the policy that lapsed. The new policy will have a reduced death benefit but will retain a cash value that will grow throughout the life of the policy at a reduced rate.
MEC
Cash value LI policy assuming it fails the 7-pay test and changes the tax treatment cash distro’s while the insured is alive.
What is the Seven-Pay test for LI?
Helps the IRS determine whether your LI policy will be converted into a MEC. It compares the total premiums paid in the first 7 years of the policy with what you’d need to pay it in full. If your payments exceed what’s needed, your policy becomes recognized as a MEC.
Policies purchased before 6/20/88 not subject to premium limits.
Test applied at start of policy and if the policy experiences a material change.
What did the 7-Pay test work to deter?
Curtail the use of single premium LI payments as a tax-free income investment vehicle.
Two conditions of a Vatical Settlement
(1) Terminally ill: certified by a physician as having an illness or condition that can reasonably be expected to result in death within 24 months of the date of certification.
(2) Chronically ill: Refers to a person who is unable to perform at least two activities of daily living for a period of at least 90 days.
Viatical Settlement: tax consequences to the insured
Amounts rcvd under a LI contract on the life of a terminally ill or chronically ill person are EXCLUDED FROM GROSS INCOME. However if the person is only chronically ill, the benefits will only be excluded from income to the extent they are used for long term care services only.
Viatical Settlement: tax consequence to the viatical settlement company
Purchase Price of policy
+Ongoing Premiums
=Basis
Death Benefit
-Basis
=Taxable Gain
Buy-Sell: Cross-Purchase Agreements
Advantages:
-Good for biz with few owners
-Death benefit passes tax-free to surviving owner
-Increase in basis to the surviving owner (primary advantage over entity purchase)
Disadvantages:
-Significant age difference between owners, younger ones will pay considerably more in premiums
-Difficult to implement with a higher number of owners
Formula: = n * (n-1)
Buy-Sell: Entity Purchase Agreement
Advantages:
-Preferred solutions for biz with multiple partners
-Death benefit passes tax-free to biz
-Biz pays all the premiums
Disadvantages:
-No step-up in basis
-Surviving owners will have substantially more gains upon sale of biz due to lack of step-up
Formula: = n
Buy-Sell: Wait and See Agreements
“Wait and see BOB” -> Biz / Owner / Biz
LI policies can be configured in multiple ways
-As a cross-purchase agreement, where partners pay premiums on the policies on each other
-As an entity purchase agreement, where the company pays premiums on policies written on partners
-A hybrid of both
