RMIN Test 3 Flashcards
What is Premature Death?
death of a family earner with outstanding unfulfilled financial obligations
What is the Cost of Premature Death?
Future earning are lost forever
Additional expense incurred:
Funeral expenses
Uninsured medical bills
Higher childcare costs
Estate settlement expenses
Outstanding debts
Possible reduction in standard of living
Which of the following needs life insurance?
Single person- with child(ren)
Married - no children (only if 1 spouse is reliable on the other)
Married with children- both spouses work
Married with children- one spouse work
- Might want to insure spouse that doesn’t work since they are taking care of the kids
How much life insurance is needed?
Depends on family size, income levels, existing financial assets, and financial goals
Human Life Value Approach → present value of the family share of the decreased breadwinner
Needs Approach → amount needed depends on the financial needs that must be met if the family head should die
Human Life Value Approach
Estimates the present value of the family’s share of the breadwinner’s earnings
Deduct taxes and self-maintenance costs
Using a discount rate, determine present value of family’s share of earnings for the number of years until retirement
Advantages to Human Life Value Approach
Provides a crude measure of the economic worth of a person
Disadvantages of Human Life Value Approach
Other sources of income are not considered (social security, retirement plans)
Earning & expenses assumed to be constant (most people get a raise each year)
Based on income rather than need
Effects of inflation on earning and expenses are ignored
Needs Approach
The amount of insurance required depends upon the existence and extent of certain needs:
a. Estate clearance fund
b. Income during the readjustment period (1-2 years)
c. Income during the dependency period
d. Life income to the surviving spouse
e. Special needs – Emergency Fund
f. Retirement needs
Disadvantages of Needs Approach
Some unrealistic assumptions; needs may change; no consideration of inflation
Advantages of Needs Approach
Reasonably accurate; considers other assets and sources of income; considers needs other than premature deat
Why might not purchase life insurance?
Belief that life insurance is too expensive to purchase
Difficulty in making the correct decision
Procrastination
Simply don’t understand its importance
Opportunity cost
Two General Types of Life Insurance
Term Life Insurance
Cash-Value(whole) Life Insurance
Term Life Insurance
Temporary protection
Death Benefit Only
Most Polices are:
Renewable → Without evidence of insurability
Convertible → the term policy can be exchanged for a cash-value policy without evidence of insurability
Types—yearly renewable; 5, 10, 15, or 20 years
Uses of Term Insurance
Amount of income that can be spent on life insurance is limited
Need for protection is temporary
Insured wants to guarantee future insurability
Limitations of Term Insurance
Premiums increase with age; not suitable for lifetime
protection; Inappropriate if you wish to save money for a specific need
Cash-Value(Whole) Life Insurance
- Level premiums and lifetime protection.
- The insured is actuarially overcharged during early years and undercharged during later years.
- The policy builds cash surrender values that are available if the policyholder wishes to
surrender the policy or obtain a policy loan
Advantages of Cash-Value Life Insurance
Major advantages of whole life insurance are lifetime protection and a method for saving
money – build and borrow cash value
Maintain coverage for your entire life (vs. a certain time period with term)
Disadvantage of Cash-value Life Insurance
Some people are underinsured after the policy is purchased
Annual premiums are higher than term insurance
If you borrow from it, you have to pay it back
Cash-value stays with insurance company when the policyholder dies
Cash-value may not be guaranteed (depending on type)
Group Insurance
Differs from individual insurance
Coverage of many persons under 1 contract
Ex:
Health insurance through your employer
Life insurance through your employer
Advantages of Group Insurance:
May be less expensive
Tax benefits to employees (costs are usually pre-tax)
Employer may pay all/part of premium
No evidence of insurability
May get insurance you wouldn’t have bought otherwise
Disadvantages of Group Insurance
Inflexible for indivauld
Must be employed
Not always available
May get insurance you wouldn’t otherwise
Life Insurance Contractual Provisions
Ownership Clause
Entire Contract Clause
Incontestable Clause
Suicide Clause
Grace Period
Reinstatement Clause
Misstatement of Age or Sex Clause
Beneficiary Designation
Payment of Premiums
Assignment Clause
Polict Loan Provision
Automatic Premium Loan
Ownership Clause- life insurance contractual provisions
Owner’s rights: may change the beneficiary (unless irrevocable), designate a new owner & surrender the policy
EX:
Ex: divorced man changes after remarriage
Ex: Disney has life insurance on Carrie Fisher
Life Insurance paid for CGI and rewriting script (41 M)
Entire-contract clause- life insurance contractual provisions
The life insurance policy and attached application constitute the entire contract between the parties
Prevents the insurer from making amendments without the policyholder’s knowledge
Incontestable clause- life insurance contractual provisions
The insurer cannot contest the policy after it has been in force two years
Protect the beneficiary if the insurer tries to deny payment of the claim years after policy was first issued
Insurer has 2 years to deduct fraud
Suicide Clause- life insurance contractual provisions
if the insured commits suicide within two years after the policy is issued, the face amount of insurance will not be paid; there is only a refund of the premiums paid
Grace Period- life insurance contractual provisions
A policy contains a grace period during which the policyholder has a period of 31 days (or more) to pay an overdue premium
Purpose: prevent policy from lapsing
Reinstatement Clause- life insurance contractual provisions
Allows a lapsed policy to be reinstated
Requirements: evidence of insurability; payment of past-due premiums; repayment or reinstatement of policy loans
Misstatement of Age or Sex Clause- life insurance contractual provisions
The amount payable is the amount that the premiums paid would have purchased at the correct age and sex
Beneficiary Designation- life insurance contractual provisions
Primary beneficiary → first to entitle to receive the policy proceeds on the insured’s death
Contingent entitled to the proceeds if the primary beneficiary dies before the insured
Revocable → policyholder reserves the right to change the beneficiary designation without the beneficiary;s consent
Irrevocable→ one that cannot be charged without the beneficiary’s consent
Specific → specifically identified
Class→ member of a group eg. children of the insured
Payment of Premiums- life insurance contractual provisions
Paid annually, semiannually, quarterly, or monthly
Assignment Clause- life insurance contractual provisions
Absolute assignment → all ownership in the policy are transferred to a new owner
Collateral assignment → policy holder temporarily assigns a life insurance policy to a credit as collateral for a loan but only certain rights are transferred to the creditor
Policy Loan Provision- life insurance contractual provisions
Policyholder must pay interest on the loan. A policy could lapse if the policyholder does not repay a loan
Automatic Premium Loan- life insurance contractual provisions
Under the automatic premium loan provision, an overdue premium is automatically borrowed from the cash value after the grace period expires. To
prevent the policy from lapsing because of nonpayment.
Settlement Options
A. Cash—most proceeds are paid as cash
B. Interest Option
C. Fixed-Period Option → policy proceeds are paid to a beneficiary over some fixed period of time
D. Fixed-Amount Option→ fixed amount it periodically paid to the beneficiary
E. Life Income Option → Installment payments are paid only while the beneficiary is alive and cease on the beneficiary’s death
Life income options include:
Life income with guaranteed period
Life income w guaranteed total amount
Joint and survivor income
Defects in the Healthcare System in the United States
- Rising Healthcare Expenditures
- Large Number of Uninsured in the Population
- Considerable Waste and Inefficiency
- Harmful Insurer Practices
Basic Provisions of the Affordable Care Act
- Prohibition of Harmful Insurer Practices
- Individual Mandate
- Essential Health Benefits
- Health Insurance Marketplace
- Premium Tax Credits
- Lifetime limits and annual limits prohibited
Cost Sharing (Reduce overutilization and reduce premiums)
Calendar-year Deductible
Coinsurance
Copayments
Annual Out-of-pocket Limit
Exclusion
Copayment- cost sharing
flat amount the insured must pay for certain benefits such as an office visit or generic drug
Doesn’t count towards annual deductibles
Ex: $25 for visit to primary care physician
Calendar-year Deductible- cost sharing
Aggregate deductible that must be satisfied during the calendar year
Amount the insured is responsible for in total (over all claims during the policy period) before the insurer pays anything
Policies may include an individual and/or family deductible
Coinsurance- cost sharing
percent of the bill in excess of the deductible which the insured must pay out-of-pocket up to some max annual dollar limit
Helps prevent overutilization of plan benefits
Typically 20%, 25%, or 30%
Out-of-Pocket (OOP) Max Limit
Most the insured will have to pay out-of-pocket in a calendar year
After out-of-pocket limit is met, insurer pays 100% of all eligible expenses
Called a stop loss limit
Health Maintenance Organization (HMO)- Managed Care Plan
provides healthcare to its members on a prepaid basis in a particular area
Negotiates rates/agreements w hospitals and physicians to provide medical services
May own hospitals and employ physicians
Choice of providers (doc/hospitals) is limited
Not based on FFS(fee-for-service)
Structure of HMO
- Employee enrolls in HMO plan
- Employee selects a Primary Care Physician (PCP)
- PCP acts as a “gatekeeper”. You must receive a referral from the PCP to see a specialist
HMO Advantages
- Premiums are high; annual costs may be lower bc cost-sharing is lower (coinsurance, deductibles)
- Broad care; usually communication between providers
HMO Disadvantages
- Little to no out of network coverage
- Must get referrals through PCP
- If you join an HMO, you likely have to change doctors
Preferred Providers Organizations (PPOs)
contracts with healthcare providers to provide certain medical services at
discounted fees
plan forms a ‘network’ of providers
Patients aren’t required to use a provider within the network but the deductible and copay are lower if they do
PPO Advantages
- No referral needed for specialist
- Can go to out of network physicians (but pay higher deductibles, coinsurance)
PPO Disadvantages
- More cost sharing than HMO
- Out of network physicians may bill insured for amounts in excess of FFS
- Less efficient communication between providers
- Billings is more complicated than HMO since each medical provider has their own system
Point of Service (POS) Plan
structured as an HMO in that members must select a primary care physician (who
acts as a “gatekeeper”), but members can go outside of network for care
If patients see providers who are in the network, they pay little or nothing out of pocket.
Deductibles and copayments are higher if patients see providers outside the network.
Consumer Directed Health Plan- CDHP
combines a high-deductible health plan with a
health savings account (HSA)
A high-deductible health plan (HDHP) has an annual deductible that is substantially higher than traditional plans.
CDHP Disadvantages
High cost to consumers who use a lot of healthcare.
Low-income individuals/families may not be able to afford high deductibles
Because of high deductible, some insureds may postpone needed medical care
Health Savings Accounts (HSAs)
Tax exempt account established exclusively for the purpose of paying qualified medical expenses
Must be covered under a high-deductible health plan
Account is an investment account from which the account holder can withdraw money tax-free for medical costs
CDHP Advantages
Consumers with high deductibles will be more cost sensitive and avoid unnecessary tests.
If not used, money in the HSA can be saved for retirement.
Health insurance is more affordable (lower premiums)
Long-Term Care Insurance
Pays a daily or monthly benefit for medical or custodial care received in a nursing facility, in a hospital, or at home
Disability-Income Insurance
Provides income payments when the insured is unable to work because of sickness or injury
Partial Disability
Residual Disability
The benefit period is the length of time that disability payments are payable after the elimination period is met
Elimination Period
Waiver of Premium
Rehabilitation Provision
Differences between Group Insurance and Individual Insurance
Group
- contract between insurer and employer
- rate applies to group as a whole
Underwriting based on average risk of group(age, distribution, industry, location)
Individual
- contract between insuerer and individual
- Covered parties named in contract
- Rate applies to indidiuals in contract
- Underwriting based on risk of individuals (weight, family history)
Group dental insurance
helps pay the cost of normal dental care
Plans cover x-rays, cleaning, fillings, etc.
A covered employee or family must satisfy a deductible each calendar year
Coinsurance requirements vary depending on the type of service provided
Most plans have maximum limits on benefits
Some dental services are excluded
A predetermination-of-benefits provision informs the employee of the amount that the insurer will pay for a service before the service is performed
