insurance fundamentals for policymakers. four assignments: insurance principles insurance coverages:...
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Insurance Fundamentals for Policymakers
Four assignments:• Insurance Principles• Insurance Coverages: Property and Casualty• Insurance Coverages: Life and Health• Insurance Regulation and Legislation
Insurance Fundamentals for Policymakers
• Types of Life Insurance• Introduction to Annuities• Health Insurance Plans
Insurance Coverages: Life and Health Topics
Life and health insurance help protect individuals’ and families’ assets in the event of death, illness, or accident. Some life insurance contracts also provide a means of savings.
Types of Life Insurance
Term life Whole life Universal life Variable life Variable universal life Specialty products
Types of Life Insurance
Probability of death for 20-35 year-old: In U.S.:
X out of 1,000 $100,000 of LI coverage:
F * S .001 * $100,000 = $____ $1 per $1000 of face amount Price for pure protection
Life Numbers…
Term Life Insurance Pricing
mortality curve (~term)
$orp(l)
x time 100
Term Versus Permanent Pricing
x time 100
$orp(l)
overpayment
under payment
• Coverage for specified period• No cash value• Policy value paid to beneficiary on insured’s death• Premium escalates with age• Renewable• May be convertible to whole life
Term Life Insurance
• Lifetime protection• Accrued cash value• Unchanged premiums • Loans on cash value
Whole Life Insurance
• Separate protection, savings, and expense components• Earns higher of minimum interest rate or market interest
rate• Flexibility—premiums, access to cash value, and
additional insureds• Risks—policy lapse, growth variability
Universal Life Insurance
• Choice of investment accounts• Level premiums• Variable investment performance• Tax-free investment account changes
Variable Life Insurance
• Value based on insurer’s account performance• Choice of accounts• Significant expense loadings and mortality cost charges
Variable Universal Life
• Current assumption whole life• Second-to-die (survivorship)• First-to-die (joint)
Other Types of Life Insurance
Life Insurance Type Features
• Death Benefit– Not taxable to beneficiary– No limit as to face amount– True for all types of life insurance contracts
Taxation of Life Insurance Products
• Cash Value Life Insurance [CVLI]– Product has two components– Protection and savings or cash value– Cash value accumulates over time – credited with interest
• ‘Inside buildup’
Taxation of Life Insurance Products
• No federal income tax for a policyholder with respect to any earnings on CVLI
• True if the life insurance contract meets the definition of a life insurance contract under Section 7702 – must have the appropriate balance between death protection and cash value
Taxation of Life Insurance Products
• Policy Loans• Borrow cash value – interest charged• Interest is not deductible if policy is Single Premium Whole Life or
Endowment Contracts
Taxation of Life Insurance Products
Annuities are designed to transfer to an insurer the contract owner’s risk of outliving his or her income.
Introduction to Annuities
We’ve worked and saved $1 million The Risk: We might live a (really) long time and outlive
our assets In most countries:
65-year-old men and women can expect to live to 81 and 85
1/3 women and 1/5 men born today will live beyond 90
The Risk
How Long Will Retirement Assets Last?
Think of as opposite of LI Life insurance addresses the risk of dying too soon
—mortality risk Annuities address the risk of living “too long”—
longevity risk
Life Insurance vs. Annuities
The insurer The contract owner The person insured under the annuity (annuitant)
The beneficiary is typically not a party to the contract.
Parties to Annuity Contracts
• Tax-efficient retirement savings—Accumulated cash value is tax deferred.
• Income that cannot be outlived• Guaranteed death benefit
Purpose of Annuities
Guarantees vary by annuity: Straight life annuity Life annuity with period certain Refund annuity
Payment Guarantees
Various types of group and individual healthcare plans are available in the private,
nongovernmental market.
Health Insurance Plans
Based on fee for service, or indemnity For individuals or groups
Traditional Health Insurance Plans
• Separately regulated• Basic and major medical expense coverage • Managed-care plans • Direct payment to providers
Blue Cross and Blue Shield Plans
• Negotiated provider fees• Reduced consumer costs• Limited consumer flexibility• Coverage of standard services
Managed-Care Plans
• Covers only network-provided services• Fixed, prepaid fee • Copayments for routine visits • Primary physician preapproval of specialist • HMO preapproval of some treatments and services • Oversight of tests and treatments
Managed-Care Plan—HMO
• Choice of providers• Lower medical costs and deductibles• No primary physician required• Costlier than HMOs
Managed-Care Plan—PPO
• Lower premium• Insurers’ access fee for use of network• Fee schedules for medical service levels• Exclusive-network-use requirement, except for
emergencies
Managed-Care Plan—EPO
• Coverage for use of out-of-network specialists• Members receive some POS coverage for using out-of-
network providers but must handle paperwork
Managed-Care Plan—POS
Medicare Advantage managed-care options– HMOs– Provider-sponsored organizations– PPOs– Medical savings accounts– Private fee-for-service plans– Special-needs plans
Medicare
• Lower premiums, higher deductibles• No deductibles for preventive care• Use of HSA or HRA to help pay deductibles • Informational decision-making tools
Consumer-Directed Health Plans
• Insurers cannot decline to insure children with preexisting medical conditions
• Adult children (to age 26) can be covered under parent’s plan
• No lifetime dollar limits on essential benefits, phase-out of annual limits
• Insurers must spend set percentage of premium on direct care or quality improvement
The Affordable Care Act
Life insurance can provide financial security for survivors of an insured who dies
Annuities can protect holders against outliving their income
Health insurance plans cover routine and major medical costs
Summary