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