Life Insurance Ccp Notes.....

TABLE OF CONTENTS

CHAPTER 1: INTRODUCTION AND INDIVIDUAL LIFE INSURANCE....... ............. .......... ....... ...2 2 CHAPTER 2: REGULATION OF THE INSURANCE INDUSTRY ................................ ............................ .... 5 CHAPTER 3: INTRODUCTION TO RISK AND INSURANCE ................ ........ ............... ............ ..... 9 CHAPTER 4: MEETING NEEDS FOR LIFE INSURANCE.................. ......................... ............... ............... ......... ..15 15 CHAPTER 5: THE INSURANCE POLICY............................................. .................................................... ............... ............... ......... ..19 19 CHARTER 6: PRICING LIFE INSURANCE................................................................... INSURANCE...................................................................22 22 CHAPTER 7: TERM LIFE INSURANCE...................................................... .......... ................. .........26 26 CHAPTER 8: PERMANENT LIFE INSURANCE AND ENDOWMENT INSURANCE ..................................................... ........................................................ ........................... ............................... .... 30 CHAPTER 9: SUPPLEMENTARY BENEFITS ................................................. ............................................................... ..............37 37 CHAPTER 10: LIFE INSURANCE POLICY PROVISIONS ............................ ................................... .............. .......43 43 CHAPTER 11: LIFE INSURANCE BENEFICIARY POLICIES...................... ............................. .............. .......49 49 CHAPTER 12: ADDITIONAL OWNERSHIP RIGHTS ........................................... .................................................. .......50 50 CHAPTER 13: PAYING LIFE INSURANCE POLICY PROCEEDS............................. PROCEEDS.............................58 58 CHAPTER 14: PRINCIPLES OF GROUP INSURANCE POLICY...................... ............................. .......... ... 62 CHAPTER 15: GROUP LIFE INSURANCE. ..................................................................67 67 CHAPTER 16: ANNUITIES ANNUITIE S AND INDIVIDUA INDIVIDUAL L RETIREMENT SAVINGS PLANS 71 CHAPTER 17: GROUP RETIREMENT AND SAVINGS PLAN................................... PLAN................................... 81 CHAPTER 18: MEDICAL EXPENSE COVERAGE............................................. .................................................... .......... ... 86 CHAPTER 19: DISABILITY INCOME COVERAGE............................ COVERAGE................................... .............. ............... .......... .. 90 CHAPTER 20:TRADITIONAL GROUP HEALTH INSURANCE PLANS ....... .............. ............ ..... 94 CHAPTER 21: 2 1: TRADITIONAL TRADITIO NAL INDIVIDUAL INDIVID UAL HEALTH HEALT H INSURANCE INSURANC E POLICIES . 100 CHAPTER 22: MANAGED CARE PLANS ................................................ ................................................................... ...................105 105 CHAPTER 23: REGULATION OF HEALTH INSURANCE.................................... ........................................ ....109 109

Principles of Insurance: Life, Health & Annuities Dated: 26th Feb, 2003

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CHAPTER 1: INTRODUCTION AND INDIVIDUAL LIFE LIFE INSURANCE Insurance companies are organized as either Stock Insurance companies • Company has stock that is bought by shareholders. So company is owned by shareholders. These shareholders get dividends. No. of companies: 1604 Income from Premium: 226 billion Dollar amount of Life Insurance in force: 9.8 trillion •

Mutual Insurance companies This type of company is owned by its policy owners. Policy owners receive dividends out of operating profits. No. of companies: 91 Income from Premium: 127 billion Dollar amount of Life Insurance in force: 6 trillion

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Fraternal Benefit companies Provided by a society to its members who share a common ethnic, religious etc. background. No. of companies: 135 Income from Premium: 4.1 billion Dollar amount of Life Insurance in force: 238 billion → Members must select the officers of the Fraternal society → Operate under a lodge system – where only lodge members and their families’ can own fraternal society’s insurance.

Mutualization:

It is harder to raise money being mutual insurance companies. So most companies start as stock company and then convert to mutual companies when they have enough funds. This process of converting from share insurance company to Mutual Insurance Company is called mutualization. Why Mutualization? Demutualization: Self explanatory. Why Demutualization? Home office: Headquarter of Insurance Company. Home office

Reg. Off

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Field Off


Reg. Off

Field Off

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Field office is also known as Branch office or agency office.

Insurance companies are financial f inancial intermediaries. A financial intermediary is an organization which uses surplus amount of savers ( for insurance company it is premium) and invests that in other sectors. Individual and Group Insurance: Individual Insurance covers individuals where as Group Insurance covers a group of people. Life Insurance: A policy where insurance company provides some benefits if insured person dies. They are of 3 types. →

Term Insurance: Pays benefit if insured dies within the covered c overed time period. No cash value

→

Permanent Insurance: Provides coverage throughout insured’s lifetime. Cash value available

→

Endowment Insurance: Is similar to Term since pays benefit if insured dies while covered or till a stated date. Has cash value available.

Annuity: Annuity is a series of periodic payments. If insured’s die then instead of paying a lump some benefit to the nominees, it can be spaced out in equal installments.

An Annuity can also be a contract under which an insurance company promises to make a series of periodic payments to a named individual in exchange for a premium or series of premiums. Health Insurance: Protection towards sickness, accident and disability. Types of coverage: Medical expense coverage: • o Hospital expense Surgery expense o Physician expense o Specified expense coverage:

Long Long Term Term care care:: like like for for old old peop people le who who need need cons consta tant nt care care and and treatment Dental coverage Prescription Drug Vision care Dread disease coverage •

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Critical illness coverage


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CHAPTER 2: REGULATION OF THE INSURANCE INDUSTRY

Every business must comply with several federal, state and provincial laws so that it operates in a fair manner. Insurance Regulation requires that the Insurance companies remain: 1. Solvent: They are able to meet their debts and to pay policy benefits when they come due 2. Conduct business fairly and ethically USA Regulations

According to the McCarran-Ferguson Act (Public Law 15), regulations are made by State Government until the regulation made is adequate. If not, Congress interferes. • •

Constitutional authority remains with Federal government State Government owns primary authority.

State regulations

State Insurance administration is governed by State Insurance Department (SID) under an ensuress that that the Insurance Insurance Commissio Commissioner ner or State State Sup Superi erinten ntendent dent of Insura Insurance nce.. SID ensure companies within the state comply with all state insurance laws and regulations. Most Most state state regul regulati ations ons are simila similarr in nature nature since since they they are based on a model model by National non-governmen rnmental tal organizati organization on Associati Association on Insurance Insurance Commissi Commissioners oners (NAIC) (NAIC). NAIC is a non-gove consists of all state Insurance Commissioners. The NAIC develop model bill, a sample law that state insurance regulators are encouraged to use as a basis of state laws. To start business in a state, any insurance company requires two certificates: Certificate of incorporation or corporate chapter: issued by state, required for any • corporation to start its business in a state Certificate of authority or license: Issued by SID, only for insurance companies • Solvency Regulation

As per this regulation, the SID imposes a minimum limit on the amount of assets, liabilities and on owners’ equity. Assets = Liabilities + Owners’ Equity Assets: Cash and Investment Liabilities: Debts and future obligations (Policy reserves shares the large portion of liabilities for an insurance company) Owners’ Equity: Capital + Surplus ( Capital is the money invested in the company by its owners, zero in case of a mutual insurer)


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The states oversee the Annual Statement , which each insurer prepares each calendar year and files with SID. This is the accounting report of a company. The NAIC has developed the format of this statement that is accepted by all state. Also the state regulators conduct an on-site examination to manually check the insurer’s business records, usually on every 3 to 5 yrs. In case an insurer becomes financially unsound, the State Insurance Commissioner has the authority to take certain actions: In case of domestic insurer (incorporated by the state): It can rehabilitate or liquidate, depending on the condition of the company. In case of a foreign insurer (incorporated under the laws of another state): Revoke or suspend the insurer’s license to operate in the state. Life and Health Guaranty Association: An organization that operates under the supervision of the SIC to protect policy owners, beneficiaries and specified others against losses that may occur in case of insolvency. This association provides funds to guarantee payment for certain policies up to stated limits. Regulation of Market Conduct Market Conduct Laws: This law regulates how insurance companies conduct their business within the state. As per this law, they perform periodic market conduct examinations of the insurers. Marketing of Insurance products: In order to obtain an agent’s license, a prospective agent must Be sponsored for licensing by a licensed insurance company • Complete approved educational course work/ or pass a written examination • Provide a reputable character certificate • The agent’s license must be typically renewed each year. A state may revoke a license if he/she engages in certain unethical practices and violates the state’s insurance laws. Policy Forms: It is a standardized contract forms that shows the terms, conditions, benefits and ownership rights of a particula particularr insurance insurance product. product. An insurance company company must file these these forms and receive receive the SID’s approval before launching a new product. SID may ask the company to revisit the form for reducing jargons so that it could be clearer to the general public. Federal Regulations •

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This applies to the sale of investment type insurance product. Businesses that sell securities must comply with Securities and Exchange Commission (SEC). Ex: Variable life insurance, Variable annuities Before selling these products, the sales agent must be registered with the National Association of Securities Dealership (NASD). Employee benefit plans must comply with the terms of Employee Retirement Income Security Act (ERISA).


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CANADA Regulations

Unlike a US insurance company, company , a Canadian company may be incorporated under the authority of either the Fed government or one of the provincial governments. Federal Regulations

The Insurance Insurance Companies Companies Act is the primary Federal law that governs specified insurance companies operating in Canada. Companies that must comply with this act are: Federally incorporated insurers, foreign insurers (insurers incorporated in countries other than Canada) and specified provincially incorporated insurers. federall agency agency that is Office Office of the superintend superintendents ents of financial financial institution institutionss (OSFI): (OSFI): A federa responsib responsible le for overseein overseeing g all financial institution institutionss in Canada Canada includin including g all life and health insurance companies. This institute runs under the direction of Superintendents of financial institutions (SFI). Every insurance company must file an Annual Return with the OSFI. This gives the financial statement of the company. OSFI also examine financial conditions of a company on a periodic basis (usually on every 3 year, but it may be anytime) SFI may take control or declare a company as insolvent or obtain a court order to liquidate to company if finds it financially unsound. Canadian Life and Health Insurance Association (CLHIA): An industry association of life and health insurance Company operating in Canada. Canadian Canadian Life and Health Health Insurance Insurance Compensat Compensation ion Corporatio Corporation n (CompCorp (CompCorp): ): It is a federa federally lly incorp incorpora orated ted,, non non-pr -profi ofitt compa company ny establ establish ished ed by CLHIA to protec protectt Canadi Canadian an consumers against loss of benefits in the event of a life and Health Insurance Company becomes insolvent. CompCorp collects money from all its member companies to fund these guaranteed payments.

Provincial Regulations

In most respects, laws to regulate insurance companies operating in different provinces are similar in all provinces except from Laws of Quebec. This is because the Quebec law is based on a Civil Law system but other jurisdictions’ laws are based on a common law system. administrative tive agency, agency, establish established ed in each Office of the Superintendent of Insurance: An administra province to enforce the province’s insurance laws and regulations. It operates under the direction of an individual known as the Superintendent of Insurance. The various provincial Superintendents of Insurance have voluntarily formed a collective body known as the Canadian Council of Insurance Regulators (CCIR). The purpose of CCIR is to discuss insurance issues and to recommend uniform insurance legislation to the provinces.


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The CCIR has adopted Superintendents’ Guidelines, a series of recommendations that concerns a variety of matters. These guidelines were developed in cooperation with the insurance industry, working through its industry association, the CLHIA. Solvency Regulation

These laws require the Office of the Superintendent of Insurance to supervise companies that were were incorp incorpora orated ted by the the provin province ce and to examin examinee those those compan companies ies period periodica ically lly.. Also Also the the insurance company should obtain a license from the office to start business in a particular provi province nce.. Most Most of the licens licensing ing requir requireme ements nts seek seek to ensure ensure that that insur insuranc ancee compan companies ies are financially able to provide the benefits they promise to pay when they issue insurance policies. Regulation of Market Conduct

Unlike requirements in the US, however the provinces do not require that all policy forms be filed before being issued but the insurers are required r equired to file policy forms in only two situations: 1) As a condition condition of obtainin obtaining g a license to conduct conduct an insurance insurance busines businesss within the the province province 2) Before market marketing ing a variable variable life life insuranc insurancee contract contract in the the province province The provinces also regulate many of the marketing activities of the companies to: 1) Prohibit Prohibit from from unfair trade trade practices practices,, false or misleadi misleading ng advertise advertisement ment 2) Agent Agent should get get the license license form the the state before before marketing marketing in that that state. state. The licensing licensing requirements are similar to requirements in the United States.


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CHAPTER 3: INTRODUCTION TO RISK AND INSURANCE

Concept of Risk: Risk exists when there is uncertainty about the future. Types of Risk: Both individual and businesses experience 2 kinds of risk. a) Spec Specul ulat ativ ivee risk risk.. b) Pure risk. What is speculative risk ? This involves 3 possible outcomes: loss, gain or no-change. Example: Your purchase shares of stock. This is a speculative risk you are taking. If the value of the stock raises you gain. If the value of the stock falls you lose. If the value of the stock remains the same there is no change. What is pure risk ? This involves no possibility of gain. Either there is a loss or no loss occurs. Example: The possibility of a professional getting physically disabled. If the disability renders the professional incapable of continuing in his profession, he suffers from a financial loss. If the professional does not get disabled he will incur no loss from that risk. Which type of risk is insurable and why? Pure risk is insurable. Speculative risk has the possibility of financial gain. The purpose of insurance is to compensate for financial loss. Hence speculative risk is not insurable. Risk Management: Risk management involves identifying and assessing the financial risks we face. In order to eliminate or reduce our exposure to a specific financial risk we may choose any of at least 4 options: -

a) Avoiding risk: For example: One can avoid the risk of personal injury that may result from an air crash by avoiding travel by airplane.

b) Controlling risk: We can try to control risk by taking steps to prevent or reduce losses.


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For example: A shop owner might control the risk of suffering financial loss due to his shop burning down by installing fire extinguishers and banning smoking inside the shop. This way he reduces the likelihood of a fire breaking in his shop and also lessens the extent of damage in case of a fire.

c) Accepting risk: When an individual or a business assumes all the financial responsibility for a risk. Self-insurance

This is a risk management technique by which a person or business accepts the financial responsibility for financial losses associated with a particular risk.

d) Transferring risk: When the financial responsibility for an associated risk is transferred from one party to another (generally in exchange of a fee), it is called transferring of risk. A most common example is purchasing an insurance coverage. Policy A written document that contains the terms of the agreement between the insurance company and the owner of the policy. This is a legally enforceable contract. Policy benefits or policy proceeds

The amount of money that the insurance company agrees to pay – when a specific loss covered by that policy occurs. Premium

The fee that the insurance company takes from the owner of the policy in exchange of assuming the financial responsibility for losses incurred, if the specific risk covered by the policy occurs. What are the three types of pure risks that are generally covered by insurance companies? Property damage risk: risk of economic loss to your automobile, home or other personal belongings due to accident, theft, fire or natural disaster. Property insurance covers a property damage risk. Liability risk: risk of economic loss resulting from you being responsible for harming others or their property. Liability insurance covers a liability risk.

Property and Casualty insurance or Property and Liability insurance

Covers a property risk as well as a liability risk. The insurance company offering such insurance is called a Property and Casualty insurer or a Property and Liability insurer. Personal risk:


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Risk of economic loss associated with death, poor health, outliving one’s savings. Life and health insurers sell insurance policies to provide financial security from personal risk. How an insurance company can afford to be financially responsible for the economic risks of its insureds? Insurers use a concept called risk pooling. If the economic losses that actually result from a given peril, such as disability, can be shared by large numbers of people who are all subject to the risk of such losses and the probability of loss is relatively small for each person, then the cost to each person will be relatively small. Characteristics of Insurable risks: 1) The loss must must occur by chance. chance. (Unexpected (Unexpected event, event, not intentiona intentionally lly caused caused by the person person covered) 2) The loss must be definite. (In terms of time and amount) 3) The loss loss must must be be signifi significant. cant. (In (In financia financiall terms) terms) 4) The loss loss rate must be be predictable predictable.. (The probable probable rate rate of the loss must must be predictab predictable) le) 5) The loss loss must not be be catastroph catastrophic ic to the insurer insurer.. (A single or or few occurrence occurrence of the the loss must not cause or contribute to catastrophic financial damage to the insurer) Classification of policies: Depending on the way in which a policy states the amount of the policy benefit, every insurance policy can be classified as being either of the following: Contract of indemnity: amount of the policy benefit payable for a covered loss is equal to the amount of the covered financial loss determined at the time of the loss or a maximum amount stated in the contract, whichever is less.

Example: Many types of health insurance policies. Valued Contract: specifies the amount of benefit that will be payable when a covered loss occurs, regardless of the actual amount of the loss that was incurred. Example: Most life insurance policies.

Some other important terms: Face amount: The amount of the benefit that is listed in the policy. Claim: The request for payment under the terms of the policy. Law of large numbers: It states that, typically, the more times we observe a particular event, the more likely is it that our observed results will approximate the “true” probability that the event will occur. Mortality tables: Charts that indicate to a great degree of accuracy the number of people in a given group (of 100,000 or more) who are likely to die at each age. Morbidity tables: Charts that indicate to a great degree of accuracy the incidence of sickness and accidents, by age, occurring among a given group of people.


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Reinsurance: is the insurance that one insurance company- known as the ceding company-sells to another insurance company-known as the reinsurer. Retention limit: The maximum amount of insurance that the insurer is willing to carry at its own risk on any one life without transferring some of the risk to a reinsurer. Retrocession: When a reinsurer cedes risks to another reinsurer then that transaction is called a retrocession. The reinsurer to which the risk has been ceded is called a retrocessionaire.

People who are involved in the creation and operation of an insurance policy Applicant: The person or business that applies for an insurance policy. Policy owner: The person or business that owns the insurance policy. Insured: The person whose life or health is insured under the policy. Third-party policy: When one person purchases insurance on the life of another person. Beneficiary: The person or party the policy owner named to receive the policy benefit.

Assessing the Degree of Risk Underwriting: This is the process of identifying and classifying the degree of risk r epresented by a proposed insured. There are 2 primary stages in this process:

1) Identifyi Identifying ng the the risks that a propo proposed sed insured insured presents. presents. 2) Classifyin Classifying g the degree degree of risk risk that a propos proposed ed insured insured represe represents. nts. Underwriter: The employee of the insurance company who is responsible for underwriting.

Identifying risks Insurers cannot predict when a specific individual will die, become injured, or suffer from illness. But there are a number of factors that can increase or decrease the likelihood that an individual will suffer a loss. The most important of these factors are the following: Physical hazard: Physical characteristic that may increase the likelihood of a loss. Example: A person with a history of heart attacks possesses a physical hazard that will increase the likelihood that the person will die sooner than a person of the same age group and sex without such a physical hazard. Moral hazard: The likelihood that a person may act dishonestly in the insurance transaction. Example: An individual with a confirmed record of illegal behavior is more likely to defraud an insurer than is a person with no such records.

Classifying risks The purpose of classifying a proposed insured into an appropriate risk category is to enable the insurer to determine the equitable premium rate to charge for the requested coverage.


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Underwriting guidelines: Rules of risk selection that are applied by underwriters to classify proposes insureds. The insurer establishes these guidelines. Generally the risk categories that are identified by all underwriting guidelines guidelines are: Propos osed ed insu insured redss that that have have the the like likeli liho hood od of loss loss that that is not not a) Standard Standard risks: Prop significantly greater-than-average. Premium rates that they are charged are standard premium rates. b) Substandard Proposed insured that have significantly significantly greater –than- average average Substandard risks risks: Proposed likelihood of loss but are still found insurable. This category is called special class risks . Premium rates that they are charged are higher and are called the substandard premium rate or special class rate. c) Declined risk : Proposed insureds that are considered to present a risk that is too great for the insurer to cover. d) Preferred risks / Super Preferred risks: Proposed insureds that present a significantly less-than-average likelihood of loss. They are generally charged a lower than standard premium rate.

Insurable Interest Requirement Laws in all states and provinces require that when an insurance policy is issued the policy owner must have an insurable interest in the risk that is insured- the policy owner must be likely to suffer a genuine loss or detriment should the event insured against occurs. Insurable interest requirement in health insurance For health insurance an insurable interest exists if the applicant can demonstrate a genuine risk of economic loss should the proposed insured require medical care or become disabled. Insurable interest requirement in life insurance An insurable interest exists when the policy owner is likely to benefit if the insured continues to live and is likely to suffer some loss or detriment if the insured dies. The figure below shows the family tree of a certain insured. The circles in the bold outline depict the relationships that create an insurable interest in the life of the insured.

Grandfathe r

Grandmother

Mother

Father Uncle

Aunt

Cousin

Sister-inlaw

Brothe r

Insured

Principles of Insurance: Life, Health & Annuities Dated: 26th Feb, 2003 Niece

Nephe w

Siste r

Spouse

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Child

Grandchild

Child’s spouse


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CHAPTER 4: MEETING NEEDS FOR LIFE INSURANCE Points to remember:

1) Insurance Agent / Sales Agent are an authorized person by an insurance Co. to represent the Co. in its dealings with applicants for insurance. 2) Insu Insura ranc ncee meet meetss (a) Individual Individual / Person Personal al needs needs I. Funds to cover final expenses I I. Dependents’ support I I I. Education costs IV. Retirement in income V. Others (b) Busine Business ss needs needs 2. A.I. Funds to cover final expenses

Estate: All things things of of value, called “Assets”. Assets include cash, bank & investment A/Cs, real estate, and ownership interests in business. Estate Plans: A plan to settle one’s Estate as per one’s wishes. The Estate Plan considers the amount of assets and debts that one is likely to have when one dies and how best one can preserve those assets so that that can be passed to one’s heirs. Note: Settling an estate means identifying & collecting the deceased’s property, filing any required tax forms, collecting all debts owed to the deceased, and paying all outstanding debts owed by the deceased. 2. A.II. Dependents’ support

To provide funds to support the family members, if the financially supporting member dies, until they obtain new methods of support or until they adjust to a lower income. In addition, LIP (Life Insurance Policy) can be used to supplement the family’s expense, which is tax-free as well. 2. A.III. Education costs

To insure the education of the children, even after the death of the parents. 2. A.IV. Retirement income

To provide support to individuals with retirement income. Permanent LIP’s accumulated saving savingss will will not not be reduce reduced d if the Insura Insurance nce Compan Company’s y’s invest investmen ments ts lose lose money, rather guarantees that the policy owner will earn at least a specified interest rate on his funds. Moreover, LIP’s provide income tax advantages. (Once the policy owner actually receives the policy values – by canceling the policy and receiving its cash surrender value – he may owe income taxes if he receives more money than he has paid for it)


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2. a.V. Other Personal needs for LI To donate the proceeds of the LIP to a charitable organization, such as a Church or an Education Educational al Instituti Institution. on. In this case, the premiums premiums are deductible deductible for federal federal income tax purposes.

2. B. Business needs

A Key Person person / employ employee ee whose whose contin continued ued partic participa ipatio tion n in the Person is a person business is necessary to the success of the business and whose death would cause a significant financial loss. A Business Continuation Insurance Plan is an insurance plan designed to enable a business owner (or owners) to continue business operation if the owner or the Key Person dies. A C losely losely Held Business is a sole proprietorship / partnership / corporation that are owned by only a few individuals. This might need to establish a BCIP. the proc proces esss of sell sellin ing g off off for for cash cash a busi busine ness ss’’ asse assets ts of the the Liquidation is the deceased, such as its building, inventory, etc, and using that cash to pay the business’s debts. Any funds remaining are then distributed among the owners of the business. Buy-Sell Agreement is an agreement in which (1) one party agrees to purchase the financial interest that the 2 nd party holds in the business following the 2 nd party’s death and (2) the 2 nd party agrees to direct his estate to sell his interest in the business to the purchasing party. The BSAs vary based upon the form of the business organization as follows:

Buy-Sell Agreements Sole Proprietorship BSA

Partnership BSA

Closely Held Corporation BSA

1) Sole Proprietorship BSA: Here the 1st party is the owner and the 2 nd party is an employee having the ability & the drive to take over the business after the owner’s death. The 1st party will identify the 2 nd party. The 2nd party, however, may not have sufficient assets to fund the purchase of the business. In that case, individual LIP is the common way to fund for him.

2) Partnership BSA: Here the 1st party is one partner & the 2 nd party is the other partner(s).


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3) The purchase of the deceased partner can be accomplished by one of the two methods – (I) Cross Purchase Method or (II) Entity Method. (I)

In Cross Purchase Method, each partner agrees to purchase a propo proporti rtiona onate te share share of the deceas deceased ed partne partner’s r’s interes interestt in the partn partners ership hip.. Each Each partne partnerr funds funds the the BSA by purch purchasi asing ng an insurance policy on the life of each of the other partners. Thus each each part partne nerr owns owns,, pays pays the the prem premiu ium m on, on, and and is the the named named beneficiary of a policy on the life of each of the other partners. When a partner dies, other partners receive the proceeds of a LIP and can use those proceeds to purchase the proportionate of the deceased partner’s ownership interest in the partnership.

(II)

In Entity Method, partnership, p, rather rather than the individu individual al Method, the partnershi partners, agrees to purchase the share of the deceased partner and distribute a proportionate share of that ownership interest to the surviving partners. The partnership purchases an LIP on the life of each of the partners, pays the premiums and is the named beneficiary of each policy. When a partner dies, the partnership uses the LIP proceeds to purchase the deceased partner’s share in the business from the deceased’s estate.

4) Closely Held Corporation BSA: It is similar to the Partnership BSA. Here also they can have their BSA either in Cross Purchase Method or in Entity Method. In the Entity Method, the Corporation buys the policies on each of the owners’ lives. Key Person Life Insurance:

A key person could be an owner / a partner / an employee of the business. In Key Person Life Insurance, the corporation owns, pays the premiums on, and is the beneficiary of the Insurance Plan. Life Insurance as an Employee Benefit:

Here Employers pay for all or part of the employee benefits as part of the total package under which the Co. compensate its employees. Employers may even offer individual benefit plans to certain employees along with the one that all other employees receive. There are two types of individual life insurance benefit plans – (I) Split-Dollar LIP and (II) Deferred Compensation Plan. (I) Split-Dollar LIP is an agreement under which a business provides individual LIPs for certain selected employees who share in paying the cost of the policies. The employer agrees to pay the portion of each annual premium that is equal to the amount by which the policy’s cash value will increase that year. The employee agrees to pay the remainder of the premium. If the employee dies while the policy is in force, in most such cases, the emplo employe yerr will will rece receiv ivee an amou amount nt equa equall to what what it paid paid for for the the poli policy cy;; the the beneficiary named by the employee will receive the remainder of the policy proceeds. If the employee retires or leaves the firm, the employee will be the


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owner of the policy but must reimburse the employer for the premiums it paid on the employee’s behalf. (II) Deferred Compensation Plans is a plan established by an employer to provide income benefits benefits to an employee employee at a later later date, date, such as the employee’s employee’s retirement, retirement, if the employee does not voluntarily terminate the employment before that date. For this the employee needs to defer a part of his/her current compensation until some future future date. date. The employ employer er uses uses this this defer deferred red compen compensat sation ion to purcha purchase se an insura insurance nce policy policy on the employ employee’ ee’ss life. life. Thus Thus the employ employer er owns, owns, pays pays the premium for and is the named beneficiary of that policy. Note that, the policy is not a part of the Deferred Compensation Agreement between the employer & the employee, rather is the funding instrument for the agreement.


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CHAPTER 5: THE INSURANCE POLICY

Contract: A contract is a legally enforceable agreement between 2 or more parties. The parties are bound to carry out the promises they made when entering into the contract, any violation would be termed as breach of contract and can be legally challenged. Types of Contracts: 1) Formal Formal and Inform Informal al contra contracts cts.. FORMAL The type of contract in which the requ requiireme remen nts conc conceernin rning g the the form form of agreement are met E.g.:- Lease deed agreement which an owner and tenant have to enter before the tenant can occupy the house.

INFORMAL (I) * The type of contract in which the requirement concerning concerning the substance substance of agreement agreement are met.

E.g.:- Life and health insurance contracts.

Should be in written form and the Document Can be Written or Oral. In Canada however should have some form Seal to be legally provincial laws require Insurance contracts to enforceable be in writing.

Advantages of written contracts in case of life and health insurance contracts:

a) The written contract puts to rest any sort of confusion over the terms of agreement. Without it legal problems might arise. b) The written written contract provides a permanent record of agreement. agreement.

2) Unilateral & Bilateral contracts. UNILATERAL (I) * Only one party makes the legally enforceable promises.

BILATERAL (I) * Both Both part partie iess make make lega legall lly y enfo enforc rcea eabl blee Prom Promis ises es so that that both both are are cont contra ract ctua uall lly y bound.

E.g.:- A life insurance policy is a Unilateral contract in the sense that Policy holder can discontinue as and when he wishes, however the Insurer Insurer is legall legally y bou bound nd to provid providee to pro provi vid de cove covera rage ge in retu return rn for for Stat Stated ed premium as long as the Premium is paid.

3) Commut Commutati ative ve and and Aleat Aleatory ory cont contrac racts. ts. COMMUTATIVE The parties parties specify specify values values in advanc advancee that that

ALEATORY (I) * One party provide providess someth something ing of value value to


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they would exchange, moreover moreover items and ano another ther in exch exchan ange ge for for a cond condit itio iona nall services are exchanged between parties are of promise. Only if the event occurs promise relatively equal values. must must be perf perfor orme med. d. Serv Servic ices es can can be of unequal values. E.g.:E.g.:- Constr Construct uction ion of hou house se where where owner owner E.g.:- Life insurance policy in which the pays the contractor a promised sum when the insurer pays the insured certain sum only if house is completed. the insured dies.

4) Bargai Bargainin ning g and and Adhes Adhesion ion contra contracts cts.. BARGAINING Both parties as equals set terms and conditions of the agreement.

ADHESION (I) * One party prepares it and the other accepts or rejects as a whole.

* The (I) indicates that insurance contract fall under this category. Contracts can also be classified on the basis of their legal status. Valid contract: One that is enforceable at law. Void: One that was never enforceable at law. Voidable: A contract which is otherwise enforceable may have grounds to reject or to

• • •

avoid it.

Formation of valid Life/Health insurance contract involves 4 general requirements. •

The parties to the contract must manifest their mutual assent to terms of contract.

In case of life/health insurance policies the parties reach this mutual assent through a process of “Offer” and “Acceptance” in which one party makes an offer and another accepts it. •

The parties to the contract must have contractual capacity.

The insurance company must have the legal capacity to issue policy. They should be licensed or authorized by proper regulatory authority to do business. As far as the individual is concerned he/she shouldn’t be a minor or lack mental capacity. A minor is a person who has not attained the age of majority (18 in Canada and in most states in the US). If a minor takes an insurance policy then the beneficiary must be a member of the minor’s immediate family. In case an insurer issues a policy to a minor, then the company has to provide the promised insurance protection. The minor, however avoid the policy and the company would have to return the paid premiums. The contract entered into by a mentally incompetent person is void. The contract entered into by a mentally impaired (drug addicts, drunker, or insane) is generally voidable by the mentally impaired person. •

The parties to the contract must exchange legally adequate consideration.


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The applic applicati ation on and the first first premiu premium m are usuall usually y consid considere ered d for a life life insura insurance nce contract. Until the first premium is paid a valid contract is not entered into. •

The contract must be for a lawful purpose. No contract can be made for a purpose which is unlawful. Such a contract is a void contract. E.g.:- A contract that requires one person to kill would never be legally enforceable. The primary purpose of all insurance is to protect against financial loss, not to provide means of possible financial gain. If the insurable interest is not met a valid contract is not formed. However if the insurable interest is met at the time the contract was made, a continuing insurable interest is not required.

These requirements must be met when life/health insurance policies are formed. Insurance policy as a property Property: A bundle of rights a person has with respect to something. It is of two types. Real Property: is land and whatever is growing on or affixed to the land. Personal Property: All property other than the real property. It includes tangible goods such as clothing, furniture, and automobiles, as well as intangible property such as contractual rights. The insurance policies are Intangible personal property, as it represents intangible legal rights that have value and that can be enforced by the courts. Ownership of Property: is the sum of all the legal rights that exist in that property. The legal rights an owner has in property include the right to use and enjoy the property and the right to dispose of the property.

Rights of policy owner: 1) Right Right to name name the benefi beneficia ciary. ry. 2) Right Right to disp dispose ose the polic policy. y.


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CHARTER 6: PRICING LIFE INSURANCE.

In order for an insurer to have enough money available to pay policy benefits when they become due, the insurer determines the premium the company must charge for the specific insurance coverage. In this chapter we shall discuss the methods evolved over the years for determining life insurance premiums Methods of Funding Life Insurance. Mutual Benefit Method: - Here the money is collected after the death of the person who was insured. This method was also known as post death assessment method. Each member of a mutual benefit society agreed to pay an equal amount of money when any other member died. This method had three main drawbacks---- 1) Collection of money. 2) Recruitment of new members. 3) As the members grew older, the number of deaths increased in each year. Assessment Method: - Under this method the insurance company estimated their cost for certain period of time, usually for one year. The organization then divided this amount among the participants. This method also faced the same drawbacks as the above method. Legal Reserve System: - This is the modern pricing system and is based on proper calculation and collection of premiums for the death benefit of the insured. The premium is directly related to the amount of risk covered. This system is based on laws requiring that insurance company should maintain Policy Reserves. Premium Rate Calculations.

Insurance Company employs specialist, known as actuaries, who are responsible for calculating the premium rates the company will charge for its products. Premium rates must be adequate for the company to have enough money to pay policy benefits. Premium rates must be equitable so that each policy owner is charged premiums that reflect the degree of the risk covered. The following factors govern the premium calculations: Rate of mortality. Investment earnings. Expenses. • • •

Rate of Mortality.

Following are the key points: 1. Bloc Block k of of pol polic icie ies. s. 2. Mo Mort rtal alit ity y Tab Table les. s. a) Expected mortality. b) Mortality experience.

therefore ore,, are charts charts that that show show the death death rates rates an insure insurerr may reason reasonabl ably y Mortality Tables, theref anticipat anticipatee among a particula particularr group group of insured lives at certain certain ages-that is, how many people in each age group may be expected to die in a particular year. Although the rates that actually occur may fluctuate from group to group, the fluctuations will tend to offset one another, being higher in


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one group and lower in the other. In general, the higher the mortality rate, the higher the premium will be charged. It is the task of the underwriter to evaluate the risk of a group and to fix the premium for the group. The risk is generally categorized as – Standard Risk, Substandard Risk, Decline Risk. Following are the important points about the Mortality Tables: For both the sexes mortality rates start high at birth and decreases dramatically at age 1. For both sexes the mortality rates steadily decreases until about an age of 10. For males the mortality rates increases sharply during teenage years, decreases in the mid 20s and then rises again in the early 30s At any given age the mortality rate for the women is lower than the corresponding mortality rate of males. •

• •

•

Investment Earnings.

Premium dollars are the primary source of funds used to pay life insurance claims. Because most polic policies ies are in force force for some some time time before before they they become become payab payable, le, insura insurance nce compan companies ies have have premium dollars to invest. The earnings from these investments provide the company to charge fewer premiums. Any investment earning can be expressed as rate of return. Expenses.

A policies net premium is the amount that the insurer should pay in order to provide the benefits. The net premium depends on 3 factors: Mortality rate. Investment Earnings. Lapse rate. (The rate at which the policies are dropped due to non-payment of premiums.) To this net premium the Insurance Company adds their operating costs, known as loading. This total amount is known as gross premium. • • •

The Level Premium Pricing System.

The level premium system allows the purchaser to pay the same amount of premium amount each year the policy is in force. It is used to price whole life insurance, term insurance that provides coverage for than one year, and endowment insurance. In this system higher premium rates are charged, than what required, during the early years of the policy. The extra money charged is invested and the return is used to meet greater risks during the later stage of the policy.

Policies with Nonguranteed Returns.

In our discussion, however, we have assumed that once each pricing element is assigned a value and the premium is set for a particular policy, the pricing process is finished. That is not always the case. For several type of policy the price can change even after it has been issued The first method is by paying policy dividends. The second method is by changing pricing elements as the policy is in force.

Policy Dividends.

Insurance policies.

Principles of Insurance: Life, Health & Annuities Dated: 26th Feb, 2003 Participating policies

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Participating policies are the one where the policy owners share the company’s divisible surplus. Surplus is the amount by which company’s assets exceed company’s liabilities. The share of the divi divisi sibl blee surp surplu luss that that the the poli policy cy owne ownerr rece receiv ives es is know known n as policy issuing ng policy dividend. dividend. By issui parti particip cipati ating ng polici policies, es, insura insurance nce compan companies ies can return return money money to the policy policy owner owner when when the condition is favorable, yet establish premium rates that will be sufficient to meet unfavorable conditions. A participating policy contains a policy dividend provision that gives the policy owner several choices in the way policy dividends can be used. These choices are known as dividend options. Laws in the United States and Canada do not require insurance companies to declare regular policy dividends; the only thing that they need to indicate is when they will declare policy dividends. Non-participating policies are the one where the policy owners do not share the divisible surplus. Genera Generally lly the the premiu premium m paid paid for non non-pa -parti rticip cipati ating ng polici policies es is less less than than the premiu premium m paid paid for participating policies of the same type.

Changes in Pricing Factors.

Certain policies mention all the cost elements and their minimum and maximum value. Based on these such a policy may declare a minimum or maximum rate of return. When the insurer gives a high rate of return the cost of the policy is reduced. The cost also depends on mortality rate. If the experienced mortality rate is less than expected mortality rate then the price of the policy is effectively reduced. With reference to Chp-1 Stock Companies Companies can issue both participating and non-participating policies. In the past Mutual Fund Companies issued only participating policies. Today Mutual Companies issues non-participating policies (with changing pricing factors) but in order to do so it demutualizes a part of it as a subsidiary Stock Company. Life Insurance Reserves.

Life Insurance Reserves

Liabilities for the Company.

Policy Reserves.

Contingency Reserves.

represent entss the amoun amountt an insure insurerr estima estimates tes it will will need need to polic policy y benefi benefits. ts. Policy Policy Reserves Reserves repres Insurance companies must acquire assets that will exceed policy reserve so that they have funds to


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claims. To calculate the policy reserve liability the companies uses conservative mortality table that shows higher mortality rate than other available tables. By using conservative mortality table the companies set aside a greater amount of assets against policy reserve than it will be necessary to pay the claims. At any moment of time the difference between the Face amount – the amount that will be paid as a death benefit – and the policy reserve is known as the insurance company’s net amount at risk for the policy. Therefore with time policy reserve increases and the net amount of risk decreases. Contingency Reserves: - An insurance company must be able to pay death claims even when the conditions are not favorable. As for example during an epidemic the mortality rate will increase rapidly and the policy reserve may not be sufficient to pay the death claims. In order to cope up with this kind of situations, a part of the loading added to net premium is kept as a reserve. This is known as Contingency Reserve.


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CHAPTER 7: TERM LIFE INSURANCE

The type of policy where the insured is covered only for a particular period of time. Policy Benefit is payable if: 1. Insure Insured d dies dies during during the the speci specifie fied d time time and 2. Poli Policy cy is in effe effect ct..

The specific period of time when the policy is active is called policy term. After the policy term ends insurance provides option of continuing insurance. If it is not continued then the policy coverage ends there. Policy anniversary: The date on which policy became effective. Term policy can be an independent policy or a rider also. A rider, also known as endorsement, is an amendment to an existing policy to either extend or curtail the benefits payable under the contract. Types of Term Insurance:

1. Level Term Life Insurance: 1. Death benefit benefit remains remains the same same through throughout out the policy policy term. 2. Thus Amount Amount of each renewable renewable premium premium remains remains same.

2. Decreasing Term Life Insurance •

•

The death benefit keeps on going down with time. Example: A $50,000 policy in first year, becomes $40,000 policy in 2 nd year and so on. The amount of renewable premium remains same .

Types of Decreasing Term Life Insurance: •

Mortgage Redemption Insurance

This policy is designed to provide a death benefit amount that corresponds to the decreasing amount owed on a mortgage loan. The amount of the outstanding principal balance on a mortgage loan gradually decreases with time. It is designed so that the amount of benefit payable at any point of time equals the amount the borrower owes on the loan. The renewal premium of the policy is generally level throughout. When the insured dies the benefit is paid to the beneficiary. The intent is that the beneficiaries will payoff the balance on the loan using the benefit received. But the beneficiary is not bound legally to make the payoff. Therefore, mortgage lender puts condition to purchase this policy and put the name of the lender as beneficiary. Joint Mortgage Redemption Insurance:


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Same as Mortgage Redemption Insurance but covers a couple. The policy expires if both insured live throughout the policy term. If one of them dies other gets the benefit. Credit Life Insurance •

This is a similar product but protects against loan or credit card bills. For this the lender is tied up as beneficiary and gets the payoff for the credit card balance from the benefit of the insurance The loan could be furniture loan, personal loan, car loan etc. •

Family Income Coverage

This This polic policy y provi provides des a state stated d monthl monthly y income income benefi benefitt amoun amountt to the insure insured’s d’s surviving spouse if insured dies with policy term. The benefit continues till the end of the term specified. This is decreasing term since more the insured lives, lesser the amount insurer has to pay out as monthly benefit. Usually there is a minimum stated number of months that insurer ensures to pay. Example: A 10-year term policy which provides $1000 monthly family coverage benefit is owned by X and Y.The minimum stated year is 3. If X dies within the term 2 years from start of policy then benefit = $1000 * 12 months * 8years = $96,000 If X dies within the term 6 years from start of policy then benefit = $1000 * 12 months * 4years = $48,000 If X dies within the term 8 years from start of policy then benefit = $1000 * 12 months * 3years = $36,000 This policy can also be purchased as rider with a whole life insurance.


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3. Increasing Term Life Insurance Just opposite of Decreasing Term Life Insurance.

the rising living cost cost etc. So suppose a $10,000 $10,000 Use: This policy is used to encounter the policy may start like that and keep on increasing by 5% on every anniversary. The insured may choose to freeze this increase at some point of time. The premium increases with the increase in benefit. The policy might be added like a rider to a whole life insurance. Features of Term Life Insurance Policies:  Renewable Term Life Insurance:

This This is a featur featuree which which allows allows a insur insured ed to renew renew the policy policy withou withoutt submit submittin ting g proof proof of insurability for the same term and face amount. One year term policies and riders are usually renewable. They are known as YRT ( Yearly Renewable Term) or ART( Annually Renewable Term) insurance. Limitations:

1. Renewal Renewal might might be limited limited to be contin continued ued till till a certain certain age. 2. Renewal Renewal might might be limited limited to happen happen only only a certain certain number number of of times. times. During renewal, the premium is recalculated based on the attained age of the insured. This causes an increase since mortality risk of a person increases with age. Renewable policies are usually costlier than non-renewable ones.  Convertible Term Life Insurance:

This is a feature which allows a insured to convert the policy to a whole life without submitting proof of insurability. Even if the health of the insured has deteriorated he cannot be excluded since proof of insurability cannot be demanded. Neither the health condition be used to calculate premium. Only factor to be considered is attained age. Limitations:

1. Renewal Renewal might might be limited limited to be contin continued ued till till a certain certain age. 2. Renewal Renewal might might be limited limited to to happen happen only only during during a certain certain time time period period of the term. Convertible policies are usually costlier than non-convertible ones. Since permanent insurance provides a cash value factor hence the premium also increases due to that. The new premium also depends on the effective date of conversion: The effective date could be of 2 types:

1. Attained age Conversion: This is the age of the insured when the conversion took place. Principles of Insurance: Life, Health & Annuities Dated: 26th Feb, 2003

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2. Original Age Conversion: This is the age when insured had the original term policy issued. The premium rate calculated using the attained age conversion is costlier than the original age conversion since the later is based on a younger age. Original age conversion is not allowed in most cases. If allowed then there might be limitation that attained age is not more than 5 years.


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CHAPTER 8: PERMANENT LIFE INSURANCE AND ENDOWMENT INSURANCE Difference between Term Insurance and Permanent Insurance:

1. Term Insurance provides coverage for a specific period of time whereas Permanent Insurance provides coverage throughout the lifetime of insured provided policy is in-force, i.e. active. 2. Term Insurance does not provide cash value whereas permanent does. Permanent Insurance also known as whole life Insurance. Cash Surrender value: The amount policy owner will get if he surrenders the policy at any point of time. Face amount: Typically, every policy has a cash value which keeps on increasing and eventually equals the face amount on the policy. This does not happen until the age 99 or 100. At that age cash value equals face amount. Policy Loan: Any whole life policy which has accrued a cash value can be used to take loan known as policy loan using the cash value as security. Premium payment period: 1. Continuous premium policy Premium is payable throughout the life of the Insured Since premium is payable throughout the life thus premium is usually less than any other policy type Also known as straight life or ordinary life insurance policy 2. Limited payment policy – fixed number of payments a. may be specific number of yrs. b. may be till certain age After all premiums have been paid it is called paid-up policy.

If Insured dies before the end of specified last premium year then insurance will pay the death benefit to the beneficiary and no premium is payable Single premium policy: special case of limited payment policy. Only one premium payable. Reserve buildup speed: Golden rule: Shorter the installments faster the buildup. Thus from faster to slower order: Single Premium Policy-Limited payment policy-Continuous Payment Policy


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Modified Whole Life Insurance:

2 types: 1. Modified Premiums: Premium is low in beginning years and then it rises after that period one time to attain a level premium and that continues for the rest of the life. This is modified premiums. Sometimes, if the change of premium premium frequency is >1 and is attained attained after a series of change then it is known known as Graded Premium Policy. Advantage: Policy owner can afford to buy a policy with higher face amount than he can presently afford. 2. Modified Coverage: Coverage is changed with increasing age. Advantage: If Insured thinks his coverage required might go down later in his/her life then this is an ideal choice. With time financial obligation of people goes down , like house loan paid off, children no more dependent etc. Joint Whole Life Insurance:

Coverage to a couple. If one of them dies then survivor couple gets the benefit and coverage terminates. Also known as first-to-die life insurance. After the death of one spouse the surviving spouse Last Survivor Life Insurance:

The benefit is paid only after both the insured has died and is paid to the beneficiary. Also known as second-to-die life insurance. Premiums are payable only until first survivor dies or may be payable until both dies. The price is less than cost of either 1. 2 Indiv Individu idual al Perm Permane anent nt insu insuran rance ce 2. 1 join jointt perm perman anen entt insu insura ranc ncee Advantage: For couples who want to provide funds to pay estate taxes that maybe levied after the after their deaths. Family Policies:

This is a combination of one whole life insurance for the primary insured and term insurance for spouse and each child. The amount on term insurance is a fraction of the whole life insurance on primary. Example; Father 50,000 Whole Life Spouse 30% 15000 Term Son 20% 10,000 Term Total coverage for Family Policy: 75,000 Each children born in the family is automatically covered on production of proof. The coverage starts usually after 15 years of age. Extra premium maybe charged for added children. Monthly Debit Ordinary:


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• • • • •

This is a whole life insurance but provides less face amount. The policy is sold under home service distribution system by home service agents Agents provide personalized service like collection of premiums Monthly premium Assigned territory of agent is known as debit, agency or account.

Pre Need Funeral Insurance: • • • •

Coverage to handle funeral and burial expenses Sold by funeral homes who are themselves agents Small face amount Funeral homes are mentioned as beneficiary

Universal Life Insurance • • • •

•

Flexible premium Flexible face amounts Flexible Death Benefit amounts Unbundling of pricing factors Mortality o Interest o o Expenses Policy owners can determine premium which translates into coverage

Unbundled Pricing factors: There are 3 factors:

1. Mortality charges: Pays the cost of the life Insurance coverage. This charge typically increases with age since this charge is a measure of the mortality risk which increases with age. This charge is usually less than a specified amount. The charge is expressed in terms of charge /$1000 of net amount of risk. Net Amount of risk = Death Benefit Benefit - Cash Value Value 2. Interest: Guaranteed minimum Interest Rate on policy’s cash value each year Interest rate can be of many types: 1. Could be tied to the market interest rate 2. Could be tied to rate of government investment tool like Treasury bills 3. Could be that it will pay guaranteed interest for first $1000 and higher interest for amount above $1000 4. Could be that if a policy loan has been taken then interest will be less but greater than the guaranteed minimum

3. Expenses: Charges to administer policy How these matters:


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Cash value = ((Premium – Expenses - Mortality Charges + Existing Existing Cash Value)(1 + Interest ) So evidently, Premium + Existing Cash Value should be enough to cover the mortality charges and Expenses. If they become less then Insured is given 60 days time to make a premium payment to cover these expenses. If the payment is not done the policy lapses. Relationship between Death Benefit and Face Amount: Option A Plan: F a c e A m o u n t

Death Benefit

Risk Cash Value

Years

Death Benefit = Face Amount Net Amount at risk = Death Benefit – Cash Value

Option B Plan: F a c e A m o u n t

Death Benefit

Risk Cash Value

Years

Death Benefit = Face Amount + Cash Value Net Amount at risk = Face Amount


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Flexible Face Amount:

After 1 year, the face amount can be increased or decreased. If increased, proof of continued insurability insurability needs to be given since these increases the net risk. If decreased, then care needs to be taken that the policy still meets the minimum limit for an insurance contract. Flexible Premium:

The initial premium might be higher than renewal premiums but both should be sufficient to handle the expenses and mortality charges. The insurance forces to pay a minimum initial premium amount. Policy Loan:

Loans might be taken on the cash value accrued for the policy. Some withdrawal charges are also applied. Federal Regulation on Universal Life Policies:

Federal Regulation Section 7702 Corridor controls that the cash value of a policy does not increase too much above face amount. A certain % is fixed to limit the excess. If it does then it violates the rule for being an insurance product for tax purposes and is considered as investment product. The Insurance products enjoy special benefits for tax purposes and thus this restriction is enforced. In Canada, this rule is stricter and thus Universal Life is rarely sold in Canada. Cash Value Terminology:

Reserve Value Accumulation Value Cash Surrender Value Adjustable Life Insurance:

Net Cash Value

In this type, insured specifies the face amount and premium he can pay and a plan of insura insurance nce is chalke chalked d out out to provi provide de insur insuranc ance. e. The product product can range from a term term insurance to a limited payment whole life policy. Based on change to the premium or face amount either the term can be increased or frequency of premium payment can be reduced. Indeterminate Premium Life Insurance:

In this type 2 premium rates is provided by Insurance companies. 1. Mini Minimu mum m Pre Premi mium um Rate Rate 2. Maxi Maximu mum m Pre Premi mium um Rate Rate The policy starts with the minimum rate for couple of years. In this time period , insurer evaluates the actual mortality, interest and expense bucket and comes up with a premium rate which lies between the previous 2 rates. This modification happens throughout the life of the policy. It enables insurer to be flexible in premium pricing since this way they can change the premium to counter all the expenses.


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Also known as non-guaranteed premium life insurance or variable premium life insurance policy. Interest Sensitive Whole Life Insurance:

In this type 2 premium rates is provided by Insurance companies. 1. Mini Minimu mum m Pre Premi mium um Rate Rate 2. Maxi Maximu mum m Pre Premi mium um Rate Rate This also provides the option to insured that whether he wants favorable changes in pricing assumptions to result in a lower premium or high cash value. Default is cash value increase. Cash Value increase method Differences: Traditional Whole Life Universal Life

Variable Life

Cash Cash value alue increa creasses by Cash Cash valu valuee incr increas eases es by Policy reserves a re periodic premiums and per perio iodi dicc prem premiu iums ms and and maintained separately from interest interest accrued. accrued. The policy policy interest accrued. The policy general investment account. reserves are maintained in a reserves are maintained in a These are known as General Investment General Investment separa separate te accoun accountt in USA where here insur nsurer er Account wher wheree insu insure rer r and segregated account in Account maintains fund from maintains fund from Canada. This This rese reserv rvee is guaranteed insurance guaranteed insurance then then inve invest sted ed in stoc stocks ks,, products. products. bonds, funds etc. Retu Return rnss can can be anti anticcipat ipated ed Retu Return rnss can can be aan ntic ticipat ipated ed Retu Return rnss can can’’t be be aant ntic icip ipat ated ed Death Benefit stable Death Benefit stable Death benefit might get redu reduce ced d with with poor poor sock sock performance Cons Consid ider ered ed as Insu Insura ran nce Cons Consid ider ered ed as Insu Insura ranc ncee Cons Consid idere ered d as secu securi riti ties es product product henc hencee need need to foll follow ow all all SEC regulations Not Applicable Not Applicable Product needs to be registered with NASD Not Applicable Not Applicable Agents need to be licensed with NASD Not Applicable Not Applicable Funds can be changed once every year


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Variable Universal Life Insurance: • •

Also called Universal Life II and Flexible-premium variable life insurance Combines flexible premium and flexible death benefits of Universal Life with investment flexibility and risk of Variable Life

Endowment Insurance:

Provides a specified benefit amount whether the insured lives to the end of the term of coverage or dies during that term. Each policy has a maturity date when the benefits are payable The cash value reaches face amount value on maturity date Thus cash value buildup is much faster. If insured dies, death benefit is paid to beneficiary. Premiums are leveled throughout the term Premium could be single premium or limited premium payment

•

• • • • • •


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CHAPTER 9: SUPPLEMENTARY BENEFITS Policy Riders: A number of benefits can be added to various forms of life insurance policies. These are provided by adding riders to the life insurance policy. In some cases the benefit is provided through standard policy provisions.

Here we describe some of the supplementary benefits that are fairly standard in the industry. SUPPLEMENTAL DISABILITY BENEFITS

Generally classified as a type of health insurance coverage. Some disability benefits however can be added to the coverage provided by a life insurance policy. Mainly there are 3 types of disability benefits that a life insurance policy or policy rider may provide. I. WAIVER OF PREMIUM FOR DISABILITY BENEFIT (WP)

Under this rider the insurer promises to give up – to waive – its right to collect renewal premiums that become due while the insured is totally disabled. In case of a universal life insurance policy, the WP benefit can specify that the: 1) Insurer Insurer will waive waive any mortality mortality and and expense expense charges that that become become due while the the insured insured is totally disabled. OR 2) Insurer will waive the amount of target premium that become due while the insured is totally disabled. Target premium is the amount of premium that, if paid on a regular basis, will maintain the policy in force. Total disability: Usually in a WP rider, total disability will be defined as the insured’s inability to perform essential acts of her own occupation or any other occupation for which she is reasonably suitable by education, training or experience.

Premiums are waived throughout the life of the policy as long as the insured remains totally disabled. She may need to proof her total disability, periodically, to the insurance company. Who pays the premiums waived under a WP benefit? The insurance company pays it. If the policy is one that builds up a cash value, it will continue doing so. In case of a participating policy, the insurance company will continue to pay policy dividends as if the policy owner were paying premiums. Some limitations in the WP benefit: 1. There There may be a waitin waiting g time (usuall (usually y 3-6 months) months) after after the insured insured becomes becomes totall totally y disabled, before the insurer will waive renewable premiums. 2. WP benefit benefit is usually usually availabl availablee to cover only only disabiliti disabilities es that begin begin during during a specified specified age span. For example that age span may be between the age 15 to 65. 3. In most WP riders, riders, once once disability disability begins, begins, interval interval of of payment of of renewal renewal premiums premiums can’t be changed.


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4. Some risks risks are typically typically excluded. excluded. Some of them them are: are: a) Intent Intention ionall ally y self-inf self-inflic licted ted injuri injuries es b) Injuries Injuries suffered suffered while while committ committing ing a crime crime c) Pre-e Pre-exi xist stin ing g condi conditi tion onss d) Injuries Injuries from from any act of of war while while insured insured is in in military military service service II. WAIVER OF PREMIUM FOR PAYOR BENEFIT

This is designed for 3 rd party policies such as juvenile insurance policies. Juvenile insurance policy is issued on the life of a child but is owned and paid for by an adult, usually the child’s parent or legal guardian. WP for payor benefit provides that the insurance company will waive its right to collect a polic policy’s y’s renewa renewable ble premiu premiums ms if the policy policy owner owner – the person person respon responsib sible le for paying paying the premiums – dies or becomes totally disabled.

The two part definition of total disability in case of WP for payor benefits: During the first 2 years of the disability the policy owner is considered to be totally disabled only if he is unable to perform the essential acts of his own occupation. After the 2-year period, the policy owner will be considered to be totally disabled if he is unable to perform the essential acts of any occupation for which he is reasonably suited by education, training or experience. Two important facts related to WP for payor benefit riders: 1) Policy Policy owner owner genera generally lly must provide provide satisfa satisfacto ctory ry evidence evidence of his own insurabi insurabilit lity y in addition to providing evidence of the insurability of the insured. 2) Usually Usually insurance insurance company company will will waive premiums premiums until until the insured insured reaches reaches 18 or 21, when the ownership and control typically typically passes to the insured. This is the case when a WP for payor benefit is added as a rider to a juvenile insurance policy. III. DISABILITY INCOME BENEFIT

Provides a monthly income benefit to he policy owner – insured, if she becomes totally disabled. The definition of a total disability is usually the same in this rider as in WP benefit rider. Typically the amount of the monthly disability income benefit is a stated dollar amount – such as $10 per $1000 of the life coverage. DI benefit also usually includes a waiting period like the WP riders. A point to note ** Policies issued with a disability income benefit generally include a WP benefit as well.

ACCIDENT BENEFITS

Most commonly offered accident benefits are ACCIDENTAL DEATH BENEFIT


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A policy rider, which specifies that if the insured dies as a result of an accident, the insurer will pay the beneficiary an amount of money in addition to the basic death benefit provided by the life insurance policy. Double indemnity benefit: When the amount paid due to the AD benefit is equal to the face amount of the policy. So the total death benefit that the beneficiary gets becomes twice the face amount of the policy.

Generally most AD benefit riders expire when the insured reaches the age 65 or 70. Limitations and exclusions in AD benefits: Some exclusions are: a) Self-i Self-infl nflict icted ed injurie injuriess (causing (causing suicid suicide). e). b) b) WarWar-re rela late ted d acci accide dent nts. s. c) Accide Accidents nts related related to aviat aviation ion activi activitie ties, s, if, during during flight flight insured insured acted acted in any other other capacities other than a passenger. d) An accident accident resulting resulting from from the insured’s insured’s engaging engaging in any illega illegall activities. activities. Sometimes laws might be there which will prevent the insurer from excluding some of these causes from a AD benefit rider. A limitation could be: AD benefit rider might be a payable only if the insured die during a certain time from the actual accident, for example say 3 months. DISMEMBERMENT BENEFIT Accidental death and dismemberment (AD&D) rider specifies that the insurer will pay a stated benefit amount to the insured if an accident causes a loss of any two limbs or sight in both eyes. Amount of the dismemberment benefit is usually equal or lower to the accidental death benefit. Usually AD&D riders state that the insurance company will not pay both AD benefit as well as dismemberment benefit for injuries suffered in the same accident.

ACCELERATED DEATH BENEFITS

This sort of policy benefit became available from the late 1980’s. Accelerated death benefit riders are also called living benefit riders. This rider provides that the policy owner may elect to receive a part or all of the policy’s death benefit before the insured’s death if certain conditions are met. The payment of an accelerated death benefit will reduce the amount of the death benefit that will be available for the beneficiary at the insured’s death. This rider has gained in popularity because of the following reasons: 1) Segment Segment of the populat population ion consist consisting ing of elderly elderly people people is is growing. growing. They require medical care, as they are prone to illness in frequent intervals. 2) Cost of health health care has has contin continued ued to increase increase.. 3) Medical Medical advances advances tend to to postpone postpone death death and prolong prolong the need need for medical medical care. care.


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Insurance companies usually offer accelerated death benefit coverage to only policies with large face amount. This is done to keep their administrative costs down. Commonly offered types of accelerated death benefit riders are discussed here: TERMINAL ILLNESS BENEFIT

TI benefit is a benefit under which the insurer pays a portion of the policy’s death benefit to the policy owner if the insured suffers from a terminal illness and has a physician-certified life expectancy of 12 months or less. Unlike other insurance policy riders, insurance companies usually don’t charge an additional premium for TI benefit rider. The amount of TI benefit payable is generally a stated % of the policy’s face amount. But it is possible that the full face amount is paid as TI benefit in some types of policies. DREAD DISEASE BENEFIT

This is one of the earliest forms of accelerated death benefit offered by insurers. DD benefit as it is popularly known is a benefit under which the insurer agrees to pay a portion of the policy’s face amount to a policy owner if the insurer suffers from one of a number of specified diseases. Point to note **: ** : Another form of dread disease coverage can be purchased as a stand-alone health insurance policy. These specified diseases or medical procedures for which DD benefit is payable are known as insurable events. They usually include Life-threatening cancer AIDS End-stage renal (kidney) failure Myocardial infarction (heart attack) Stroke Coronary bypass surgery May also include: Vital organ transplants Alzheimer’s disease LONG-TERM CARE BENEFIT

A LTC benefit is payable as a monthly benefit to a policy owner if the insured requires constant care for a medical condition. For example, an insured who has severe arthritis or advanced Alzheimer’s disease may need some form of constant care. The types of care that an LTC benefit covers are specified in the rider. Activities of daily living (ADL) include activities such as eating, bathing, dressing, going to the bathroom, getting in and out of bed or a wheelchair, and mobility.


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ADLs are used to determine the eligibility of the insured to receive LTC benefits. ADL assessment can be done by the following methods: 1) Rely Rely on phys physici ician an certi certific ficati ation. on. 2) Contract Contract with with firm, firm, which which speciali specializes zes in ADL assess assessment. ment. 3) Develo Develop p own own ADL ass assess essmen mentt tools tools.. The amount of each monthly LTC benefit payment is generally equal to some stated percentage of the policy’s death benefit. The insurer usually continues to pay monthly LTC benefits until a specified percentage of the policy’s basic death benefit has been paid out. Most LTC benefit riders impose a 90 day waiting period before they are payable. According to some LTC riders, coverage must be in force for a given period of time, usually 1 year or more, before the insured will qualify for LTC benefits. BENEFITS FOR ADDITIONAL INSUREDS

Various riders can be added to life insurance policies to provide benefits if someone other than the policy’s insured dies. These riders take several forms. Here we discuss some of the more common ones in the industry. SPOUSE AND CHILDREN’S INSURANCE RIDER

A spous spousee and childr children’ en’ss insura insurance nce rider rider added added to a perman permanent ent insura insuranc ncee policy policy provid provides es a coverage similar to that provided by a family insurance policy(which is a whole life policy that provides coverage on the insured’s entire family). The coverage provided by this rider is typically sold on the basis of coverage units. In contrast, in the family insurance policy, the coverage provided is typically a percentage of the face amount provided on the life of the insured. Most insurance companies do not provide more than 5 to 10 coverage units. The premium for the children’s coverage is a specified flat amount. It does not change with the number of children in the family. The term insurance coverage on each child expires when that child attains a stated age , usually 21 or 25. Such riders usually have a provision for the child to convert his term insurance rider to an individual life insurance policy, and the coverage amount can also be changed to a certain number of times over the current amount, in such a case. CHILDREN’S INSURANCE RIDER

Similar to the spouse and children’s coverage in its functionality. The spouse coverage is not present. Generally aimed at single parents. SECOND INSURED RIDER

Also called an optional insured rider or an additional insured rider. This rider provides a term insurance coverage on the life of another individual other than the policy’s insured. This second individual is called a Second insured. This individual could be the spouse of the primary insured, his relative or even an unrelated person.


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The amount of the coverage on this second insured is usually unrelated to the coverage that the basic policy provides. The premium amount is based on the risk characteristics of the second insured and not that of the primary insured.

INSURABILTY BENEFITS

Two types of insurability benefits exist.

I.

GUARANTEED INSURABILITY BENEFIT

GI benefit rider is also sometimes referred to as a guaranteed insurability option. This rider when attached to a life insurance policy gives the policy owner the right to buy additional insurance of the same type as to which the rider is attached. To buy these insurance policies the insured does not have to provide evidence for insurability. GI rider guarantees that the policy owner will be able to purchase additional life insurance even though the insured may no longer be in good health. Typically the amount of coverage that the policy owner can buy is limited to the policy’s face amount to which the GI rider is attached or to an amount specified in the GI rider, whichever is smaller. Generally GI benefit can be exercised only up to a certain age (usually age 40). The GI rider can be exercised until this specified age, only on certain dates. If the life insurance policy with a GI rider also includes a WP rider and the insured is disabled at the time an option to purchase additional insurance goes into effect, the insurance company automatically issues the additional life insurance coverage. The insurance company also waives the payment of the renewal premiums for all of the policy’s coverage’s to which the WP rider applies until recovery or death of the insured. II. PAID-UP ADDITIONS OPTION OPTION BENEFIT

This rider allows the owner of a whole life insurance policy to purchase single-premium paid-up additions additions to the policy policy on stated stated dates in the future and thus to increase the amount amount of coverage under the basic policy. Many such riders allow the policy owner to purchase paid-up additional whole life insurance on each policy anniversary. These paid-up additions have their own cash values. Premiums for the paid-up additions are based on the net single premium rate for the coverage at the insured’s age at the time the paid-up additions were purchased. Most riders state that if the policy owner does not exercise the purchase option for a stated number of years, then the rider will terminate. At that time the number of paid-up additions already bought remains in force but the policy owner can no longer exercise the option to buy new paid-up additions.


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CHAPTER 10: LIFE INSURANCE POLICY PROVISIONS

An Insurance policy is a written document that describes the agreement between two parties - the insurer and the policyowners. Here we will know about all the provisions that are typically included in the individual life insurance policies. Regulations of Policy Provisions

In the USA, state laws typically require individual life insurance policies to include specified provisions that spell out the rights of policyowners and the beneficiaries. Other options may be included at the insurer’s options. The SID reviews all these provisions in the Policy form and then approves the policies. In Canada, the common law provinces have all enacted insurance laws patterned, with minor variations, on the Uniform Life Insurance Act. The Uniform Life Insurance Act is a model law adopted by CCIR to regulate life insurance policies. Although, the province of Quebec has not adopted this law but that law is also very similar to this act. These provincial laws require insurers to include certain provisions in the life insurance policies. These provincial laws also directly grant certain rights to the policyowners and impose certain obligations on insurers. Although Canadian laws do not require policies to include provisions spelling out these rights and obligations but the insurers routinely do so. When the applicable insurance laws (in the US or in Canada) require a policy provision, the insurer is free to include a provision that is more favorable to the policyowners than the required. Standard Policy Provisions

Individual life insurance policies generally contain the following standard provisions: 1. 2. 3. 4. 5. 6. 7.

A free free-l -loo ook k prov provis isio ion n An enti entire re cont contra ract ct prov provis isio ion n An incont incontest estabi abilit lity y provis provision ion A gra grace ce peri period od prov provis isio ion n A rein reinst stat atem emen entt prov provis isio ion n A misst misstate atemen mentt of age age or or sex provis provision ion A sett settlem lement ent option optionss prov provisi ision on

In addition addition,, participat participating ing life insurance insurance policies include a policy policy dividends dividends provision provision, and permanent life insurance policies that build a cash value generally must include a nonforfeiture provision and a policy loan provision 1. Free Free-L -Loo ook k Provi Provisi sion on It is also known as free-examination provision that gives the policyowner a stated period of time (usually ten days), after the policy is delivered in which to examine the policy. During this period, the policyowner has the right to cancel the policy and receive a full refund of the initial paid premium. The insurance coverage is in effect throughout the free-look period, or until the policyowner rejects the policy, if sooner. 2. Enti Entire re Con Contra tract ct Pro Provi visi sion on This provision defines the documents that constitute the contract between the parties. This provision prevents oral statements from affecting the terms of the policy and prevents


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controversies from developing regarding the terms of the contractual agreement. Generally the contract can be classified as closed or open. A closed contract is a contract for which only those terms and conditions that are printed in, or attached to the contract are considered to be part of the contract. The entire contract consists of the policy, any attached riders and the attached copy of the application for insurance. Except fraternal insurers, all individual life insurance life policies issued in the USA and Canada are closed contracts. An open contract is a contract that identifies the documents that constitute the contract between the parties, but the enumerated documents are not all attached to the contract. Fraternal insurers (in US and Canada) generally issue policies as open contracts which state that the entire contract consists of the policy and any attached riders, the fraternal society’s society’s charter/co charter/consti nstitutio tution/by n/bylaws, laws, the attached attached declaratio declaration n of insurabil insurability, ity, if any, signed by the applicant. The entire contract provision usually states that Only specified individuals (such as certain officers of the insurer) can change the contract. No change is effective unless made in writing No change is effective will be made unless the policyowner agrees to it in writing •

• •

3. Inco Incont ntes esta tabi bili lity ty Prov Provis isio ion n

According the rules of contract laws, statements made by the parties when they enter into the contract can be classified as either warranties or representations. Warranty: A warranty is a statement made by a contracting party that will invalidate the contract if the statement is not literally true. Representation: A representation is a statement made by a contracting party that will invalidate the contract if the statement is not substantially true.

(Statements made in an application for insurance are considered to be representations rather that warranties.) Misrepresentation: A false or misleading statement in an application for insurance is known as misrepresentation.

misrepres resent entati ation on that that would would affect affect the insura insurance nce Material Misrepresentation: A misrep company’s evaluation of the proposed insured is called as material misrepresentation. Fraudulent Misrepresentation: A misrepresentation that was made with the intent to induce the other party to enter into a contract and that did induce the innocent party to enter into the contract.

The Incontestability Provision describes the time limit within which the insurer has the right to avoid the contract on the ground of material misrepresentation in the application. During evaluation of the application, if the company finds any material misrepresentation it has full right not to issue the policy. But if it has issued a policy and at a later point of time it finds any such statements in the application then the provisions are different in the USA and Canada.


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In United States, the contestable period is two years from the date the policy was issued. This 2 year contestable period is the maximum period permitted by the laws in most states. A period shorter than two years is permitted because that would be more favorable to the policyowner. In Canada, the period is two years from when the policy takes effect or two years from the date it has been reinstated, if later. The provincial insurance laws also contain an exception that an insurer may contest a policy at anytime if the application contained a fraudulent misrepresentation. 4. Gr Grac acee Per Perio iod d Pro Provi visi sion on

Insurance laws in the US and Canada require every individual life insurance policy to state the period of grace within which a required renewal premium may be paid. The grace period is a specified length of time within which a renewal premium that is due may be paid without penalty. Minimum grace period: 30 or 31 days ( in US and Canada) If a renewal premium is not paid by the end of the grace period, the policy is said to be lapse. Some insurers, however, do not consider a policy as having lapsed if that policy has cash value (described later). In case of a universal life insurance policy, the grace period will begin on either: (1) (1) the the date date on which which the the cash cash value value is insuff insuffic icie ient nt to cover cover the the policy’s policy’s entire monthly monthly mortality mortality and expense expense charges; charges; grace period is 61 or 61 days (2) the date date on which the the cash value value is zero; grace grace period period is 30 or 31 days. The provision also states that the insurer should notify (at least 30 or 31 days before) the policyowner that the cash value is insufficient to meet the policy charges and that the coverage will terminate if the policyowner does not make the payment that is large enough to cover these expenses. 5. Policy Policy Loans Loans and and Policy Policy withd withdraw rawal al Provis Provision ion The Policy Loan Provision grants the owner of a life insurance policy the right to take out a loan for an amount that does not exceed the policy’s net cash value less one year’s interest on the loan.

Policy loan differs from a commercial loan in two ways: The policyowner is not legally obligated to repay a policy loan. However he may repay it partially or fully anytime. The insurance company does not perform a credit check on a policyowner who requests a policy loan. •

•

The Policy withdrawal Provision , also called as partial surrender provision, permits the policyowner to reduce the amount in the policy’s cash value by withdrawing up to the amount of the cash value in cash. The insurers do not charge any interest on policy withdrawals. 6. Rein Reinst stat atem emen entt Prov Provis isio ion n


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Reinstatement is the process by which a life insurance company puts back into force a policy that has either been terminated because of nonpayment of renewal premiums • bee been n cont contin inue ued d unde underr the the exte extend nded ed term term or reduc reduced ed paid paid-u -up p insu insuran rance ce • nonforfeiture option

Most insurers do not permit reinstatement if the policyowner has surrendered the policy for its cash surrender value. In the US, about one-half of the states require individual life insurance policies to include this provision and the laws require policies at least a 3-year period during which the policyowner has the right to reinstate a policy that has lapsed. It may be longer also depending on the insurer. Laws in Canadian provinces and territories also require individual life insurance policies to include a reinstatement provision. Canadian laws specify the minimum reinstatement period as 2 years. A policyowner must fulfill certain conditions to reinstate: The policyowner must complete a reinstatement application within the time frame stated in the reinstatement provision. The policyowner must present satisfactory evidence of the insured’s continued insurability. The policyowner must pay a specified amount of money. The policyowner may be required to either pay any outstanding policy loan or have the policy loan reinstated with the policy. •

•

• •

Also in most US states and provinces in Canada, a new contestable period begins on the date on which the policy is reinstated. During this new contestable period, the company may avoid a reinstated policy only on the basis of material misrepresentations made in the application for reinstatement. Redating: Under this practice, the insurance company changes the policy date to the date on which the policy is reinstated. As a result, the premium rate charged for the redated policy will be based on the insured’s attained age and will be charged for the original policy. 7. Missta Misstatem tement ent of Age Age or or Sex Provis Provision ion This provision describes the action the insurer will take to adjust the amount of the policy benefit in the event that the age or sex of the insured is incorrectly stated. If the insurer finds such error after the death, then it adjust the face amount of the policy to the amount the premium actually paid would have purchased if the insured’s age or sex had been stated correctly. If the the missta misstatem tement ent discov discovere ered d before then the the insu insure rerr may may gran grantt the the before the death, death, then policyowner the option to pay (or receive as a refund) any premium amount difference caused by the misstatement instead of having the insurer adjust the policy’s face amount. 8. Settle Settlemen mentt Opt Option ionss Provis Provision ion It is also called as payout option provision. Such provision grant a policyowner the right to decide how the policy benefits will be paid. 9. Poli Policy cy Divi Divide dend ndss Provi Provisi sion on This This provi provisio sion n gives gives the the policy policyown owners ers the right right to choos choosee from from among among severa severall dividend payout options. Laws in most jurisdictions in the US and Canada require


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parti particip cipati ating ng polic policies ies to descr describe ibe the divid dividend end option optionss that that are availa available ble to the the policyowners. 10. Nonforfeitu Nonforfeiture re Benefits Benefits These benefits are available to the owner of a life insurance policy that builds a cash value. State insurance laws require insurance companies to include non-forfeiture benefits in all individual life insurance policies that build a cash value. Although provincial laws do not require insurance companies to include these in the policies but companies usually do it.

This states states that that a policy policyown owner er who Cash Surren Surrender der value value nonforfeitu nonforfeiture re option: option: This discontinues premium payments can elect to surrender the policy and receive the policy’s cash surrender surrender value. value. Followin Following g the surrender surrender of a policy, policy, all coverage coverage under the policy terminates. The net cash value is the actual amount that a policyowner gets after adjustments of paidup additions additions,, dividend dividend accumulati accumulations, ons, advance premium premium payments payments and policy policy loans outstanding. Laws throughout the US and Canada allows an insurer to reserve the right to defer payment of any policy’s cash surrender value for a period of up to six months after the owner of the policy requests payment. Continued Insurance Coverage Nonforfeiture Options Reduced Paid-Up Insurance: Under this option, the policy’s net cash value is used as a net single premium to purchase paid-up life insurance of the same plan as the original policy. The premium charged is based on the attained age of the insured. The face amount will be smaller than the face value of the original policy. The coverage issued under this option option contin continues ues to have have like like build building ing cash value, value, right right to surren surrender der the polic policy y and receiving dividends. But any supplemental benefits that were available on the original policy such as accidental death benefits are usually not available with the reduced paid-up insurance. Extended Term Insurance: Under this option, the insurance company uses the policy’s net cash value to purchase term insurance for the full coverage amount provided under the original policy for as long a term as the net cash value can provide. The term-length depends upon the amount of the coverage, amount of net cash value, sex of the insured and his attained age. Automatic Nonforfeiture Benefits: This benefit becomes effective automatically when a renewal premium is not paid by the end of the grace period and the insured has not elected another another nonforfeit nonforfeiture ure option. option. The most typical automatic automatic nonforfeiture nonforfeiture benefit is the extended term insurance benefit.

However, the laws in a few jurisdictions require that policies include an Automatic Premium Loan (APL) provision and specify that the automatic nonforfeiture option is the automatic premium loan. This provision states that the insurer will automatically pay an overdue premium for the policyowner by making a loan against the cash value as long as the cash value equals or exceeds the amount of the premium due. Universal life insurance policies usually do not include this provision. Life Insurance Policy Exclusions


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Although laws permit but generally companies does not included these exclusions: war (except for military military or experiment experimental al exclusions clause, aviation exclusion provision (except aircraft or privately owned aircraft’s pilots & crew members). But Suicide exclusion provision is still included in individual life insurance policies. The provision in some policies states that the insurer will pay the larger of the policy’s cash value or the premiums paid for the policy in case it finds that the insured has committed suicide within the two year period after the issue of the policy.


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CHAPTER 11: LIFE INSURANCE BENEFICIARY POLICIES Class Designation: A beneficiary designation that identifies a certain group of persons, rather than naming each person, is called a class designation. Primary Beneficiary: Party designated to receive the policy proceeds following the death of the insured.

Proceed may be divided among the beneficiary if indicated by insured else it gets distributed evenly. In order to receive policy proceed, beneficiary must survive the insured. Also kno known wn as second secondary ary or succes successor sor benef benefici iciary ary.. A contin contingen gentt Contingent Contingent Beneficiary Beneficiary: Also beneficiary receives the policy proceeds if all primary beneficiaries have predeceased the insured. No surviving Beneficiary:

If the insured is dead and all named beneficiaries are also dead then the proceeds are paid to policy owner. If policy owner is dead then the proceeds goes to policy owner’s estate. Preference Beneficiary Clause: If the policy owner does not name a beneficiary then insured keeps a list of stated order of preference and proceed will be paid according to that order.

If no list is also available then the proceed will be paid to the insured’s estate. Facility of Payment: Group Life, monthly debit ordinary etc contain a facility of payment clause which permits the insurance company to pay a little part of the proceed to someone who has incurred funeral expenses on behalf of the insured. Revocable Beneficiary: A beneficiary is called revocable if the policy owner has the unrestricted right to change the beneficiary while alive. Right of revocation: Policy owner’s right to change beneficiary. Irrevocable Beneficiary: Beneficiary where you cannot change your beneficiary without the consent of the beneficiary.

Policy owner loose their right of revocation by one of the 2 methods: m ethods: 1. Policy owner volunteers to give up his rights 2. Legal limitations


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An irrevocable beneficiary has vested interest in the proceeds of the life insurance policy even during the lifetime of the insured. insured. A vested vested interest is a property right that has taken taken effect and cannot be altered or changed without the consent of the person who owns the right.

Rights Rights of any benefi beneficia ciary, ry, includ including ing revoca revocable ble ones, ones, are termin terminate ated d with with the death death of the beneficiary and the policy owner can then nominate a new beneficiary. USA: Community Property Sales

A community property state is one in which , by law, each spouse is entitled to equal share earned by the other and property acquired during the marriage. The The stat states es are: are: ARIZ ARIZON ONA, A, CALI CALIFO FORN RNIA IA,, NEW NEW ME MEXI XICO CO,, LOUISIANA, NEVADA, TEXAS AND WASHINGTON.

WISC WISCON ONSI SIN, N, IDAH IDAHO, O,

Insurance policy is also a property in these states. Thus, even if the other spouse is named as revocable beneficiary, it might be required to take consent of the revocable beneficiary ( spouse) to change change the benefi beneficia ciary ry if the change change hurts hurts the intere interest st of the other other spouse spouse.. Alter Alternat native ively, ly, beneficiary can be changed for only half the proceeds. Canada: Common Law Jurisdiction 1962(applicable to policies before 1962 only) Preferred Beneficiary Law:

A preferred beneficiary classification was maintained for a policy and policy owner can change the beneficiary only within this class without consent or can change to someone outside the group with consent of the group. All ownership rights are revoked as soon as the preferred beneficiary died. Beneficiary for Value: This group is also irrevocable beneficiary. This could be people like who lend money and policy owner names them beneficiary. These people also have vested interest but their rights are not revoked as soon as the value beneficiary dies and his rights are passed to beneficiary’s estate.

These laws were discontinued after the Universal Life Insurance Act of 1962 Beneficiary Change procedure:

1. Recording method: Method of informing the insurance company in writing about the new beneficiary by policy owner. 2. Endorsement Method: Policies have a document attached to the insurance contact and that document contained the beneficiary name.

CHAPTER 12: ADDITIONAL OWNERSHIP RIGHTS

Apart from the right to name the beneficiary, the policy owner has a no# of other valuable rights. These rights with respect to 1. Premium Payments. 2. Poli Policy cy Divi Divide dend ndss


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3. Sett Settle leme ment nt Op Opti tion ons. s.

Among these some rights vary depending on the type of the policy. PREMIUM PAYMENTS :

The policy owner has the right to choose Premium Payment Mode (frequency) Premium Payment Method 1.A. .A.

PREMIUM PA PAYMENT MO MODE

This is the frequency at which renewal premiums are payable and both the insurer & the the poli policy cy owne ownerr must must agree agree to that that mode frequency ncy can be mode of paymen payment. t. The freque annual/semiannual/quarterly/monthly. The applicant selects anyone of these modes at the time of application but holds the right to change it after the policy is in force. However, the policy owner cannot select a mode that results in a premium less than the required minimum. For example, if the minimum premium for monthly mode is $20, the policy owner has to pay that. Otherwise he would be required to choose a less frequent mode of payment, such as quarterly or semi annually. 1.B. .B.

PREMIU EMIUM M PAYMEN YMENT T METH METHOD OD

The policy owner can pay the premium a) In person person to the the Home Home Office Office / an an authoriz authorized ed Branch Branch Office Office

b) By mail: - The P/Owner receives a premium notice fro the Ins. Co. before each premium premium due date. In most cases the P/Owner P/Owner returns returns a portion of the notice along with the premium payment. The P/Owner may pay the premium in cash / by MO / by check. c) By auto automa mati ticc paym paymen entt tech techni niqu ques es:: - The The most most comm common on auto automa mati ticc paym paymen entt techniques include 

Preauthorized Check (PAC): The P/Owne P/Ownerr autho authoriz rizes es the Ins. Ins. Co. to genera generate te checks checks agains againstt the P/Owner’s checking/savings A/C. The Ins. Co. sends these checks there directly for payment. The P/Owner also authorizes the Bank/the Savings Institution to honor these checks & deduct the funds directly from the P/Owner’s A/C. The P/Owner usually receives a notification of each such transaction on his/her bank statement.



Electronic Funds Transfer (EFT): The P/Owner authorizes his/her bank to pay the premiums automatically on premium due dates. The premium is simply transferred from the bank to the insurer w/o any paper check. The P/Owner receives a notification only of each such transaction on his/her bank statement.



Payroll Deduction:


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In this this partic particula ularr case case the cooper cooperati ation on of the P/Owne P/Owner’s r’s employ employer er is needed needed.. The employ employer er deduct deductss insura insurance nce premiu premium m direc directly tly from from the employee’s paycheck.

Advantages of Automatic Premium Payment Methods:

1. 2. 3.

4.

Reduced insurer’s administrative expenses for policies with monthly/quarterly premium payments mode. Redu Reduce ced d the the inst nstance ancess in which hich the the P/Ow /Owners ners forge orgett to pay ren renewal ewal premiums. As a cons conseq eque uenc nce, e, most most insu insure rers rs reduc reducee the the extr extraa char charge gess that that woul would d otherwise otherwise be added for semiannual semiannual/quar /quarterly terly/mon /monthly thly premium premium payment payment mode. Some Some insur insurer erss offer offer quarte quarterl rly/ y/mo mont nthl hly y premiu premium m paymen paymentt mode modess only for for those P/Owners who have selected an automatic payment technique.

Note: The sales agents are authorized to accept only the initial premium. So thru them the policy owner cannot pay his/her renewal premium. Exception: Home service agents are authorized to accept renewal premium.

POLICY DIVIDEND OPTIONS: Policy Dividend: This is the insurer’s divisible surplus that is shared among the P/Owners having the participating policies. General Terms & Conditions: 1) The poli policy cy must must be a partici participat pating ing one. one. 2) The policy policy is is suppo supposed sed be in in force force for a long long period period of time. 3) The divide dividend nd is payable payable on the the policy’s policy’s anniv anniversary ersary date. 4) The policy policy must must me in force force for for a certain certain (generally (generally 2 years, years, may may vary from one insurer to another) period of time before the policy is eligible for the dividend. 5) The amount payable as policy dividend is determined annually by the Board of Directors of the Insurance Co.

What does the dividend amount reflect? 1) The insurer’ insurer’ss actual mortali mortality, ty, interest interest,, and expenses expenses during during that that year. 2) The The pla plan n of of ins insur uran ance ce.. 3) The policy policy’s ’s prem premium ium amount amount.. 4) The The leng length th of time the poli policy cy has has been been in force. force. (Gen (Gener eral ally ly the the divi divide dend nd amount increase substantially with the age of the policy) What is meant by Dividend Options? Dividend options refer to a number of different ways in which the P/Owners of participating LIPs receive policy dividends. There are five such options. The P/Owner can select any of these five options at the time of applic applicati ation on & that that can be chang changed ed any time. time. Certai Certain n restri restricti ctions ons are applie applied d for Additional Term Insurance Option.


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The Five Options are: 1) Cash Dividend Option: The insurer sends the P/Owner a check in the amount of the policy dividend that was declared. For some policies, if the check is not cashed within a stated period, then the insurer will apply the amount of the dividend under another option.

2) Premium Reduction Dividend Option: The insurer applies the policy dividends towards the payment of the renewal premiums. The insurer notifies the P/Owner of the amount amount of the policy policy divid dividend end and bills bills for the differen difference, ce, if any, any, betwee between n the premium amount & the amount of the policy dividend.

3) Accumulation at Interest Dividend Option: The dividends are let on deposit with the insurer to accumulate at interest. Allows the P/Owner to withdraw a part/all of these dividends & the accumulated interest at any time during the life of the policy. If the P/Owner surrenders the policy he is eligible to get the accumulated value of the policy dividends along with the surrender value of the policy. In case the insured dies, it goes to the named beneficiary.

4) Paid-up Paid-up Additional Additional Insurance Insurance Dividend Dividend Option: Option: The insurer uses any declared P/Dividend as a net single premium to purchase Paid-up Additional Insurance on the insured’s life and this is issued on the same plan as the basic policy and in whatever face amount the dividend can provide at the insured’s attained age.


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Advantages of this option: A) The premium charged, does not include the amount to cover expenses. So the cost is lesser than a new LIP. B) Does not require establishing the insurable interest. C) If the basic policy is one that builds cash value, then the paid-up additions purchased with policy dividends will also build cash value and the P/Owner has the right to surrender those additions for their cash value at any time while the policy is in force. D) Though Though the face amount amount of paid-u paid-up p additi additions ons,, purch purchase ased d each each year, year, is relatively small, over the life of the policy, the total additional insurance available can be substantial.

The insu insure rerr uses uses each each poli policy cy Additiona onall Ter Term m Insura Insurance nce Divide Dividend nd Opt Option ion:: The 5) Additi divide dividend nd as a net single single premiu premium m to purcha purchase se one-ye one-year ar Term Insurance Insurance on the insured’s life. This is often called the Fifth Option. Restrictions applied to the Fifth Option: A) The max amount amount of 1-year 1-year term insurance. insurance. That could could be purchased purchased each each year is often limited to the amount of the policy’s cash value. B) Does require require establishi establishing ng the insurable insurable interes interestt in case, the P/Owner P/Owner wishes wishes to change from another dividend option to this one. Note: If the annual policy dividend is larger than the premium reqd. for the 1-year term ins., the insurer will apply the remaining under any of the other options.

SETTLEMENT OPTIONS:

This comes into the picture if LIP when it’s the time for the insurer to pay the proceeds to the beneficiaries after the insured dies. Normally insurer pays a lump sum directly to the beneficiary in the form of a check. Apart from lump-sum settlements of policy proceeds, Ins. Cos. provide several alternative method methodss of receiv receiving ing the the procee proceeds ds of a LIP. LIP. These These altern alternati ative ve method methodss are called called Settlement Options. What is Settlement Agreement? When the P/Owner selects an optional mode settlement mode at any time while the policy is in force, a contractual agreement, called Settlement Agreement, is done. This agreement governs the rights & the obligations of the parties after the insured’s death.

The P/Owner has the right to select any such option, shift to some other option and select any of the settlement modes . Two types of Settlement Settlement Mode are available. Irrevocable: The beneficiary is not allowed to A) shift to any other settlement option once the proceeds become payable. irrevocab cable. le. Defa B) Revocable: If not irrevo Defaul ultt is revocable if the settlement mode is not specified at the time of application. What is Supplementary Contract? This is a settlement agreement between the Ins. Co. & the beneficiary when the later selects a settlement mode, as the insured did not.


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Who is a Payee? The person/party who is supposed to receive the proceeds as per the terms of a settlement agreement is referred to as the Payee. Who is a Contingent Payee? A Contingent payee / Successor payee is one who will receive any proceeds still payable at the time of the payee’s death. What are the common settlement options? Four options are normally available. 1) Inte Intere rest st Opti Option on 2) Fixe Fixedd-Pe Peri riod od Opti Option on 3) Fixe Fixedd-Am Amou ount nt Opti Option on 4) Life Life Inc Incom omee Opti Option on



Interest Option: Under Under this this the insure insurerr invest investss the policy policy procee proceeds ds and perio periodic dicall ally y pays pays the interest on those proceeds to the payee. It guarantees at least a specified minimum interest rate.



Fixed-Period Option: Under this the insurer agrees to pay the policy proceeds in installments of equal amounts to the payee for a specified period of time. Each payment will consist partly of the policy proceeds & partly of the interest earned on the proceeds. Here also at least a specified minimum interest rate is guaranteed.



Fixed-Amount Option: Under this the insurer pays equal installments of a stated amount until the (policy proceeds + interest earned) are exhausted. Here also at least a specified minimum interest rate is guaranteed.

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Life Income Option: Under this the insurer agrees to pay the policy proceeds in periodic installments over the payee’s lifetime. Here basically the Ins. Co. agrees to use the policy proceeds as the net single premium to purchase a life annuity for the beneficiary.


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What is a Life Annuity? Life annuity is an annuity that provides periodic benefits for at least the lifetime of a named individual. The beneficiary of a Life Income Option can choose one among of the several types of annuities and based upon the type of the annuity there are the following types of Life Income Option:  Straight Life Income Option – The policy proceeds are used to purchase a straight life annuity . It guarantees that the periodic benefits will be made throughout the lifetime of the annuitant.  Life Income with Period Certain Option -- The policy proceeds are used

to purchase a life income annuity with period certain. It guarantees that the periodic benefits will be made throughout the lifetime of the annuitant as well as guarantees that the payments will be made for at least a certain period, even after the annuitant dies before the end of that period.  Refund Life Income Option -- The policy proceeds are used to purchase a

life income with refund annuity. It provides the periodic benefits will be made throughout the lifetime of the annuitant as well as guarantees that at least the purchase price of the annuity will be paid in benefits.  Joint & Survivorship Life Income Option -- The policy proceeds are

used used to purch purchase ase a joint provides es a series series of joint & survivor survivor annuity. annuity. It provid payments to two or more individuals & those payments will continue until both or all the individuals die.

TRANSFER OF POLICY OWNERSHIP: O WNERSHIP:

If the owner of a life insurance policy has the contractual capacity, then she has the right to transfer ownership of some or all of her rights in the policy. Following are the two ways of transferring ownership: agreement under Transfer of ownership by Assignment: - An assignment is an agreement • which one party transfers some or all of his rights in a particular property to another party. The property owner who transfers the right is known as assignor; the party to whom the rights are transferred is known as assignee. The restrictions to assignment are: - 1) The assignor should have the contractual capacity. 2) In case of an irrevocable beneficiary or for a beneficiary of the preferred class in Canada, the assignment can only be done with the consent of the beneficiary. Because the right to assign any property is granted by law, insurers are not required to give the policy owner notice of his rights to assign a life insurance polic policy. y. Most Most life life insur insuranc ancee polici policies, es, howeve however, r, do not includ includee assign assignmen mentt provisions. The assignment provision describes the roles of the insurer and the policyowner roles during an assignment. The insurance company is not obliged to act in accorda accordance nce to the provi provisio sion n unless unless it receiv receives es a writte written n docume document. nt. It generally provided by the assignee. As the insurance company is not liable for the validity of an assignment it considers an assignment to be valid whenever it receives a written document. However the insurer might check the validity where it has the preknowledge about the contractual inability of the policyowner. Types of assignment: 1. Absolute assignment is the one where complete transfer of rights occurs. Thus the assignor no longer has any right and the assignee becomes the policy owner. The transfer can be as a gift, where there is no exchange of


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money, or as a sale of the policy where an equivalent amount of money is exchanged. life insu insura ranc ncee poli policy cy is a temp tempor orar ary y Collateral assignmen assignmentt of a life 2. Collateral assignment of the monetary value of a life insurance policy as collateral— security – for a loan. This type of assignment differs from the previous one as limited to to those those ownership ownership rights a) the collateral assignee’s rights are limited that directly concern the monetary value of the policy; as for example the rights to select the beneficiary or the policy dividend dividend option remains with the assignor, but the assignor can not take any policy loan or surrender the policy as these decision are related to the monetary value of the policy. b) the collateral assignee has a vested right to a policy’s monetary values, but the rights are limited; because of this the assignor has right over the amount of indebtedness. Thus when the policy proceeds will be paid the only the amount that the assignor owes will be paid to the assignee. c) the collateral assignee’s right to the policy values are temporary. If the assignor pays back the assignor then the assignment terminates. Once the loan loan is repaid repaid the assigno assignorr secure securess a releas releasee from from the assignee assignee and forwards it to the insurance company to cancel the assignment. Problems resulting from assignment: - The most common problem arises when the assign assignmen mentt is not notifi notified ed to the the insura insurance nce compan company y throug through h a writte written n document. If the insurer was not notified of the assignment before it paid the policy benefits, then it has no liability to pay the proceeds again to the assignee. •

Transfer of Ownership by Endorsement: - Many life insurance companies in United States specify endorsement method of transferring ownership. Under this method, ownership is transferred without requiring the owner to enter a separate contract. This is generally used where the policy is transferred as a gift. According to this provision, in order to change the ownership the present owner must notify the insurance company, in writing. When the insurer records the change, change actual actually ly become becomess effect effective ive from from the date date when when the policy policy owner owner signed signed the the noti notifi fica cati tion on.. The The poli policy cy must must be retu return rned ed to the the comp compan any y to incl includ udee the the endorsement and to transfer the ownership. But in certain situations only a written document can be considered to transfer the ownership (as for example in case of an unfriendly divorce.)


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CHAPTER 13: PAYING LIFE INSURANCE POLICY PROCEEDS.

this chapte chapterr we shall shall discu discuss the routine routine proces processs follow followed ed by the the Life Life Insura Insurance nce In this Companies to process the life insurance claims. The claim examination process begins when the claimant to policy proceeds notifies the insurance company that the insured has died. Typically, the person who claims for the policy proceed is the primary beneficiary. Upon being notified o the insured death, the insurance company typically provides the claimant with a claim form on which the claimant provides the insurer the information the insurer needs to begin processing the claim. In United States it is mandatory to provide claim form within 15 days from the day of requisition but in Canada there is no such hard and fast rule. Proof of Loss.

Along Along with the claim form the claimant claimant must also provide provide the proof proof for the death of the insured. In United States generally the official death certificate is produced but in Canada, most insurance insurance company will accept accept official official death certificate, certificate, an Attending Attending Physician Physician Statement Statement (APS), a coroner’s certificate of death. Claim Examination Process.

The The insu insura ranc ncee comp compan any y empl employ oyee ee who who is resp respon onsi sibl blee for for carr carryi ying ng out out the the clai claim m examination process is generally known as claim examiner. The following things are determined: Status of Policy: - The claim examiner must check whether the policy was in force when the insured died. Identification of the insured: - The claim examiner examines the identity proof present in the Claim from and the Proof of loss form with the information provided in the compan company’s y’s policy policy record records. s. A claim claim is consid considere ered d as fraudulen when the claiman claimantt fraudulentt claim when intentio intentionally nally attempts attempts to collect collect policy proceeds proceeds by providing providing false information. information. A claim is considered as a mistaken claim when the claimant makes an honest mistake while making a claim. Verificati Verification on of Policy Policy Coverage: Coverage: - The examiner must review the terms of insurance to determine what type of coverage it provides. Policies that contain exclusion criteria provide that if the insurer dies if the insurer dies due to excluded causes then the insurer is not liable to pay the proceeds. Identifying the Proper Payee: - Once the validation of the claim has been done the examiner now needs to identify the rightful owner of the benefits. The examiner generally follows the following flow chart. There are 3 situations that require further investigation by the claim examiner- common disasters, short-term survivorship, and conflicting claimants. Sometimes both the insured and the primary beneficiary die due to a common disaster. In this case the general law of Unites States and Canada states that If the insured and the beneficiary die at the same time or under circumstances that make impossible to determine which of them died first, then policy proceeds are payable as if the insured survived the beneficiary. If the beneficiary survived the insured but died before the insurer paid the proceeds then it becomes payable to beneficiary’s estate. The policyowner, however, may prefer that the proceeds be pad to someone other than the beneficiary’s heirs if the beneficiary survives the insured. Some insurance company includes common disaster clause or time clause , according to this the beneficiary must survive the insured by a specified days, such as 30 or 60 days. If the beneficiary does not survive that period then the policy proceeds will be given as if that the beneficiary deceased the insured.


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Proceeds Payable to policy owner, if living;

Approve to Pa Clai Claim ms.

NO NO Primary Beneficiar y?

YES

NO

Livi ng? YES Pay the Primar

Contingen t Beneficiar y? YES Livi ng?

NO YES

Other Continge nt Beneficia ry?

Pay the Contingent

In most cases the primary beneficiary makes the claim. In US in case of conflicting claims the insurance company can take the help of an interpleader. Interpleader is a procedure under which an insurance company that cannot determine the proper claimant may go to the court in order to seek advice or decision. The court may hold the policy proceeds and would release the insurer from any further liability. The court would then judge the rightful owner. In Canada, for common law system the insurer pays to the court and then the court judges the proper recipient. This is known as payment into court. In Quebec, an insurance company may to the Minister of finance. The Minister holds the proceeds until the court settles the rightful recipient. calculate ate the polic policy y Determ Determini ining ng the Amount Amount of the Death Death Ben Benefi efit: t: - To calcul proceeds the examiner will add certain things and would deduct other things. The examiner first adds the following items: The amount of any basic death benefits payable ( In most cases this is equal • to the face amount. If the policy was in force under the reduced paid-up insurance nonforfeiture option then the basic death benefit may be reduced, also if the insured sex was misstated.) The accidental benefits payable. • The accumulated policy dividends, including interests. • The face amount of any paid-up additions. • The amount of any unearned premiums paid in advance. • After adding these, the examiner deducts the following things to determine the final proceeds payable. The amount of any outstanding policy loans. • The amount of any premium due and unpaid. [This item appears if the • insured died during the policy grace period before the premium has been paid.


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Payment of Policy Proceeds.

The insurance company requires the recipient of life insurance policy proceeds to sign a written document, known as release. By signing this document, the claimant states that he has received full payment of his claim to the proceeds of a life insurance policy and that he releases the company from all sort of claims. In order for such a release form to be valid and binding on the claimant, he must have the legal capacity required to provide the release. Claimants who are minors or does not have sound mental capacity do not have the capacity to provide a release. One way in which the insurance company can obtain a valid release when the beneficiary does not have the legal capacity, is by paying the proceeds to a court-appointed guardian. The expenses for appointing a guardian by the court are borne by the claimant. In some situations where policy proceeds are payable to a minor, an insurance company may hold the proceeds at an interest to a future date. This is generally the day when the minor reaches majority or the court appoints a guardian who can give a valid release to the insurance company.

Special Claim Situations.

There are policies that may contain exclusion criteria. The claim examiner may pays attention to death claims where the policy is contestable, the policy provides accidental benefits, the insured disappeared or the beneficiary is responsible for insured death. Policy Contest: - If any policy contains misinterpretation, then the insurer has the right to avoid the contract during the policy’s contest period (which is usually 2 years from the date when the policy becomes effective). Insurers in Canada have the right of canceling the contract at moment of time based on fraud contracts. If the claim examiner has enough ground to prove prove the charge of material material misinterp misinterpretat retation, ion, then the insurance insurance company may cancel cancel the contract and may refund the premiums paid for the policy. Typically, the claim department consults the legal department of the company before contesting a policy on the ground of material misinterpretation. Accidental Death Benefit Claim: - When a claim for accidental death benefit comes to an insurer the claim examiner will determine whether the claim falls under policy’s definition of “ accidental”. In order to validate the examiner may ask for the following: 1. Proof of loss. 2. APS. 3. Autopsy report. The examiner may demand the above documents in case where: - a) unusual circumstances surrounds the death of the insured; b) the policy provides accidental benefit; c) the insured dies within the contest period of the policy. When a clai claim m appe appears ars agai agains nstt the the Disa Disapp ppea eara ranc ncee of the the Insu Insure red: d: - When disappearance of the insured the claimant does not have enough proof to support his claim. In this situation the insurance company cannot pay the proceeds. The claimant has the right to go to the court to declare the insured as dead. If the insured disappeared under circumstances that made it likely he is dead, then the court may be willing to find that the insured is dead. If the insured disappeared without explanation, courts typically will find that the insured is dead or presumed to be dead only if (1) the insured has been missing for certain period of time, typically seven years (2) (2) a dili dilige gent nt but but unsu unsucce ccess ssfu full sear search ch has has been been done done for for the the insu insured red (3) (3) no one one has has had had commun communica icatio tion n with with the insure insured d since since he disapp disappear eared. ed. Upon Upon receiv receiving ing the court court order order the insurance company may pay the proceeds to the claimant if the policy is in force to the presumed death of the insured. insured. Thus when an insured insured disappears disappears the beneficiary beneficiary,, the policy owner, or any other interested party will have to pay the due renewal premiums that will be due to keep the policy in force. In any case where the policy lapses before the court issues the order then the insurer will have no liability.


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Beneficiary Wrongfully Kills the Insured: - Throughout Canada and United States, a beneficiary who is convicted in a criminal court proceeding of intentionally killing the insured is not eligible to receive the proceeds. In certain states and throughout in Canada if the beneficiary is convicted of less crime- like manslaughtering- is not eligible to receive the policy proceeds. In Quebec the civil laws are more stringent as it revokes the beneficiary rights if the beneficiary attempts to kill the insured, even if the attempt fails. Without the outcome of the criminal court the civil can determine that the beneficiary has wrongfully killed the insured. In most cases where the beneficiary is denied of the proceeds the insurer is liable to pay to someone —may be the contingent beneficiary. If however, it is proven that the policy was taken to earn benef benefit it by killin killing g the insure insured, d, then then the lawful lawful purpo purpose se requir requireme ement nt is not satisf satisfied ied and and the insurance policy becomes void.


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CHAPTER 14: PRINCIPLES OF GROUP INSURANCE POLICY

Group insurance policy covers a number of people rather than an individual or one family. The Group insurance policy contract is called “ Master Group Insurance Contract”. The contract is between the insurance company ( Group Insurer) and the Group Policyholder. The role of Group Policyholder is almost same as that of a Policyowner of an individual insurance policy. But here, the Policyowner has some ownership rights, which Group Policyholder doesn’t have, like naming the beneficiary. The insured people under the Group insurance policy is called as Group insured (in US), Group life insured (in Canada, for life insurance), and Group person insured (in Canada, for health insurance). The Group insurance policy is of two types: Non-contributory Plan: In this plan, the insured group members are not required to • contribute any part of the premium. Contributory Plan: In this plan, the insured group members have to pay some or all of • the premium part. Formation of the Contract

These are the four requirements for a group insurance contract. Mutually agree to the contract’s terms Both parties must have the contractual capacity Must exchange legally adequate considerations Must form the contract for a lawful purpose The first three are same as that of an individual policy contract. The last point is somewhat different here. In case of an individual contract, the presence of insurable interest must be present for this. But in case of a group contract, the purpose of benefit is sufficient to verify the fourth point, not necessarily the insurable interest. • • • •

The Policyholder distributes a written document ( Certificate of Insurance) to the group insureds that describes: Coverage the contract provides Group insureds’ rights under the contract Group Insureds are also called as Certificate holder . Sometimes, the coverage, the benefits and the rights are mentioned in a booklet, called as, Special Benefit booklet. • •

Group Insurance Underwriting

Since group insurance doesn’t require the evidence of insurability so the underwriter focuses on the characteristics of the group. These are the Group Underwriting Considerations: •

Reason for the group’s existence: As per the insurance laws in the US, there are seven groups that are eligible for getting a group policy. These are 1. Single-Employer Group: The policyholder of a single-employer group insurance contract is either the employer or the trustees of a trust fund created by the


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employ employer, er, and the employee employeess are the insure insured d group group member members. s. A trust is a fiduciary relationship in which one or more persons ( trustees) hold legal title to property (trust fund) for the benefit of another person ( trust beneficiary). A fiduciary is a person who holds a position of special trust.

2. Labor Union Group: The contract is issued to a labor union to insure the members of the labor union. The federal Taft-Hartley Act in the US prohibits employers employers from making making premium premium contribut contributions ions on behalf behalf of employees employees who belong to a labor union unless the contract is issued to a trust established for the purpose of purchasing insurance for union members. Labor union groups are also called as Taft-Hartley trustees or negotiated trusteeships.

3. Multiple-employer Group: A group insurance contract insuring the employees of more than one employer may be issued to a trust that is created by a) two or more employers b) two or more labor unions or 3) one or more employers and one or more labor unions.

4. Debtor-Creditor Group: These groups consist primarily of persons who have borrowed funds from a lending institution, such as a bank. The creditor is the policyholder.

5. Credit Union Group: This group consists of the members of one or more credit unions.

6. Association Groups: These associations are formed for a purpose other than to obtain insurance. These are the associations that are eligible for group insurance. a) Trade Association: An association of firms that operate in a specific industry associati ation on of indivi individu duals als who who share share a b) Professional Association: An associ common occupation. Ex: Medical Doctors, Engineers, attorneys c) Public Employee Association: An association of individuals employed by a state, county, or city government or by a state or local school board d) Common Interest Association: An association of individuals who share a common state or a common interest. Ex: retired persons, alumni of a specific college, participants of a specific sport

7. Discretionary Groups: Groups that does not fit in the above groups but SID approv approves es for group group insur insuranc ancee covera coverage ge in called called as Discre Discretio tionar nary y group group.. In evaluating whether to approve such a group, SID consider factors such as whether issuing the policy is in the best interest of the public and whether the policy benefits are reasonable in relation to the premiums that will be charged for the coverage. Except Employee-Employer group, other group policyholders usually are not required to pay a portion of the group insurance premium. •

Size of the group: The size of the group has a strong impact on the underwriter’s ability to predict the group’s probable loss rate. The larger the group, the more likely that the group will experience a loss rate that approximates the predicted loss rate. When the group policy was introduced, minimum 50 people were required in the group for policies. But now days, insurers are issuing the group policies for 10 to 15 group insureds


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also. In case of small groups, group insurers may ask to submit satisfactory evidence of insurability for each group insureds separately. •

Flow of new member in the group: Young and new members are needed 1) to replace those who leave the group so that the size stable, 2) to keep the age distribution of the group stable.

•

Stability of the group: If the group does not remain a group for a reasonable length of time then the administrative cost in issuing a policy would become high. Ex: a group of temporary and seasonal workers

•

the US, US, most most stat statee laws laws requ requir iree all all elig eligib ible le Partic Participa ipatio tion n level level of the group: group: In the employees to participate in a non-contributory plan (100% participation level). But in case of a contributory plan, the participation level should be a minimum of 75%. But it varies from state to state, also depends upon the insurer. The provincial laws in Canada do not impose minimum participation requirements.

•

Benefit Benefit levels: levels: The group policyholder works with the insurer to establish the death benefit levels provided to the insureds in a fair manner to avoid antiselection. Some group policies allow covered group members to select additional coverage from a schedule of option optional al covera coverages ges.. In these these situat situation ionss the group group insure insurerr minimi minimizes zes the the effect effectss of antiselection by 1) limiting the optional coverages and 2) retaining the right to reject an insureds’ election of the optional coverage if the benefit levels are high and the insureds cannot provide satisfactory evidence of insurability.

•

Activities of the group: A group is assigned a risk classification – Standard, Substandard, or declined based on the group’s normal activities. Ex: a group of coal miners is substandard.

Group Insurance Policy Provisions •

Eligibility Requirements: Policies are permitted by law to define eligible employees related to conditions of employment such as salary, occupation, or length of employment. Some group policies provide coverage both for group members and for their dependents. But generally the dependents does not have the right to name the beneficiary of his coverage, instead the group member will be the beneficiary for dependents’ coverage.

For new members, these are the two provisions: provision: An employee must be actively at work (rather than on leave Actively-at-work provision: or ill) on the day the coverage is to take effect Probationary Period provision: It states the length of time (usually 1 to 6 months) that a new member must wait before becoming eligible to enroll in the group insurance plan. This period is called Probationary period. But if the plan is contributory, then this period is followed by eligibility period (enrollment period), usually 31days. This is the time during which a new member may first enroll for coverage. As part of the enrollment process, the employee must sign a written authorization to make payroll deduction. If any employee wants to enroll in the plan after eligibility period then she can join only after submitting satisfactory evidence of insurability.


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•

Grace period Provision: 31 days. But if the policy terminates after the grace period because of non-payment of the renewal premiums, the policyholder is legally obligated to pay the premium during the grace period.

•

Incontestability Provision: Contestable period is same as for the individual policies. But in case of group policies this provision also allows an insurance company to contest an individual group member’s coverage without contesting the validity of the master group contract.

•

Termination Provisions: 1. Terminatio policyholder may Termination n of the Group Insurance Insurance Policy: Policy: The group policyholder terminate the policy at any time by notifying the insurer in writing. The insurance company also has the right to terminate the policy on any premium due date, if certain conditions are met like participation levels. The insurer must provide a written notification to the policyholder in advance regarding termination with the date. 2. Termination of the Group Insured’s Coverage: The coverage of the group insured will terminate if the group insured a) ceases to be a member of specified class b) terminates her employment of group membership, or 3) fails to make a required contribution to the premium.

Group Insurance Premiums Unlike individual policies, the premium rate for a group policy usually recalculated every year. Insurers use three kind of ratings to establish the initial premium rate and to calculate the renewal premium rates in succeeding years. •

•

•

method od to calc calcul ulat atio ion n by whic which h the the insu insurer rer uses uses its its own own past past Manual Manual Rating: Rating: A meth experience (and other insurers’) to estimate a group’s expected claims and expenses. Experience Rating: A method to calculation by which the insurer considers the particular group’s prior claims and expense experience. this meth method od,, insu insure rerr uses uses a comb combin inat atio ion n of Manual and Blende Blended d Rating Rating:: : In this Experience Ratings.

Premium Rate: Set every year and stated as a rate per $1,000 of death benefit provided by the policy Premium Amount: Actual premium paid to the insurer for the coverage, varies every month depending on the coverage Premium Refunds: It is usually called dividends. Companies that do not issue participating policies generally call these refunds as Experience refund. It is payable to group policyholder, even if the plan is contributory. And in case of a contributory plan policyholder doesn’t share the refunds with the groupmembers until the refund exceeds the policyholder’s premium part and in case of excess, the employer may apply it to pay a portion of the employees’ employees’ contribu contributions tions during next year or to pay for addition additional al benefits benefits for covered covered employees. Group Plan Administration Insurer-administered Plan: The insurer keeps the contain name of each plan participants, the amount of insurance on each participant, and name of each beneficiary.


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The grou group p poli policy cyho hold lder er keep keepss the the cont contai ain n name name of each each plan plan Self-admin Self-administer istered ed Plan: Plan: The participants, the amount of insurance on each participant, and name of each beneficiary. But in either case, the insurer receives monthly reports regarding the composition of the group and any changes in the group.


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CHAPTER 15: GROUP LIFE INSURANCE.

We begin our discussion of group life insurance by describing how group life insurance is regulated in the United States and Canada and some provisions that typically include group life insurance. Then we shall discuss the various types of group life insurance policies and finally we shall discuss how group creditor life insurance policies differ from other forms of group life insurance. Regulation of Group Life Insurance. Regulation of Employee Benefits: - State, provincial, federal legislature has enacted laws designed to ensure that all employers are treated equally in the workplace. Employment laws prohibit any sort of discrimination regarding hiring, advancement, wage, and other terms and condition. Terms and condition includes employee benefits such as group life insurance. Thus the employer must ensure that all benefit plans comply with laws. A numb number er of fed federal eral laws laws in U.S. U.S. regu regula late te the the grou group p insu insura ranc ncee poli polici cies es 1) Age Discrimina Discrimination tion in Employmen Employmentt Act (ADEA) (ADEA) 2) Americans Americans with Disabili Disabilities ties Act (ADA) 3) Employment Retirement Income Security Act(ERISA). Most of the employee-employer group life and health insurance in U.S. must comply with ERISA. ERISA defines any plan as a welfare benefit plan that an employer establishes to provide specified facilities to the plan participant and their beneficiary. ERISA also contains detailed provisions that regulate employer-sponsored retirement plans. ERISA requires the welfare benefit plans to be maintained accordance a written document, which shall describe: The benefits that are provided by the plan How the plan be funded The procedure that will be followed to make amendments in the plan •

  

The written document must also mention the names of the fiduciaries. ERISA sets detailed plan for them. They are responsible for the benefit of the plan. In case of any loss they are personally respon responsib sible. le. ERISA ERISA impose imposess a lot of disclo disclosu sure re and reportin reporting g laws laws for a plan. plan. The plan administrator is responsible for ensuring that the welfare plan complies with the disclosure and reporting laws. A summary plan description must be providing to each of the participants and federal Department of Labor (DOL). An annual report must be filled to Internal Revenue Service (IRS). •

State and Provincial Regulation of Insurance: - In most of U.S. have enacted laws based on the NAIC Group Life Insurance Model Act (NAIC Model Act) and thus the laws are fairly uniform across the states. In Canada, common law jurisdictions, the insurance laws are based on the Uniform Insurance Act . In Quebec, individual and group insurance policies are according to the Quebec Civil Code. In addition to these the CLHIA governs certain aspects of group insurance. These laws list the groups that are eligible for group insurance and the various provisions that must be included in the policies.


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Group Life Insurance Policy Provisions.

In this section we shall explain the typical provisions that are included in the group insurance policies: 1. Benefit Amounts:- Every group life insurance policy must identify the amount- or the method to determine the amount that the insurer will pay the group insured. Benefit schedule defines the amount for the group insured. One type is that the benefit may be calculated on the basis of a formula, as for example some multiple of the salary received by the group insured. The other type specifies amount coverage either (1) for all group insured or (2) for each class of group insured. If the insurance coverage covers the dependents then the policy includes a separa separate te benefi benefitt schedu schedule le that that define definess the the depend dependent ent benefi benefit. t. Insura Insurance nce compan company y requirements and the laws of many jurisdictions require that the amount of coverage provided on the dependents should be less than the benefit paid to the group insured.

2. Beneficiary Designation: - Under the terms of a group life insurance policy—unless it is a credit creditor or group group life life policy policy—ea —each ch insure insured d group group member member has the right right to name name a beneficiary who will receive the insurance benefit that is payable when the group insured dies. The insured group member has the right of revocation and the not the policyowner. If the policy has dependent coverage then the group insured has the right to designate the beneficiary in this case also. According to NAIC model Act, only sums up to $2000 can be paid as f acility acility payment clause.

3. Conversion Privilege: - The NAIC Model Act and the CLHIA Guidelines require group life insurance policies to include a conversion privilege. The conversion privilege allows the group insured whose coverage terminates for certain reasons to convert her group insurance to individual coverage. There are two cases for which the group insured’s group coverage may terminate – (1) the group insured falls out of the group; (2) the group insurance terminates. Insured’s Eligibility for Group Insurance Terminates: In order to execute the conversion privilege the insured must apply for the individual policy and must pay the initi initial al premiu premium m within within 31 days days from from the the day of termin terminati ation on of his group insura insurance nce coverage. In accordance to NAIC Model Act, unlike CLHIA Group Guidelines, many group life insurance companies allows conversion only after the age of 65 yrs. In general the insured can buy any type of individual policy that insurer have at that time but the benefit of the policy is limited. Many group insurance companies allows to convert to the face amount of the original group life insurance, but most of the insurance company, in accordance to the NAIC Model Act and CLHIA Group guidelines, state that the face amount of the individual policy may not exceed the difference between (1) the amount of the group insured’s coverage under the original group life policy and (2) the amount of the group coverage for which the insured will become entitled within the 31 days conversion period. In addition to this the CLHIA guidelines states that the face amount of such policy to limit to $20,000. Group Life Insurance Policy Terminates: According to the NAIC Model Act the Conversion privilege remains to a group insured if the group insurance policy remained in force for five years before termination. In such a situation the insured can buy a individual policy without submitting the proof of insurability within the conversion period of 31 days. The maximum coverage is equal to the lesser of either (1) $10,000 (2) the amount of coverage in force under the group plan minus the amount of group coverage for which the insured becomes entitled within 31 days of the policy’s termination. In Canada, the CLHIA Guidelines direct that group life insurance policy to include WP rider. So incase the policy terminates, then the disabled member’s plan will continue as though the policy remained in effect.


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Extension of Death Benefit: The NAIC Model Act states that if the group insured dies within the conversion period without converting her policy to an individual policy then the insurer is bound to pay the amount that would have been covered if the insured had opted for an individual policy. In Canada there is no such provision but the insurance companies generally put a similar provisions.

4. Misstatement of Age: - The amount of the benefit payable is decided by the benefit schedule. Thus in case of a misstatement of age, most of the group insurance policy states that if the amount of the premium is wrong due to misstatement of age, then the insurer will retroactively adjust the amount of the premium required for the coverage to reflect the correct age.

5. Settlement Options: - Generally the policy proceeds are paid in the lump-sum mode. Sometimes settlement options are given; then in that case all the usual modes of settlement options are made available. Group Life Insurance Plans.

1. Group Term Life Insurance: - 99% of the group life insurance polices are of YRT. Evidence Evidence of the insurability insurability is not required required from the group insureds insureds each year when the coverage is renewed. These term policies do not build any cash value and the insurer has the right to change the premium amount every year. Federal income tax laws consider the employer’s contribution to policy premium as a taxable income. In United States, except for certain policies, gives a certain tax relaxation regarding this matter. For this an employee can receive up to $50,000 of non-contributory group term insurance coverage. Thus if any coverage exceeds $50,000 then the employer has to pay income tax for the employer contribution for the excess of $50,000. Group YRT is someti sometimes mes used used to pay supple supplemen mentar tary y benefi benefits, ts, as for exampl examplee survivor income plan. This plan provides periodic payments to the survived dependents. Most of the policies pay a certain percentage of the group insured salary at the death time. For example the plan may pay (1) 20% of the Salary to the survivor spouse if there is no dependent child; (2) 30% if there is any dependent child. The benefits paid to the surviving spouse will continue until the earlier of (1) to a certain time after the spouse remarries; (2) the spouse reaches age of 65 years. The benefit paid to the unmarried child may continue to (1) 19 years of age, the time by when she becomes a full-time student (2) till the child is no longer a full time student or she reaches an age of 23 years, whichever earlier. As in the pervious case if the total the total coverage exceeds $50,000, then the employee must pay income tax on the premium amounts that the employer pays for the excess coverage. 2. Accidental Death and Dismemberment Plans: - AD&D benefits may be included as a part of the group insurance or they may be given as separate plans. The low cost of AD&D makes it an attractive policy. When accidental death benefit is added to a group insurance policy, then generally the coverage is equal to basic benefit of the group insurance coverage. Many companies provide accidental death benefit due to travel to its employees. In such a situation the benefit is given if the accident occurs if an accident occurs while travelling for the company.

3. Group Permanent Plans: - Group permanent plans are less popular since they do not receive any tax privilege. In most cases the group permanent policies are issued as supplementary coverage . This means that the coverage is provided as optional basis or as additions to group term insurance coverage. Generally the following plans are available under this plan: -


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plan is genera generally lly couple coupled d with with decreas decreasing ing term term Group Paid-Up Paid-Up Plans: Plans: The plan insurance. The plans are contributory; the premium paid by the employee is used for buying single premium paid-up permanent policy. The premium paid by the employer is used to provide the group decreasing term insurance coverage. The total coverage under the paid up policies increases every year and the term coverage decreases every year thus keeping the total coverage to a predetermined limit. The same logic regarding the income tax also applies in this case. Level premiu premium m group group polici policies es are also also Level Level Premiu Premium m Whole Whole Life Life Plans: Plans: Level available. It is generally paid-up whole life policy at the age 65 years. Because these policies have cash value, employers use these to provide retirement benefit. If the plan is non-contributory then the employee does not have any vested right on the policy, thus it the policy terminates then the accumulated cash value goes to the employer. If the plan is contributory then the employee has the vested right upon the amount of the cash value accrued by the premium paid by her. A small portion of the premium paid by the employer for this type of policies. Group Universal Life Plans: Group Universal Life Plans are very similar to individual life insurance policies. Here the employee has the right to choose the premium he wants to pay. Generally the employer does not pay anything. Group underwriting methods may be used, but if the coverage is very high then the insurer may ask for the proof of insurability. The employee may also increase or decrease the coverage, in case of increment the insurer may ask for proof of insurability. The expenses for group universal life insurance coverage are less than corresponding individual universal insurance policy. Group Universal Life Insurance Policies are known as portable coverage, which means that the group universal plans can be carried as group plans even if the group insured falls out of the group. 4. Group Creditor Life Insurance: - This sort of plans is issued to creditors to cover the life of the present or the future debtors. Unlike all group life insurance plans, here the creditor is the named beneficiary. At any time the amount of the benefit is the outstanding loan. Most Mo st insu insura ranc ncee comp compan any y limi limits ts the the amou amount nt of the the cove coverag ragee and and the the time time peri period od irrespective of the loan. The premium for the group life insurance coverage is usually paid by the debtor, although it may be entirely paid by the creditor or the may be shared by the debtor and the creditor. The State and Provincial laws states a limit to premium paid by the debtor. It is generally expressed as the amount per $1000 of the coverage. If the debtor has to pay the premium then the debtor has the right to refuse to buy such a policy. The debtor needs to buy any sort of insurance against the loan but the creditor can not bound him to but the group creditor cre ditor life insurance.


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CHAPTER 16: ANNUITIES AND INDIVIDUAL RETIREMENT SAVINGS PLANS

Definition of Annuity: In general terms an annuity is a series of periodic payments. In the financial services industry, the term annuity means a contract under which one party-the insurer-promises to make a series of periodic payments in exchange for a premium or a series of premiums. The need of annuity: Annuity protect against the financial risk of outliving one’s financial resources. Who can issue annuity? Historically, by law, only insurance companies. Other providers of financial services now market annuity products issued by insurers. Some of these providers may wish to issue annuities in the long run. The Annuity Contract: The terms of an annuity contract govern the rights and duties of the contracting parties. The parties to an annuity contract are the •

•

The insurer that issued the contract and The person who applied for and purchased the contract, known as the contract holder.

The insurer will issue a policy to the contract holder, which will contain all the terms of the contractual agreement entered into by the parties. Annuities can be of two types: Individual Group • •

As per the terms of the contract the contract holder will pay the insurer a series of premiums or a single premium. Premiums that the insurers receive for annuities are generally referred to as annuity considerations. The insurer calculates the amount of the periodic annuity benefit payments that it will be liable to pay under as annuity policy based on the following basic mathematical concept: A sum of money, known as principal, that is invested for a certain period of time at a stated rate of interest can be paid out in a series of periodic payments-in an annuity-over a stated period of time. Some important facts and figures: Individual and Group Annuities in force in 1998 (as a percentage of premiums): In USA: Group 54%, Individual 46% • In Canada: Group 42%, Individual 58% •


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Classifications of Annuities

Annuities can be classified on the following criterion: • • • • •

How the annuity was purchased How often periodic annuity benefits are to be paid When annuity benefit payments are scheduled to begin The number of annuitants covered by the annuity policy Whether annuity values are guaranteed or variable

How the annuity was purchased:

The categories of annuities under this parameter are the following: •

Single-premium annuity: An annuity that is purchased by the payment of a single, lumpsum premium. Benefit payments under a single-premium annuity may begin shortly after the premium is paid or may begin after a considerable duration of time from the premium payment date.

•

contract holder holder pays pays equal equal premiu premium m for the Periodic Periodic level-prem level-premium ium annuity annuity: The contract annuity at regularly scheduled intervals, such as monthly or annually, until some predetermined future date.

•

Flexible-premium annuity: The contract holder pays premiums on a periodic basis over a stated period of time, the amount of each premium payment, can vary between a set min. and max. Amount. The contract holder may choose to even skip the payment of premium of a particular installment. The requirement is to pay the minimum stated premium for a year.

Single-premium annuities are the most popular followed by Flexible-premium annuities. Periodic level-premium annuities are the least preferred.

How often benefits are paid Annuity period: The time span between each of the payments in the series of periodic annuity benefit payments. The frequency of periodic annuity benefit payments depends on the length of the annuity period. • •

Monthly annuity: When the annuity period for an annuity policy is 1 month. Annual annuity: When the annuity period for an annuity policy is 1 year.

There could be quarterly or semiannual annuities also.


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When Benefit payments begin

The date on which the insurer begins to make the annuity benefit payments is known as the annuity’s maturity date or the annuity date. Depending on when the insurer is to begin making periodic annuity benefit payments we could have Immediate annuities and Deferred annuities. Immediate annuity: These are annuities where the benefit payments are scheduled to begin one annuity period after the annuity is purchased. Generally these are single-premium annuities. Such an annuity policy is called single-premium immediate annuity (SPIA). Deferred Annuity: An annuity under which the periodic benefits are scheduled to begin more than one annuity period after the date on which the annuity was purchased.

The period during which the insurer makes the annuity benefit payments is known as the payout period or liquidation period. The period between the contract-holder’s purchase of the policy annuity and the onset of the payout period is known as the accumulation period. Deferred annuities could be both Single-premium deferred annuities (SPDA) and Flexiblepremium deferred annuities (FPDA). A point to note is that any annuity purchased with the payment of periodic premiums is by definition a deferred annuity. Accumulated value of a deferred annuity = Net amount paid for annuity + Interest – Withdrawals The manner in which the policy provides for investment earnings on the accumulated value depends on whether the deferred annuity is a fixed-benefit annuity or a variable annuity. Withdrawal provision: This provision grants the contract holder the right to withdraw all or a portion of the annuity’s accumulated value during the accumulation period. Withdrawal Charge: Most policies imposes a ceiling on the amount withdraw able from the accumulated value for a deferred annuity per year without charge. If the contract holder wants to withdraw more than this amount, then the insurer generally imposes a withdrawal charge. Cash surrender value: At any point of the accumulation period the contract holder has the right to surrender the policy for its accumulated value less any surrender charges included in the policy. Surrender Charge: This is typically imposed if the policy is surrendered within a stated number of years after it was purchased. The amount of surrender charge usually decreases over time.

Cash Surrender Value on deferred annuity = Accumulated value – Surrender Charges Payout option provision is an annuity policy that lists and describes each of the payout options from which the contract holder may select.


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When Benefit Payments End

There are three general types of payout options available: • • •

Life annuity Annuity certain Temporary life annuity

Life Annuity is an annuity that provides periodic benefit payments for at least the lifetime of a named individual. Some life annuities also provide further payment guarantees.

The named individual whose lifetime is used as the measuring life in a life annuity is often referred to as the annuitant. Annuity Beneficiary is the person or party that the contract holder names to receive any survivor benefits that are payable during the accumulation period of a deferred annuity. Payee is the person who receives the annuity benefit payments during the payout period. Annuity Certain is an annuity policy, which will provide periodic payments over a period of time that is unrelated to the lifetime of an annuitant. The stated period over which the insurer will make benefit payments is called the period certain. At the end of the period certain the annuity payments cease. Temporary Life Annuity provides periodic benefit payments until the end of a specified number of years or until the death of the annuitant, whichever occurs first. Once the stated period expires or the annuitant dies, the annuity benefits cease. For example in a 5 years temporary life annuity the max. Length of time in which the annuity benefits will be payable is 5 years. But if the annuitant dies before that time the payment ceases.

The number of annuitants covered by the policy Joint and survivor annuity or joint and last survivor annuity is an annuity, which provides benefit payments throughout the lives of both the annuitants. The terms of a Joint and survivor annuity determines whether the amount of each periodic benefit payment remains the same after the death of one of the annuitants or whether it decreases and in that case by what percentage or amount.

Whether Annuity values are Guaranteed or Variable

The investors to annuities have different purposes in mind with those funds and also have different capacities for assuming financial risk when they place money in annuities. Many insurers offer 2 general options to annuity purchasers: •

Guarantee to pay at least a stated interest on the annuity funds it holds Or

•

Pay interest at a rate that is not guaranteed, instead, the interest rate will vary according to the earnings of certain investments held by the insurer.


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Fixed-Benefit Annuities are annuities under which the insurer guarantees that at least a defined amount of monthly annuity benefit will be provided for each $ applied to purchasing the annuity.

Most fixed-benefit annuities specify that once the insurer begins paying the annuity benefits, the amount of the benefit payment may not change. But this is not a rule. In some cases the insurer may declare a change of the amount of the benefit amount. In case of single premium immediate annuities the benefit amount is generally fixed. In case of deferred annuities annuity policy includes a chart of annuity values. This chart will list the amount of annuity benefit that is guaranteed per $1000 of accumulated value. A fixed-benefit deferred annuity policy also describes the manner in which the insurer will credit investment earnings to the policy’s accumulated value. Variable Annuities are annuities in which the amount of the policy’s accumulated value and the amount of the monthly annuity benefit payment fluctuate in accordance with the performance of a separate account. The individual who purchases a variable annuity assumes the investment risk of the policy. Because the insurer makes no guarantees regarding the investment earnings or the amount of a variable annuity’s benefit payments, the insurer retains no risk under the policy.

The mechanism that allows this investment risk transfer from the insurer to the purchaser is the separate account. This is called the segregated account in Canada. This account is completely separate from the insurer’s general investment account. Insurers typically offer a number of different separate accounts and they follow a different investment strategy for each such account. The value of a separate account may increase or decrease depending on the performance of the account’s investments. Variab Variable le annui annuity ty contra contract ct holder holderss may select select from from this this list list of separa separate te accoun accounts ts and may periodically transfer funds from one such account to another. Accumulation units represent the ownership shares of a variable annuity contract holder in a separate account. The number of units that a contract holder can own depends on the premium that he pays. As premiums are paid throughout the accumulation period, the number of accumulation units that a contract holder owns increases.

The insurer must periodically recalculate the value of an annuity unit based on the investment experience of the separate account. The insurer then recalculates the amount of the periodic benefit payment by multiplying the total number of annuity unit times the current value of an annuity unit.

Life Expectancy Factor

In the case of life annuities, the length of payout period is linked to the annuitant’s lifetime. So the life expectancy factor is considered when calculating the amount of periodic annuity benefit that can be provided for a specified premium amount. Annuity mortality rates-the mortality rates experienced by persons purchasing life annuities-are not identical to the mortality rates experienced by persons insured by LI policies for a given age and gender.

The difference in form of antiselection in the case of annuities compared to that in LI policies:


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People in good health and who anticipate a long life are more interested in purchasing life annuities then are those in poor health. This is just the opposite of that happens in the case of a LI policy. Mortality rates depending on gender and annuity premium rates: Mortality stats show those females as a group may anticipate living longer than males as a group. This is why; insurers generally tend to charge higher premium rates from females than for males of the same age. In recent years, legislatures and courts are examining whether the use of gender-based premium rate is a form of unlawful discrimination on the basis of gender. Some insurers use unisex mortality tables and charge males and females with the same premium rates for annuities.

Types of Life Annuities: The 3 variations of life annuity that insurers commonly offer are 1. Stra Straig ight ht life life annu annuit ity y 2. Life Life income income annu annuity ity with with peri period od certa certain in 3. Life Life inco income me with with refund refund annuit annuity y Straight life annuity provides periodic payments for only as long as the annuitant lives. This form of annuity is the least popular as there is a risk of the annuitant paying much more money as premium than he actually receives as payout from the annuity, as he expired early during the payout period. Life income annuity with period certain guarantees that the annuity benefits will be paid thru out the annuitant’s life and guarantees that the payments will be made for at least a certain period, even if the annuitant dies before the end of that period. In this case, the contract holder selects a contingent payee who receives the payout benefits in case the annuitant dies. Please note that if the annuitant dies after the expiration of the period certain, the no extra benefits are paid to the contingent payee. Life income with refund annuity also known as a refund annuity, provides annuity benefits thru out the lifetime of the annuitant and guarantees that at least the purchase price of the annuity will be paid in benefits. This guarantees that if the annuitant dies before the total benefit payments equal the purchase price of the annuity, a refund will be made to the contingent payee. This refund is the difference difference between between the purchase purchase price of the annuity and the total total amount amount of benefits that had been paid during the lifetime of the annuitant.

Refund annuity is available in 2 forms: • •

Cash refund annuity where the refund is paid as a lump sum. Installment refund annuity where the refund is payable in a series of periodic payments.

Comparison of Premium Rates: Premium rates for the straight life annuities are the lowest.


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Annuity Contract Provisions: • • •

•

•

•

Entire contract provision: Same as that of LI Free-look provision: Same as that of LI Incon Incontes testab tabili ility ty provi provisio sion: n: Typica Typically lly an applic applicati ation on of an annui annuity ty does does not contai contain n questions regarding the insurability of the applicant. So he does not need to provide any representations on which the insurer bases his decision of issuing an annuity. In such cases, the incontestability provision states that, once the contract becomes effective, the insurer may not contest the validity of the contract. In case the annuity product has any supplementary benefit riders associated with it then the applicant for such a rider generally must provide proof of insurability. In such a case the incontestability provision gives the insurer a specified period – such as one or two years – in which to contest the validity of the the cove covera rage ge prov provid ided ed by the the ride riderr base based d on a mate materi rial al misr misrep epre rese sent ntat atio ion n in the the application. Missta Misstatem tement ent of age or sex provisio provision: n: states states that if the annuitan annuitant’s t’s age age or sex was misstated, then the annuity benefits payable will be those that the premiums paid would have for the correct age or sex. Assignment provision: Unlike in the case of LI policies, here the contracts generally state that if the contract is part of specified types of qualified retirement plans, then the contract may not be sold, assigned, transferred, or pledged as collateral for a loan or any other purpose to any other person. Such contracts are not assignable by federal laws. Settlement options or Payout options provision: identifies and describes each of the payout options that a contract holder may elect for the payment of annuity benefits.

Some additional provisions, which are possible, based on the type of the annuity contract are: •

•

•

Beneficiary provision: gives the contract holder the right to name the beneficiary who will receive any survivor benefits payable if the annuitant or the contract holder dies before annuity benefit payments begin. Withdrawal provision: right to withdraw all or part of the annuity’s accumulated value during the accumulation period. Surrender provision: the right to surrender the annuity for its surrender value during the accumulation period.

Fixed-premium annuities generally include the following additional provisions: • •

Grace period provision: Same as in LI. Reinstatement provision: Same as LI.


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Regulation of Annuities

The regulations are same in both USA and Canada, as is in the case of LI policies. This is because, its only insurance companies which are allowed to sell annuities. For variable annuities the regulations are the same as is in the case of variable LI policies. Taxation of Annuities

Annuities are an increasingly popular product in the US and the fact that a product that qualifies as an annuity in accordance with federal tax laws provides favorable federal tax treatment is partly responsible for that. For the purpose of income taxes, each annuity benefit payment is considered to consist of the following 2 parts: 1. One portio portion n is the return return of princip principal, al, which which is not taxable taxable becaus becausee the purchase purchaserr has already paid income taxes on that amount. am ount. 2. The remainder remainder portion portion of each each benefit benefit payment payment is considered considered taxable taxable investmen investmentt income because the purchaser has never paid income taxes on the policy’s investment earnings. By contrast, Canada’s tax laws do not provide this favorable treatment for annuities. Investment incomes for annuities are taxable incomes thru out the life of the annuity. The one exception is annuity used to fund a qualified retirement plan. Individual Retirement Savings Plans

Both the Govt. of USA and Canada have enacted laws that provide federal IT advantages to individuals who deposit funds into government-qualified retirement savings plans. Here we will describe some of these qualified individual retirement savings plans, focusing on the plans that may be marketed by LI companies. For federal IT purposes, the amount that certain individuals deposit into qualified retirement savings plans-up to a stated maximum-are usually deductible from their gross incomes in the year in which those funds were deposited into the plans. In addition, the investment earnings on a qualified account generally are not taxed until the funds are withdrawn. In United States of America:

There are 2 types of individual retirement savings plans, which qualify to receive favorable federal IT treatment: • •

IRA Keogh (HR 10) plans


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Federal laws • • •

Define which individuals may establish each type of qualified plan. Place limits on the amounts a taxpayer may contribute to each type of qualified plan. Establish rules for the taxation of plan withdrawals.

IRA (Individual Retirement Arrangement)

IRA may take one of the following 2forms : Individual retirement account is a trust account created in the US for the exclusive benefit of an individual and his beneficiaries; the trustee must be a bank, investment company, stock brokerage, or similar organization. Individual retirement annuity is an individual annuity issued by an insurance company. Insurers use the acronym IRA to refer to an individual retirement annuity.

The sponsoring financial institution handles the administrative aspects of an IRA plan. It ensures that the IRA plan meets the legislative requirements to qualify as an IRA arrangement and obtain approval from the Internal Revenue Service (IRS) that the plan qualifies. Tax treatment on IRAs varies on the basis of whether it’s a Regular IRA or a Roth IRA. Regular IRA has been established in 1974. The following is a summary of the tax treatment on a regular IRA: 1. Anyone Anyone who who is less than than age 70 1/2 and who has has earned earned income income may contri contribut butee up to $2000 per year of the earned income into a regular IRA. 2. Taxation Taxation of investmen investmentt earnings earnings is deferred deferred until until funds funds are withdraw withdrawn. n. With only only a few exceptions, however, penalties are imposed on withdrawals made before the taxpayer attains age 59 ½. 3. Taxpayers Taxpayers must must begin making making annual annual withdraw withdrawals als of at least least a specified specified minimum minimum amount amount when they reach age 70% and after that time they may not make additional contributions to their IRAs. Roth IRAs have been established since Jan 1, 1998. The primary difference in the tax treatment of a Roth IRA and a Regular IRA are as follows: •

•

•

No current tax deductions are allowed for contributions to a Roth IRA. Thus, Roth IRA contributions are made with after-tax dollars, whereas Regular IRA contributions are made with pre-tax dollars. Qualified withdrawals from a Roth IRA that the taxpayer has held for at least 5 years aren’t subject to income taxation. Qualified withdrawal includes withdrawals taken after the age 59 ½ and the withdrawals made by a 1 st time homebuyer. Unlike Regular IRAs, Roth IRAs aren’t subject to minimum distribution requirements.

Keogh Plans (HR 10 Plans)

Available for self-employed individuals. A financial institution, such as an insurance company or an investment company, must sponsor the plan. Insurance companies market individual annuity contracts that qualify as Keogh plans.


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The administrative aspects of the Keogh are handled by the sponsoring organization. IRS approval is necessary for Keogh plans. Following is a summary of important information about Keogh plans. •

• • •

Funds of the Keogh plans may be placed in any of the several types of investments, such as stocks, bonds, or real estates etc. The deposit to a Keogh plan is deductible from taxable income up to a certain limit. Withdrawals from a Keogh account are taxable as income. Penalties on the withdrawals may be payable if the legislatively defined requirements for making withdrawals are not met.

In Canada:

A qualified retirement account is known as a registered retirement savings plan (RRSP). Any gainfully employed individual, including an employee who is covered by an employer-sponsored pension plan, can establish this RRSP. The following is a summary of information about RRSP. The contribution to an RRSP is deductible from taxable income up to a stated maximum. This may also depend on whether the individual is an active participant in a qualified pension plan. Such an individual will have a lower ceiling to the contribution eligible for deduction from taxable incomes. Funds in RRSP may be placed in a number of investment vehicles. RRSP accounts must begin withdrawing the accumulated funds by the time they reach age 69. • •

• •


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CHAPTER 17: GROUP RETIREMENT AND SAVINGS PLAN.

In this chapter we shall learn about the following: REGULATION OF RETIREMENT PLANS. TYPES OF RETIREMENT PLANS. COMPONENTS OF RETIREMENT PLANS. GOVERNMENT SPONSERED RETIREMENT PLANS. • • • •

Regulation of retirement plans.

In order to encourage employers and labor union to buy retirement plans for the members, both in United States and in Canada, federal income tax laws provide income tax benefits to both the plan employerss that that establ establish ish the plan, plan, and the plan participants – the plan sponsors sponsors – the employer employees. In order to have the tax benefit the plans have to meet certain regulations. In United States these plans are known as qualified plans and in Canada they are known as registered plans. In Canada the plans have to be approved and registered with Revenue Canada prior to the establishment of such plans. In United States, plan sponsors are not required to obtain prior approval of Internal Revenue Service, yet they choose to obtain prior approval form IRS. We shall now discus the salient laws that govern the formulation of such plans in U.S. and in Canada. United States: - Most of the legislation part comes from Employee Retirement Income Security Act (ERISA). Following are the requirements that ERISA imposes on retirement plans. 1. Non discrimination requirements prohibit qualified plans from going for the benefit of highly paid employees. 2. Vesting requirements must be clearly stated in a plan. This right give vested interest of the employee on the benefits of plan even he leaves the service prior to retirement. This requirement should clearly state that when the employee has the right to policy benefits and when does she have the vested interest on the employer’s contribution. 3. Security requirements must be fulfilled to safeguard the interest of the plan participants. 4. Reporting has to be done by the plan sponsor to government agencies and to the plan participants regarding the plan provisions. 5. Fiduciaries are responsible to administrate the plan and to hold the plan assets. They are bound to do their duty in accordance to the statutory guidelines mentioned in ERSIA. 6. Tax benefits: a) Within Within stated stated limits limits the contribu contribution tionss made from the the employers employers end is consi considered dered as a part of employer’s current expense and hence is not considered as taxable income. b) The employer employer’s ’s contribut contribution ion to thee thee plan is not not considered considered as taxabl taxablee income for for the employee. The tax on employer’s contribution is deferred till she actually receives the benefits from the plan. c) All the interes interestt earning earningss are allowed allowed to accrue accrue tax-fr tax-free. ee. The plan partici participan pantt actually pays the tax on the interest earnings on receiving the benefits from the plan. Retirement plans can either be contributory or non-contributory. Since there is no tax benefit on the employee’s contribution most of the retirement plans in U.S. are of noncontributory type. Canada: - The Canadian federal government and all the provincial government have each enacted a Pension Benefits Act. The Pension Benefits Acts require that when an employer establishes a pension plan, it must be registered with a specified government agency. In order to qualify for


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registration it must comply various numbers of rules, which are quite similar with requirements imposed by ERISA. The different requirements for the Pension Benefit Act are: 1. The plan must contain specified minimum vesting requirements. 2. The plan must be portable; i.e. the benefits can be transferred from one registered plan to the other. 3. Plan assets must be invested in accordance to PBA. In order to get favorable tax benefits the plan must be approved and registered by Revenue Canada. In order to get registered by Revenue Canada the plan must be registered in accordance to Pension Benefit Act. The requirements that are mentioned for Revenue Canada are: 1. Employer’s contributions, within specified limits, are deductible from employer’s current taxable income. 2. Employer’s Employer’s contrib contributio ution n is not conside considered red as employee’s employee’s taxabl taxablee income. income. 3. Within Within specifie specified d limits, limits, employe employee’s e’s contribu contribution tionss are tax tax fee. 4. Investment Investment earning earningss are allowed to accrue accrue tax-free tax-free until until participant participantss receive the the benefits. benefits. Types of Retirement Plans.

Employers establish three general types of qualified (registered) retirement plans in the United States and in Canada. Pension Pension plans: plans: - These are plans according to which the employer promises to pay pension to the employees after their retirement. Most employers sponsored pension plans, in U.S., are qualified pension plans and are referred as qualified plan. plan. In Canada such a plan is known as a registered pension plan (RPP) . Both qualified and registered can be categorized as the following: Defined Benefit Plans: This plan defines that the participant will receive a • fixed amount as retirement benefit. The benefit is usually given as monthly annuity. The services of an actuary are typically required to determine the amount of contribution required for the plan. Contributions made for all the plan parti particip cipant antss are poo pooled led into into one invest investmen mentt accoun accountt and are alloca allocated ted to individual plan participants as they retire according to the plan’s provision. Defined Contribution Pension Plans: In this plan the employer states the • amount amount of contri contribut bution ion that that will will be paid paid for each plan plan partic participa ipants nts.. The contribut contributions ions are invested invested into separate separate accounts accounts for each participa participant. nt. The participants get the entire accrued amount as a lump sum or as monthly annuity. There are advantages that the Defined Contribution Plans have over Defined Benefit Plans—firstly, the employer knows the amount that will be paid for the plan plan in advanc advance, e, second secondly, ly, the employ employer er does does not not have have to depen depend d on the actuary’s actuary’s estimation. estimation. Moreover Moreover ERSIA imposes more complicate complicated d laws for Benefit Plans. Profit Profit Sharing Sharing Plans: Plans: - This is a retirement plan that is primarily funded from the employer’s profits. In Canada these plans are known as deferred profit sharing plan features es are quite quite simila similarr to the define defined d contri contribut bution ion plans plans.. Since Since the (DPSP). The featur employer is making contribution from the profits, so it might not pay the contributions when the contribution warrants them. Qualification rules in U.S. states that employer’s contribution must be substantial and recurring and should not benefit high paid employees. To qualify qualify as DPSP DPSP in Canada, Canada, a plan plan that that define definess the amount amount of the employ employer’ er’ss contributions “by reference to profits” must provide that at least 1% of those profits will be contributed. If the plan defines the amount of the employer’s contributions “out of profit” then limitations are imposed, but those are not as stringent as 1-% rule.


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Qualified Retirement Savings Plans. United States: An employer may provide a thrift and savings plan. This plan works in the same way as Profit Sharing Plans; the only difference is that the employer’s contribution is obligatory. An account is established for each plan participants. The employee’s contribution is subjected to statutory limits and the employer generally pays an amount equal to the employee’s contribution. The employee’s contribution to this plan does not enjoy any federal income tax benefits. In order to provide tax benefits laws in U.S. allows the employees to participate in special type of thrift and savings plan known as 401(k) plan. The employee’s contribution is considered as taxable income, but she has to pay tax when she withdraws the money from such a plan. In order to participate in 401(k) plan the employee enters into a salary reduction agreement. Another type of qualified retirement plan that is established for employer with not more than 100 employees in the preceding year. This type of plan is known as Savings Incentive Match Plans for Employees (SIMPLE plan). The employee agrees to reduce her compensation but the reduction is also taxable. The limitations to the contribution to the SIMPLE IRA are generally higher than other type of IRAs but that is lower than the limitations provided to other qualified plans. The employer also also need needss to cont contri ribu bute te to the the plan plans, s, but but with within in cert certai ain n limi limits ts.. Ther Theree is clau clause se for for nondiscrimination and other regulations are quite simple. All contributions to a SIMPLE IRA accounts must be vested in the employee. em ployee. Canada: An individual who wishes to establish a retirement plan in Canada can buy Registered Retirement Savings Plan, and within stated limits can deduct from his current taxable income. Many employers buy group RRSP. Employees and employers are permitted to make contribution to the plan but the contribution from the employer’s end is considered as that the employee made them. Hence the employee has the vested right over the amount of the plan form very beginning. Any contribution to the plan is tax-free. Nonqualified Retirement Savings Plans.

Many nonqualified plans are established to avoid the complex legislative norms that govern the qualified (registered) plans. We shall now discuss the nonqualified retirement plans in U.S. and in Canada. United States: For small employers there is simplified employee pension (SEP) plan. The The empl employ oyee ee is requ requir ired ed to esta establ blis ish h her her own own IRA IRA in whic which h the the empl employ oyer er will will add add her her contribution. The contribution made by the employer is considered as her expenses and hence deductible from her current income. The employer’s contribution is considered as taxable income for the employee, but she is allowed to take certain tax deductions. The deductible for the contribution maid to SEP IRA is more than in other IRAs. SEP are easier to administrate since it involves less amount of paper work. Canada: Some Canadian employers have established employee’s profit sharing plans that are non nonreg regist istered ered saving saving plans plans.. Contri Contribu butio tions ns must must be made made every every year. year. The (EPSPs) that contributions made by the employer are deductible from his present taxable income. To get the tax benefit the employer must share the profit under “reference to profit” that is the share must be 1%. The employee has to pay tax on both the contributions contributions made by the employer and herself. Components of a Retirement Plan. •

•

The plan: The terms of a plan are written in a document known as plan document. This document spells out the different provisions; as for example: the plan must state the eligibility criteria for the plan participants, the time by when the participants are fully vested, the time by when she will receive the benefits form the assets of the plan. Plan administrator: The plan sponsor names a plan administrator who is responsible for various aspects of the plan’s operation. The administrator can be the sponsoring employer


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or a board of committee that will be established by the employer. The administrator is responsible for maintaining the records for all participants. The administrator uses these records to provide reports to the governmental agencies and to the plan participants. In many cases the administrator may require many other services in order to maintain the plan. She is responsible for hiring these services. Life insurers provide both plans and administrative services. Funding vehicles: A funding vehicle is the means of investing the plan’s assets as they are accumulated. The means can be an annuity, mutual fund, life insurance contract, others. The plan sponsor is required to follow certain limits while selecting the funding vehicle for the plan. Funding vehicle provided by the insurance companies are guaranteed against certain financial loss and mortality rates. The various funding vehicle provided by the insurance company are: 1. Group Deferred Each year year the contri contribut bution ionss made made for each plan Deferred Annuity: Annuity: Each par parti tici cipa pant nts, s, are are used used to buy buy sing single le prem premiu ium m defe deferr rred ed annu annuit ity. y. When When the the participant retires the benefits from the plan are given as usual retirement benefits. Because the contributions are used to buy plans before the retirement of the of the participants, these plans are also known as fully insured products. 2. Deposit Administration Contracts: The plan sponsor places the assets of the plan in the General Investment Account of the insurer. When the participant retires the insurer buys an immediate annuity with the amount of his share from the account. The insurer generally guarantees against investment losses and states a minimum amount that the participant will receive. 3. Immediate Participation Guarantee Contracts (IPG): Here also the assets of the plan are placed in the General Investment Account of the insurer, but this contract does not guarantee against investment losses. Instead the contract allows the sponsor to participate in the gain and the loss of the insurer. However there is a limit to which the sponsor shares the loss of the insurer. 4. Separate account Contracts: This is sometimes called as investment facility contract , the insurer invests the assets in stocks, short-term investments, mutual funds, etc. The insurer maintains investment strategies for different accounts, and the sponsor chooses one or more accounts in which the assets will be invested. Generally the separate accounts do not guarantee the performance of the account. 5. Guaranteed Investment Contracts (GIC): Here the insurer accepts the assets form form the the spon sponso sorr for for a cert certai ain n numb number er of year years. s. The The inte intere rest st is gene genera rall lly y guaranteed. The interest earned on the investment can be annually returned to the sponsor or can be accumulated till the period ends. At the end of the period the accumulated sum is returned to the sponsor.

Government Sponsored Retirement Plans. Canada: In Canada we have the following retirement plans that are sponsored by the government: Old age Security Act: This act provides pension to all Canadians of age above 65 years. The The pensio pension n amount amount is not depend dependent ent on the the preret preretire iremen mentt wage, wage, marita maritall status status,, curren currentt occupation, etc. Everyone who has reached an age of 65 and has met certain residential criteria is eligib eligible le to receiv receivee the pensio pension. n. The money to fund fund these these pensio pensions ns is taken taken form form federa federall government general tax revenues. These are federa federall progra programs ms that that Canada Canada Pensio Pension n Plan Plan and Quebec Quebec Pensio Pension n Plan: Plan: These provide pension to workers who have contributed money into the plan during their working years. The CPP and QPP work very closely and hence the participants can be easily transferred from one plan to another. Participation for all workers in these plans is mandatory. The covered employee must pay a certain amount of her income into the plan and the employer has to pay the same


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amount as the employee. The self-employed worker needs to pay a higher amount. The benefit of the plan depends on the amount contributed but is limited to a legislatively established amount. United States: Nearly all people in U.S. are covered by the Old Age, Survivors, Disability and Health Insurance (OASDHI) Act, or better known as Social Security; excepting few groups. As for example federal civil service workers are covered by Civil Service Retirement Act, railroad workers are covered by Railroad Retirement Act, and some state and municipal civil workers. At present moment it is not mandatory for state civil workers to participate in Social Security and most of the state covers their civil workers in their own retirement programs. Other states have voluntarily joined the Social Security. Social Security provides pension to the covered persons of age more than 62 years; however people retiring before 65 years receive a less amount of pension. The act covers the dependant spouse or children in case the covered dies. The act also covers the disabled. The workers must contribute a percentage of their annual income to the plan. The employer also need o contribute the same amount as the employee. The amount of the monthly benefit is dependent on the contribution made by the individual. The monthly benefit is increased in order to reflect the increase in cost of living measured by CPI.


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CHAPTER 18: MEDICAL EXPENSE COVERAGE

Medical expense coverage are indemnity benefits. Medical expense coverage are maintained by Managed care plans. Managed care Plans are medical expense plans that combine financing and delivery of health care within a system that manages the cost , accessibility and quality of care.

2 Managed care plans are: 1. Health Maintenance Organizations( HMO ) 2. Preferred Provider Organizations( PPO ) Basic medical expense coverage : Consists of separate benefits for each covered medical care cost.

Some common basic expense coverages: Hospital expense : Hospital expenses like room, board, medication, lab tests etc. Surgical expenses: Inpatient and Outpatient surgery Physician’s expense coverage: Physician’s visit both in and out of the hospital. There could be one policy for each coverage or one policy of all kinds of coverages. These are also known as first-dollar coverage since insurance companies starts reimbursing right from the first dollar of the expense and no contribution is asked from insured. Major medical insurance: This medical expense plan provides substantial benefit to the same category of expenses provided by basic expense coverage and sometimes also contains preventive care.

A maximum benefit limit or lifetime unlimited maximum benefit is specified. 2 types available: 1. Supplemental major medical policy: Provides coverage for amount that exceed the limit that comes with basic medical coverage or coverages that can be bought separately. 2. Comp Compreh rehen ensi sive ve Major Major medi medica call poli policy cy:: Comb Combin inat atio ion n of basi basicc medic medical al cove covera rage ge and and supplemental medical coverage. Most plan are of this type. Usual, reasonable and customary fees: UCR is the maximum dollar amount of a given covered expenses that the insurer will find eligible for reimbursement. Based on statistics from national study of fees, a standard expense level is set for a locality for a certain covered expenses by applying a predetermined formula. This benefit amount is UCR fee. When a claim is processed the proceed is determined whether the amount is within UCR or not. Expense participation: Encourages insured(s) to keep benefit amount to a minimum and thus help in reducing the coverage premium. 2 kinds of participation:


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1.Deductible: A flat amount that insured needs to pay first before the coverage level starts. Like first $20. The deductible of group policies is usually lower than individuals ones. 2.Calendar year deductible: Total maximum deductible incurred in a year for various covered expenses. 3.Coinsurance: After After the deduct deductib ible le has been been paid paid the the benefi benefitt reimbu reimburse rsemen mentt level level starts starts.. However this provision states that for this level also insured needs to pay a percentage of the expense. 4.Stop Loss provision: All expenses incurred during a year are totaled as out-of-pocket expense. There is a limit on the out-of-pocket expense. This provision states that once the insured has paid the max. out-of-pocket the rest of the claims will be paid at 100% Common exclusions: 1. Cosmetic surgery for beautification 2. Self inflicted injury treatment 3. Treatment of Injury while In military service 4. Routine dental, eye exams and corrective lenses 5. Treatment in a free of charge govt. facility or that is paid by any other organization. Supplemental medical expense coverage: 1. Dental Covers routine dental exams, dental procedures and preventive work Both coinsurance and deductible applied 2. Prescription Drugs: Benefit to purchase drugs and medicines Usually contains a small deductible of $5-$10 called co-payment Pharmacist submits a claim for the rest of the amount to the insurer Sometimes insured might also be needed to file a claim 3. Vision care 1 routine eye checkup each year Limit on benefit for lenses, frames and contacts 4. Dread disease Coverage for a special specified disease like cancer Can supplement basic medical expense coverage and can serve the same purpose as supplemental major medical coverage. Not sellable in many states 5. Critical Illness This plan pays a lump some money if the insured is diagnosed with a particular disease. Example: Heart attack, stroke, life threatening stroke Typically includes return of premium if the insured dies without incurring the disease.


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6. Long Term Care: This plan provides coverage for people who because of old age or any other cause. Medicare Supplement Coverage:

In USA, the Old Age, Survivors, Disability and Health Insurance ( OASDHI ) also known as social security provides medical coverage under Medicare program. Insurance companies have insurance products which provide supplemental coverage over Medicare. These are known as Medigap policies. Govt. Sponsored Programs: Medicare and Medicaid Medicare:

Eligibility: 1. Age 65+ and have social security benefits 2. Have 2 years of eligible disability income benefits 3. Have retirement benefits under Railroad retirement act 4. Those who are afflicted with – or are the dependent of a person afflicted with – kidney disease disease that requires dialysis or transplant There are 2 parts of this program: Basic insura insurance nce covera coverage ge and is automa automatic ticall ally y extend extended ed to everyo everyone ne witho without ut any Part Part A: Basic premium. Deductible and coinsurance provision is present. Includes 1. Hospitalization 2. Confinement in an extended care facility after hospitalization and 3. home health care services. Financed by payroll tax imposed on employees through Social Security program. Part B: Supplementary coverage can be bought by paying premium of 45.50. Finance by premium of people insured and federal government general revenues.

Intermediaries: Third parties who administer Part A. Carriers: Third parties who administer Part B. Medicaid: • • •

• • • •

Program for poor people. State and federal funded program. Each state administers its own program and establishes its own eligibility criteria. Thus Medicaid varies hugely from state to state must all follow a minimum federal mandate for requirements. Medicaid must cover long-term custodial nursing-home care. Person receiving Supplemental Social Security (SSI) must receive Medicaid. Disabled and blind person must receive Medicaid Medicaid is always the secondary payor of benefits


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Major Differences between Life and Health Insurance: Life Insurance Valued Contact One time payment Smaller Effect

Independent

Health Insurance Contract of Indemnity Multiple Effect of inflation, changes in economy and changes in medical practice effect the amount of benefits largely. Effected by geographical location

Claim Costs: Cost the insurer predicts that it will incur to provide the policy benefits promised. It is calculated for every type of expenses like : 1. Surgery 2. Hospital expense 3. Physician fee 4. major medical expense. For each type the claim cost is calculated as: Claim Cost: Frequency of expected expected claim * Avg. amount of each claim Gross premium = Net premium + Loading. Since number of claims for Health Insurance is much more, so insurer always adds an extra amount to actual Loading to counter unforeseen contingency conditions Loss Ratio: Ratio of Benefits an insurer paid out for a block of policies to the premium received. Loss Ratio is calculated to keep a check on the insurer so that they cannot add too much to the Loading as a measure of protection against a gainst contingency situations.


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CHAPTER 19: DISABILITY INCOME COVERAGE.

Individual and commercial insurance companies provide disability income coverage that provides a specified, periodic income replacement benefits to an insured that becomes unable to work because of an illness or an accidental injury. Definition of Total Disability.

Each disability income policy specifies the definition of total disability that the insurer uses to determine whether a covered person is entitled to get the disability benefits. Any Occupation: At one time the disability was defined as the state where the covered • person becomes disable to perform any sort of occupation. Because of the strict sense of the definition most of the covered person will never be entitled to the benefits. Thus the insurance companies now use a more liberal definition. Current Usual Definition: This provides that an insured is considered totally disabled if • at the start of disability, the disability prevents him from performing the essential duties of his regular occupation. At the end of the specified period, usually two or five years, an insured is considered as totally disabled if his disability prevents him from working at any occupation for which he is reasonably fitted by education, training, or experience. Policies that use this definition however may state that the insured will not be considered as disabled if he voluntarily returns to any occupation. Own Previous Occupation: This definition which is generally included in individual • policies rather than group policies, states that the policy will pay disability benefits if the insured becomes unable to perform the acts of her own previous own previous occupation. Thus even if the insured starts working at any other gainful occupation different from his previous occupation, he is entitled to receive the benefits. definition is generally generally included included in disabili disability ty coverage coverage known as Income Income Loss: This definition • income protection coverage. The definition of total disability for the insured states that the insured is disabled if he suffers an income loss for his disability. As a result, the insurer pays the benefit both while the insured is totally unable to work and while he is able to work but his disability has reduced his income. The policy specifies both (1) a maximum benefit amount that will be paid when an insured will be completely unable to work and (2) a method of determining the amount of lost income when the disabled insured is working. Presumptive Disabilities: A presumptive disability is a stated condition that, if present, • automatically causes the insured to be considered totally disabled; thus the insured will receive the full benefits even he resumes his original occupation. This generally includes total and permanent blindness, loss of the use of any two limbs, and loss of speech or hearing. Benefit Period.

Benefit period is time for which the insurer pays the disability income benefits. Based on this the policy can either be classified into short term or long term. Short-term group disability income coverage provides a maximum benefit period of • less than one year; such coverage commonly specifies maximum benefit period of 13, 26, or 52 weeks. Long-term group disability income coverage provides a maximum benefit period of more than one year; the maximum benefit period commonly extends to the insured’s normal retirement age or to age 70.


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Individual disability income income coverage is seldom offered with a maximum benefit period of less than one year. Thus, short-term individual disability income coverage provides a maximum benefit period of one to five years. Long-term individual disability income coverage provides a maximum benefit period of at least five years. The benefit period in this case may extend until the insured reaches 65years of age; in some cases, benefits are provided for the insured’s lifetime.

Elimination Period.

An elimination period is the waiting period for which the insured has to be disabled to receiv receivee the benefi benefits. ts. The elimin eliminati ation on period period reduce reducess the cost cost for provid providing ing the benefi benefits ts for disability that lasts for very short periods. Longer the elimination period shorter will be the cost of the coverage. The length of elimination period for both short and long-term individual disability income coverage last from 30 days to 6 months. Most short-term group life disability income coverage contains no elimination period for disability due to accidents and an elimination period of 1 week for disability for sickness. Most long-term disability coverage has an elimination period of 30 days to 6 months. Benefit Amount.

As a general rule, the benefit amount available through disability income coverage is not intended to replace fully an individual’s predisability income. Instead the benefits are limited. Disability income amounts however should not be so low that the insured faces a drastic income loss. The insurer generally uses either of the following two methods to determine the benefit amounts. The methodology depends on whether the policy is a group policy or individual policy or on whether the policy is a short-term or long-term policy. Income Benefit Formula: This is generally used for group disability income benefit • pol polic icie ies. s. Here Here the the insu insure rerr stat states es the the bene benefi fitt as some some perc percen enta tage ge of the the insu insure red’ d’ss predisability income. The insurer considers all sort of disability income. For group longterm term disabi disabilit lity y income income covera coverage ge the benefi benefitt genera generally lly amoun amounts ts to 65-75 65-75 % of the predisability income. For example, the insurer may state that the insured will receive 70% of his predisability income and the benefits will be reduced if he receives disability income form any other sources. Group short-term disability income coverage has this percentage as 90-100%. Flat Amount: This is generally used for individual policies. Here the insurer mentions a • flat amount to be paid when the insured becomes totally disabled. The amount of the benefit depends on the insured’s earnings at the time he purchased the policy. But here the benefit does not depend on earnings form any other source. The insurer carefully limits the maximu maximum m benefi benefitt for which which the insure insured d can buy the polic policy. y. The insure insurerr genera generally lly considers the following factors while setting up the maximum benefit from the policy: 1. The amount amount of of the applica applicant’s nt’s usual usual earned earned income, income, before before tax. tax. 2. The The amou amount nt of the the appl applic ican ant’ t’ss unea unearn rned ed inco income, me, such as divi divide dend ndss and and the the interest, that will continue when the insured become disabled. 3. Addition Additional al income income during during disability disability,, such as income income benefits benefits from from group policy policy and government sponsored policy. 4. The app applic licant ant’s ’s curre current nt tax tax brac bracket ket.. In general, the maximum amount of disability income benefit that insurer will provide is 50 to 70 % of his pre-tax earnings.


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Supplemental Benefits.

We shall now describe certain supplemental benefits that are usually added to disability income coverage. These are either added automatically with the policy or are added as an option by paying extra premium for such benefits. Partial Disability Benefits: In this case certain benefit is provided to the insured if he has • partial disability —a disability that prevents the insured from performing certain acts of his own occupation or prevents him from being a full time employee of his present occupa occupatio tion. n. This This amount amount is typica typically lly either either a flat flat amoun amountt or often often 50% of the the total total disability benefit. Using the formula method the benefit may vary depending on the insured’s loss of income due to partial disability. Future Purchase Option Benefit: In case of flat benefit the insurer may provide a future • purchase option, which grants the insured to increase the benefits as his income increases. The option is generally provided if the insured can show that his income will increase considerably in the future. However the increment of such benefits is limited. The insurer does not need to provide proof of insurability to increase the benefit amount. Cost of Living Adjustment Benefit: COLA benefit states that the insured will provide the • disabled insured a benefit amount that increases to reflect the increase in cost of living. Generally the increment depends on certain standard indices such as CPI. Exclusion.

1. 2. 3. 4.

Following are the exclusion criteria for the disability income benefits: Injuries Injuries or sickness sickness that that result result from from war, war, declared declared or or undeclared undeclared.. Intent Intention ionall ally y self-inf self-inflic licted ted injuri injuries. es. Injuries Injuries receive receive as a result result of of active active participa participation tion in in a riot. riot. Occupa Occupatio tion-r n-rela elated ted disabili disabilitie tiess or sickne sickness ss for which the insure insured d is entitl entitled ed to receiv receivee income benefits under some group or government disability program.

Specialized Types of Disability Coverage. These coverage are designed to provide benefits, other than loss in come if the insured gets disabled. In Chapter 4 we described that a closely held business will suffer from a financial loss if the key person or any of the partners dies. Likewise the business may suffer from a loss of income if the key person or any of the partners gets disabled. Key Person Disability Coverage: This coverage provides benefits to offset the losses that • a business suffers if the key person gets disabled. The benefit goes to the company. Disability Buyout Coverage: This for the BSA. Here the benefits are provided to buyout • the partner’s or owner’s interest should he become disabled. Business Overhead Expense Coverage: Should the owner gets disabled, still he might • incur expenses to operate his business. For example office rent, mortgage payments, etc. This coverage provides disability benefits to cope up with the overhead expenses. Insurers describe overhead usual and necess necessary ary busin business ess expens expensee inclu includi ding ng overhead expenses expenses as the usual employee’s salary, rent, telephone, electricity, gas, and other expenses that are required to keep the business open. Government-Sponsored Disability Income Programs. United States: U.S. workers who are under age 65 and who have paid a specified amount of Social Security Tax for a prescribed number of quarter-year periods are eligible to receive Social Social Security Security Disabilit Disabilityy Income Income (SSDI). (SSDI). For this the disability is described as a person’s inability to work because of a physical or mental sickness or injury that have lasted or expected to


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last at least for one year or might lead to death of the insured. The monthly benefit is equal to the amount of retirement benefit that the person would have received. The benefit does not begin until the insured is disabled for 5 months. Hence approximately the benefits start after 6 months. The benefit continues up to (1) 2 months after the disability ends; (2) the insured dies; (3) the insured reaches 65 years of age when he becomes entitled to receive retirement benefits. The disability plan might also provide dependent benefits. However there is a limit to the maximum family coverage. Short-term income benefits benefits are available available under the federal Unemployment Canada: Short-term Insurance Act . This is given to all workers who have worked for a specified no. of weeks in the preceding 52 weeks period. The benefit begins after a short waiting period if the absence from work is result due to an accident or sickness or pregnancy. The plan is financed by compulsory contribution of the employee and the employer. The employer can reduce his contribution by getting insured through private plans. In this case the private plans are the first payor . Long-term disability is available from CPP and QPP. To qualify the worker must (1) have made contribution for a stated period; (2) be under 65 years of age; (3) be afflicted with severe and prolonged disab disabili ility. ty. Severe Severe disabi disabilit lity y preven prevents ts the the worker worker from from engagi engaging ng himsel himselff into into any gainfu gainfull occupation and prolonged disability states that the disability is going to last long or might cause the covered worker’s death. The amount of the benefit depends on the worker’s predisability wage and his contribution to the plan. The benefit continues the disability is recovered, or till the insured reaches an age of 65 years or till he dies. Dependent children benefit is also present in these plans.


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CHAPTER 20:TRADITIONAL GROUP HEALTH INSURANCE PLANS

It’s a contra contract ct betwee between n the Insurer & the GPH (group Group Health Health Insurance Insurance Policy: Policy: It’s policyholder) that purchased the group insurance coverage.

Group Health Insurance Policy

Group Me Medical Ex Expense Po Policy

Group Di Disability In Income Po Policy

What does the Group Medical Expense IP specify? 1. The type type of of medica medicall expens expenses es to be be covered covered.. 2. The benefi benefitt maxi maximum mumss (if (if any). any). 3. The The ded deduc ucti tibl blee amo amoun unt. t. 4. The The coin coinsu sura ranc ncee feat featur ures es..

1.

3.

What does the Group Disability Income IP specify? The elimination period. 2. The method of determi rmining the amou mount of the disability income benefit. The maximum benefit period. Important points to remember

1) Group Medical Expense Policies (GMEP) provide an option to cover employees’ dependents. But for this the employee cum insured has to bear the additional premium for the dependent(s).

2)

Group Disability Income Policies (GDIP) do not provide the option at all.

What are the extra provisions included only in the Group Health Insurance Policies & not in The Group Life Insurance Policies? There are 4 such provisions & they are: 1. Prere-existing co conditions pr provision. 2. Conversion provision. 3. Coordi rdination of be benefits provision. 4. Physical examination prov rovision.

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1) Pre-Existing Conditions Provision:

In Group Policies, a pre-existing condition is defined to be a condition for which an individual receives medical cares during the three months immediately prior to the effective date of his/her coverage. This provision states that the benefits are not payable for pre-existing conditions until the insured has been covered under the policy for a specified length of time.


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

What are/is the criteria/n that decide/s the eligibility of an insured for the coverage? 1. The insured insured has has not receiv received ed treatment treatment for for that condi condition tion for for 3 consecutiv consecutivee months Or 2. The insured insured has has been covered covered under the the policy policy for 12 12 consecuti consecutive ve months. months. What is HIPPA?  HIPPA stands for Health Insurance Portability and Accountability Act. It was enacted by the U.S. Congress in ’96. This Act imposes a no# of requirements on employer sponsored group health insurance plans, health insurance companies & health maintenance organizations. According to this act the maximum look-back period against “ Pre-existing Conditions” is six months.

2) Conversion Provision:

This This provis provision ion grants grants an insure insured, d, who who is leavin leaving g the group, group, a limite limited d right right to purcha purchase se an Individual MEP with the presenting the evidence of insurability. The right is limited in that the insurer can refuse to issue the individual policy if the coverage results in the insured group member becoming over-insured. For instance, an employee who’s changing his/her job & will be eligible for GMEP from his/her new employer would be considered over-insured if he were also issued an Individual MEP. Disadvantages of Conversion from GMEP to IMEP: 1. High Higher er pre premi mium um is is char charge ged. d. 2. Benefi Benefits ts provi provided ded are are more more restri restricte cted. d.

In most states in the U.S. require to include this provision for GMEP. However, this is not a mandatory provision to be included in GMEP in Canada 3) Coordination of Benefits (COB) Provision:

COB is designed to prevent a group-insured, who is covered under more than one GMEP, from receiving benefit amounts greater than the medical expenses actually incurred. For instance, spouses, who both work, are eligible for coverage under their own employers’ group policy & their spouses’ group policy. If benefits payable under such duplicate coverage were not coordinated, the insured could receive full benefits from both the policies & consequently would profit from an illness or injury. 

How is it taken care of? By defining one Plan as the Primary & the other as the Secondary.

The Primary Provider pays the full benefit promised under the plan. Once the insured receives this benefit, and then the insured can claim to the secondary plan, along with the description of the benefit amounts the primary plan paid. The then determ determine iness the amount amount payabl payablee for the claim claim in Secondary Secondary Provider Provider then accordance with the terms of that plan.



What are the different types of COB Provision? 1. Allowable Expenses. 2. Non-duplication of Benefits.


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

What is Allowable Expense? This is the reasonable & customary expense that the insured incurred & that is covered under at least one of the insured GMEP.

pays the differe difference nce betwee between n the amount amount of Note here that the Secondary Provider pays Allowable Expense & the amount already received from the Primary Plan. Under this type of a COB, the insured does not pay any portion of the expenses.



What is Non-duplication of Benefits? It’s a COB provision, if included in a secondary provider’s plan, limits the amount payable by the secondary plan to the difference, if any, between the amount paid by the primary plan & the amount that would have been payable by the secondary plan, had that plan been the primary plan. This This provis provision ion requires requires the insure insured d to bear a portio portion n of the of covere covered d medical expenses. (Please go thru the examples.[Pg No.- 379-381])

A few facts about COB: If an individual is covered by two plans, one in which she acts as the employee and the  other in which she acts as the dependant, then the primary payor is the former plan. If an individual is covered by two plans one of which has the COB provision then it  becomes the primary payor. If individual is covered as dependant by two plans, such as a child covered by plans of her  parents, then according to “ Early Birthday Rule” the primary payor will be the plan of the parent who has the earlier Birthday.


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4) Physical Examination Examinat ion Provision:

This is included in most GDIP & grants the insurer the right to examine the insured, who has claimed a disability income, by a doctor of the insurer’s choice & at the insurer’s expense. This provision also allows the insurer to make the disabled undergo medical examinations at regular intervals so that the insurer can verify that the insured is still disabled.

Group Health Insurance Underwriting:

A group’s risk classification – standard, substandard, or declined – will be established on the basis of the group’s morbidity rate. 

What are the factors that decide the expected morbidity rate of a group? 1. The nature nature of the indus industry try the the group group members members work work 2. The age distri distribut bution ion of the group. group. The rate increa increases ses as increas increases es the age of the group members. 3. The distrib distributio ution n of the males males & the the females females in the group. group. Females Females experience experience higher morbidity rates than do males of the same age.

Funding Mechanisms:

The way in which a group insurance plan’s claim costs & administrative expenses are paid is known as the plan’s Funding Mechanism.



What are the two main funding mechanisms for Group Insurance Plans?

1.

Fully Insured Plans – Here the group policyholder makes the monthly premium payments to the Insurance Co and the Insurance Co. bears the responsibility for all claim payments. This is also known as Traditional Funding Arrangement.

2.

Here the the empl employ oyer er take takess the the comp comple lete te Fully Fully Self Self Insure Insured d Plans Plans – Here responsibility for all the claim payments & related expenses.

3.

Othe Otherr fun fundi ding ng mecha echani nissms fal falll bet betwe ween en tho those two. two.

Following three mechanisms are built upon the Fully Insured Plans: 

Retrospective Rating Arrangements Under this the insurer agrees to charge the group policyholder a lower monthly premium than it would normally charge based upon the group’s prior claim experience. On the other hand, the Group Policy Holder agrees to pay an additional amount to the insurer if at the end the policy year; the group’s claim experience becomes unfavorable. RRA usually includes an experience refund feature, which means if the group’s claim experience is favorable, the insurer will refund some amount to the group policyholder.



Premium Delay Arrangements This allows the group policyholder to postpone paying monthly group insurance premium for a stated period of time (usually 60 or 90 days) beyond the expiration of the policy’s grace period. This helps the group policyholder to make use of that amount in its own


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purpose. But the group policyholder must pay the deferred premiums, if any, to the insurer when the contract terminates. 

Minimum Premium Plans Under MPP, the group policyholder deposits into a special account funds an amount that is sufficient to pay a stated amount of claims. The insurer pays the claims until this fund is exhausted. Thereafter, the insurer is responsible for paying the claims from its own fund against a very nominal premium from the group policyholder. In MPP the premium taxes get considerably reduced.

Following three mechanisms are built upon the Self Insured Plans: 

Salary Continuation Plan Under this plan, the employer provides 100% of the insured employee’s salary on the first day of the employee’s e mployee’s absence due to sickness or injury & continuing that for some specified time.



Stop Loss Coverage If a self-insured group experiences several catastrophic medical claims in one year, the employer may not have that much fund to cover all such claims. To deal with such situations many employers purchase Stop-Loss Insurance from an insurance co. so that they can transfer their liability to the insurance co. when the claims exceed a certain dollar amount.

There are two types of stop-loss coverage available. Under Individual Stop-Loss Coverage / Specific Stop-Loss Coverage the insurer pays a portion of the each claim that exceeds a stated amount. Under Aggregate Aggregate Stop-Loss Coverage the insurer pays when the employer’s total claims exceed a stated dollar amount within a stated period of time (usually 12 months). Note:

1) The insurer in Stop-Loss Coverage is known as the Stop-Loss Carrier. 2) The carrier does not pay the benefits directly to the insured. It reimburses the employer, who stands responsible for making the payments to the group insured.


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



Plan Administration Some self-insuring employers purchase Administrative Service Only (ASO) contracts from any insurance company or a Third Party Administrator (TPA) to deal with the administrative aspects of a group insurance plan. A TPA is an organization other than an insurance company that provides administrative services to the sponsors of Group Benefit Plans. Unde Underr an ASO cont contra ract ct,, the the empl employ oyer er pays pays a fee fee in exch exchan ange ge for for the the administrative services provided by the insurer or the TPA. These fees are not subject to state premium taxes. What are the benefits of Fully Self Insurance to the Fully Insured Plans? 1) No premiums need to be paid any insurer. 2) So avoids insurer’s expense charges. 3) Avoids paying profit of the insurer. 4) Avoids paying commissions to agents. 5) Employer retains the money for the premium with it, which leads having an improved cash flow & earning interest on that.

More importantly, self-insured plans are exempted from State Laws providing more freedom to the self-insurance employer in designing the plans. However, many self-insured plans in the US, are subject to regulation by the federal ERISA.


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CHAPTER 21: TRADITIONAL INDIVIDUAL HEALTH INSURANCE POLICIES

People who are otherwise not eligible for group health insurance coverage generally purchase individual health insurance policies. This is a contract between the insurer and the policy owner. The policy will describe the coverage provided, the benefits payable, and the premium amounts and their due dates. The policy owner and the insured are usually the same person. The insurer typically pays the benefits directly to that person or to a medical-care provider on behalf of that person. The number of coverage options that insurers offer to group policyholders is usually not available to individual policy owners. But the applicant of an individual health insurance policy is generally permitted to make choices concerning the following: • • • •

Benefit levels Renewal provisions Amount of the policy’s deductible (for individual medical expense policies) Combin Combinati ations ons of elimin eliminati ation on period periodss and maximu maximum m benefi benefitt period periodss (for (for indivi individu dual al disability income policies)

Individual Health Insurance Policy Provisions

Many of the provisions for Individual Health Insurance policies are same as with the Group Health Insurance policies. Here we discuss some of the provisions typically included in the Individual Health Insurance policies. Renewal Provision

This provision describes •

•

The circumstances under which the insurer has the right to refuse to renew or the right to cancel the coverage. The insurer’s right to increase the policy’s premium r ate.

Traditionally, Canadian insurers and US have used the following 5 general classifications of individual health insurance policies.

•

Cancelable Policy. Optionally renewable policy. Conditionally renewable policy. Guaranteed renewable policy.

•

Non-cancelable policy.

• • •

Cancelable Policy grants the insurer the right to terminate the policy at any time, for any reason, simply by notifying the policy owner that the policy is cancelled and by refunding any advance premium that has been paid for the policy. Some states in the US do not permit insurers to issue cancelable policies.


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Optionally Renewable Policy gives the insurer the right to refuse a policy on certain dates specified in the policy-usually either the policy anniversary date or any premium due date. Insurer is also allowed to add coverage limitations and to increase the premium rate if it does so for an optionally renewable policy.

A class of policies consists of all policies of a particular type or all policies issued to a particular group of insured. Conditionally Renewable Policy grants the insurer a limited right to refuse to renew an individual health policy at the end of a premium payment period. The decision must be based on one or more specific reasons stated in the policy. The reasons cannot be related to the insured’s health. The age and employment status of the insured are often listed as reasons for possible non-renewal. Guaranteed Renewable Policy means that the insurer must renew the policy-as long as premium payments are made-at least until the insured attains the age limit stated in the policy. Mostly this age is 60 or 65. Sometimes it could be 70 and there are cases when the policy is a guaranteed renewable policy through the lifetime of the insured. Non-cancelable Policy is guaranteed to be renewable until the insured reaches the limiting age stated in the policy. In addition, the insurer does not have the right to increase the premium rate for a non-cancelable policy under any circumstances; the guaranteed premium rate is specified in the policy.

Disability income policies typically are non-cancelable, medical expense policies are rarely noncancelable. In the US, HIPAA enacted in 1996 imposes a general requirement that the insurers must renew or continue an individual medical expense insurance policy in force at the option of the policy owner. In common-law jurisdictions of Canada, most individual medical expense policies are cancelable and most disability income policies are ar e non-cancelable. In the province of Quebec, individual health insurance policies have several classifications, from which the applicant can choose the one to purchase. Premiu Premium m rates rates for non non-can -cancel celab able le polic policies ies are higher higher than than equiva equivalen lentt polici policies es in the other other classifications.


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Grace Period Provision Allows the policy owner to pay a renewal premium within a stated grace period following the premium due date. The length of the grace period varies, depending on how frequently renewal premiums are payable. Generally policies with monthly renewal premiums have a 10-day grace period. Policies with less frequent renewal premium periods have typically a 31-day grace period. Reinstatement Provision States that if certain conditions are met, the insurer will reinstate a policy that has lapsed for nonpayment of premiums. The policy owner usually must pay any overdue premiums and must complete a reinstatement application. Insurer has the right to evaluate the reinstatement application and to decline to reinstate the policy on the basis of statements in that application. If the insurer does not complete the evaluation within a stated number of days-in most states, 45 days-after receiving the reinstatement application, or if the insurer accepts an overdue premium without a reinstatement application, then the policy is usually considered to be automatically reinstated. Coverage under a reinstated policy is limited to accidents that occur after the date of reinstatement and to sicknesses that begin more than 10 days after the date of reinstatement. Incontestability provision Most individual individual medical medical expense expense policies policies contain contain a provision provision entitled entitled time time limit limit on cer certai tain n defenses. This is also known as incontestable clause or incontestability provision. This states that after the policy has been force for a specified period, usually 2 or 3 years, the insurer can’t use material misrepresentations in the application either to void the policy or to deny a claim unless the misrepresentations were fraudulent.

Most individual disability expense policies contain a incontestability provision which states that after the policy has been force for a specified period, usually 2 or 3 years, the insurer can’t contest the policy’s validity on the ground of material misrepresentations in the application. This does not includ includee a refere reference nce to fraudu fraudulen lentt misrep misrepres resent entati ation. on. Essen Essenti tiall ally y this this is same same as that that of the incontestability incontestability provision in LI policies in USA. Pre-Existing Conditions Provision Most individual health insurance policies include a pre-existing conditions provision stating that until the insured has been covered under the policy for a certain period, the insurer will not pay benefits for a pre-existing condition.

A pre-existing condition is usually defined in individual health insurance policies as an injury that occurred or a sickness that first appeared or manifested itself within a specified period-usually 2 years-before the policy was issued and that was not disclosed on the application. The insurer has the opportunity to evaluate such a condition and, thus, can specifically exclude the condition from the policy’s coverage. In most states and throughout Canada, 2 years is the maximum period during which an insurer is permitted to exclude pre-existing conditions from coverage. Insurers are permitted to specify a shorter exclusion period because a shorter exclusion is more favorable to the insured. In USA, HIPAA prohibits insurers from including a pre-existing condition in the individual health insurance policy issued to specified individuals. Claims Provisions


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This define both the insured’s obligation to provide timely notification of loss to the insurer and the insurer’s obligation to make prompt benefit payments to the insured. In Canada, the policy usually requires the insured to notify the insurer of a claim in writing within 30 days from the date the claim arose and to furnish the insurer with proof of loss within 90 days from the date the claim arose. The insurer must pay benefits within 60 days of receipt of proof of loss for a medical expense claim and within 30 days of receipt of proof of loss for a disability income claim. Policies issued in the US contain similar requirements. Physical Examination Provision

After the insured submits a claim, the insurer has the right to have the insured examined by a doctor of the insurer’s choice, at the insurer’s expense. The insurer, therefore, has the ability to verify the validity of disability income claims. Legal Actions Provision

This provision limits the time during which a claimant who disagrees with the insurer’s claim decision has the right to sue the insurer to collect the amount the claimant believes is owed under the policy. The length of this time period varies from jurisdiction to jurisdiction, but varies between 1 to 3 years after the claimant provides the insurer with proof of the loss. Change of Occupation Provision

This allows the insurer to adjust the policy’s premium rate or the amount of benefits payable under a policy if the policy owner changes his occupation. The insurer is typically permitted to reduce the maximum benefit payment amount payable under the policy if the insured changes to a more hazardous occupation. If the insured changes to a less hazardous occupation, the provision permits the insurer to reduce the policy’s premium rate. Over insurance provision

This is intended to prevent an insured from profiting from a sickness or injury. This provision states that the benefits payable under the policy will be reduced if the insured is over insured. An over insured person is one who is entitled to receive either •

•

More in benefits from his medical expense policies than the actual costs incurred by treatment. A greater income amount during disability than he earns while working.

Individual Health Insurance Underwriting

The underwriter evaluates an application for individual health insurance policy to determine the degree of morbidity risk represented by the proposed insured. Morbidity Factors

The primary factors that affect the degree of morbidity risk presented by a proposed insured are the individual’s age, current and past health, sex, occupation, avocations, work history, and habits and lifestyle.


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Age: Morbidity rates generally increase with age. Health: The current health and the individual’s health history are required in determining the morbidity risk. Sex: Females have a higher morbidity rate than males of the same age. Occupation: The morbidity risk also depends on the applicant’s occupation. An individual’s risk classification and corresponding premium rate correspond to the individual’s occupation class. individua dual’s l’s avocat avocation ionss also also have have a strong strong bearin bearing g on his potent potential ial health health Avocations: The indivi insurance risk. Work history: An individual’s work history can also have a bearing on her morbidity risk. Habits and Lifestyle: The person’s habits and lifestyle can expose him to a high degree of risk and accidental injury or illness. Risk Classifications

The risk classifications are: • • •

Standard risk Substandard risk Declined risk

Exclusion rider, also called the impairment rider, specifies that benefits will not be provided for any loss that results from the condition specified in the rider.


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CHAPTER 22: MANAGED CARE PLANS

Managed Care Plans were created to: 1. Eliminate the fact that more frequent visit by patient to doctor means more financial benefit for doctors. 2. Broaden the circle of financial risk to include health care providers. Health care providers should be encouraged to deliver the necessary care in a cost-effective way. Utilization management: Process by which a plan manages an insured’s use of medical services and assures that she receives necessary, appropriate, high quality care in a cost effective manner. Utiliz Utilizati ation on manage managemen mentt broade broadens ns and combin combines es utiliz utilizati ation on review review and case case manage managemen mentt techniques. Utilization Review is a process by which a plan evaluates the necessary and quality of a patient’s medical care. UR includes: 1. Preadmission certification: Insured must contact a UR agent if he wishes to get admitted to hospital. UR agents then determines the kind of service needed and makes proper arrangements 2. Concurrent review: While patient is in hospital, UR staffs monitors the condition 3. Retrospective reviews: Same as preadmission but is done after the patient’s release from hospital. This is a concurrent review step of the whole analysis. This might reveal erroneous charges and billing errors. Case Management

Case Management is an extension of UR and is a process by which a plan evaluates not only the medical necessity of care but also alternative treatments or medical care. Health care coverage Continuum:

Traditional Indemnity Plans

PPO

Gatekeeper PPO

Open ended HMO

HMO

Pure Managed Care plans

Health Maintenance Organizations (HMO)

A HMO is a health care financing and delivering system that provides comprehensive health care services for subscribing members (Subscribers) in a particular geographic area. HMOs can be owned or sponsored by many different types of organizations: by national HMO organizations, by commercial insurers, and by medical schools and hospitals. HMOs can be operated as either notfor-profit or for-profit organizations.


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Characteristics of HMOs

1) Comprehens Comprehensive ive Care: HMO subscribers subscribers are eligible eligible to receive receive comprehens comprehensive ive health health care services, including impatient and outpatient treatment in a hospital. Unlike traditional indemnity plans, HMO emphasize the practice of preventive care, including routine physical examinations, diagnostic tests, pre-natal and well-baby care, and immunizations. 2) Prepaid Care: In a traditional HMO, subscribers subscribers receive comprehensive health health care in exchange for the payment of a periodic fixed fee. Most HMOs require the subscriber to pay an additional fee (co-payment) for certain medical services. HMOs shift all or part of the financial risk to the health care providers. 3) Network Providers and Negotiated Fees: HMOs contract with physicians and hospitals to make up a network of health care providers. HMO subscribers must choose their medical care providers from within this network. By Contracting, HMOs achieve advantages like: Can control the quality of the providers Can negotiate fees and thus reduce the cost • •

These are the fee structure arrangements that are used to pay the providers. Capitation: Under this arrangement the providers gets paid PMPM (per member per month) for a subscriber regardless of number of visits. But PMPM may be different for each HMO subscriber Salary: Physicians get a pre-determined salary based on the average salaries of local physicians in the same field. They also receive certain types of performance bonuses or incentive pay. Discounted fee-for-service: HMO pays physicians a certain percentage of their normal fees (like 90%). It is not as widely used as other fee structures. Fee Schedule: The HMO will pay up to a specified maximum fee for each procedure. In this case it is transferring more risk to the service providers. 4) Intensive Use of Managed Care Techniques: HMO requires subscribers to select Primary care physician (PCP) who serves as the first contact with the HMO. If additional care needed, PCP refers refers the subscrib subscriber er to specia specialis lists ts withi within n the the networ network. k. That That is why they are often often called called gatekeepers.

Types OF HMOs Open Panel HMO: any physician or provider who meets the HMO’s specific standards can contract with the HMO (2 type) Closed Panel HMO: physicians either must belong to a special group of physicians that has contracted with the HMO or must be employees of the HMO (2 type) Mixed Models: combine characteristics of two or more methods. Open Panel Individual Practice Association (IPA) model: Under this arrangement, HMO enters into • a contract with an IPA, which is an association of physicians (independent practitioners) that agrees to provide services. Physicians provide services to their own patients as well as to the HMO subscribers. This model requires less start-up capital and can offer a broad range of specialists. IPA model is generally compensated by ‘capitation’ or ‘discounted fee-for-service’ arrangements. Some HMO requires subscribers to pay co-payment also. But in this case the financial risk rests with an IPA.


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•

contracts directly with the physician physicianss (primary (primary care Direct Direct Contra Contract ct HMO: HMO: HMO contracts physi physicia cians ns or specia specialis lists) ts),, not thru thru any associ associati ation onss or middle middleman man.. Fee structure, structure, financial risk, less start-up capital (own clinic and staff) – same as above

Closed Panel Staff Model: Physicians are actually employees of the HMO and generally out of offices • in the HMO’s facilities. The staff model HMO may own or contract with hospitals, laborator laboratories, ies, pharmacies pharmacies,, and other other organizat organizations ions to provide provide non-phys non-physician ician medical medical services. Uses ‘Salary’ structures. Financial risks on the HMO, costly to start up but have greater control over physicians so can manage utilization of health care services better than other models. Group Model: Functions same as a staff model, except that the physicians are employees • of a physicians’ group practice, rather than employees of the HMO. The physicians in such a group share office space, staff, and medical equipment at a common health center or clinic. Ex: Kaiser Permanentre in the US. If the group HMO contracts with more than a group, then it is called a network model HMO. Pay to the group by ‘capitation’ method, group pays the physician ‘salaries’ based on their performance, expertise and amount of administrative work. Financial risk on the physicians’ group. Preferred Provider Organizations (PPO)

Unlike HMO, PPO does not provide health care directly rather it acts as a broker or middleman by contracti contracting ng between between health health care providers providers and health health care purchasers purchasers (employers, (employers, third-par third-party ty administrations, insurance companies, and unions). PPOs can be organized or sponsored by group of phy physic sician ians, s, hospi hospital tals, s, Blue Blue Cross Cross or Blue Blue shiel shield d plans plans,, TPAs, TPAs, or employ employers ers.. In the US, insurance companies are the dominant sponsors of PPOs. PPOs also use a network of providers but also offer some coverage for members who choose to use the services of non-network or out-of-network providers. Out-of-pocket expense (generally 30%) will be more in case of out-of-network provider selection, only to encourage the subscribers to choose the network provider. PPOs typically compensate health care providers on a fee-for-service basis. As a result, PPOs do not accept the financial risk of providing health care services to insureds but they pass it on to either the insurer or the policyholder. Hybrid Plans •

•

Open-ended HMOs or Point of service (POS) Plan: This plan has some features of a traditional HMO and some of a traditional indemnity plan. The subscriber of this plan either uses the HMO network or may choose to use a provider that does not participate in the HMO. HMO. The The subscr subscribe iberr typica typically lly pays pays higher higher out-o out-of-p f-pock ocket et expens expensee than than und under er a tradit tradition ional al indemn indemnity ity plan. plan. But this this plan plan contai contains ns financ financial ial incent incentive ivess to encour encourage age subscribers to use network providers. Gatekeeper PPOs: This PPO plan requires plan members to choose PCP (gatekeepers) within the PPO network of physicians. In this case, the out-of-pocket expense will be lower than the usual PPO.

Another difference is this plan is the compensation method to the providers. Here PCP is compen compensat sated ed on a capita capitatio tion n basis. basis. Thus Thus gatek gatekeep eeper er PPOs PPOs trans transfer fer financ financial ial risk risk to providers.


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CHAPTER 23: REGULATION OF HEALTH INSURANCE Regulation in the United States State Regulation of Health Insurance: NAIC has developed these model laws to regulate the health insurance: Uniform Individual Accident and Sickness Policy Provision Law • Group Group Health Health Insurance Insurance Definition Definition and Group Group Health Health Insurance Insurance Standard Provision Provisionss • Model Act Model Newborn Children Bill • Group Health Insurance Mandatory Conversion Privilege Model Act • Group Coordination of Benefits Regulations and Guidelines •

Most state regulations for individual health insurance are similar as they are patterned with the NAIC model laws, but state regulations for group health insurance differs widely from state to state as they are not patterned with the NAIC model laws. Policy Provisions: Most state insurance laws require including these provisions in the policy: Minimum grace period be included in individual and group policies • Incontestable clause in individual and group policies • Most states limit the time within which pre-existing conditions can be excluded from • coverage (in individual and group policies) Cancellation and renewal provisions (in individual policies) • Reinstateme Reinstatement nt provisio provision n (in individu individual al policies) policies),, and Conversio Conversion n provision provision (in group • policies) Coordination of Benefit (COB) provision in group policies, and overinsurance provision in • individual policies. Regulations Unique to Group Health Insurance: About half of the states require a minimum number (usually 5 or 10) under a group policy. The insurer can rely solely on its own underwriting requirements to decide the minimum group size if state doesn’t require any minimum number. Most state laws also states the eligibility requirements for a group to have a group health insurance policy. NAIC model laws states that the group should be an employer, a labor union, a creditor, a trust established by an employer or union, an association, a credit union, or a discretionary group. Mandated Benefits: Applicable to both group and individual policies. The benefits that have been mandated include, among among others others,, covera coverage ge of newbor newborn n child children ren,, treatm treatment ent of alcoho alcoholis lism m and drug drug addict addiction ion,, coverage of services provided by chiropractors, psychologists and podiatrists; coverage of certain diagnostic tests such as mammograms. But these benefits widely vary from state to state. Regulation of Alternative Providers: In addition to regulating the insurance industry and traditional health insurance, the states also regulate HMOs, PPOs, and other alternative health care plans. State laws for regulating HMOs are based on the NAIC Model HMO Act. In order to qualify, an HMO must provide certain basic health care services and must meet a number of statutory requirements designed to ensure the financial and operational viability of the plan.


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Taxation: Health insurers are subject to state, as well as federal, taxes. Most states impose a premium tax on insurance premiums received by insurers operating within the state. The states do not tax to selffunded health insurance. The states generally do not tax premiums paid to the Blue Cross and Blue Shield and HMOs. In states, an employer may deduct as a business expense any group health insurance premiums it paid on behalf of the employees. Employees also generally are not taxed on premiums paid on their behalf except for disability income benefits. Federal Regulation of Health Insurance: Age Discrimination in Employment Act (ADEA): An employer having 20 or more employees must comply with this act. This Act protects workers who are age 40 and older from being discriminated against because of their age. As per this act, all active employees, regardless of age, must be eligible for the same health care coverages, and older employees cannot be required to pay more for that coverage than younger employer pay. Retired employees are not protected by the ADEA. Title VII of the Civil Rights Act of 1964: An employer having 15 or more employees and that are engaged in interstate commerce must comply with this act. This act prohibits employment discrimination on the basis of race, color, sex, religion, or national origin. A 197 1978 8 amendm amendment ent to this this act, act, Pregnan Pregnancy cy Discr Discrimi iminat nation ion Act, Act, requir requires es employ employers ers to treat treat pregnancy, childbirth, or related medical conditions the same as any other medical conditions. (Applicable for employees as well as to their wives) Family and Medical Leave Act: An employer having 50 or more employees must comply with this act. As per this act, an employee can take up to 12 weeks of unpaid leave within any 12-month period upon the birth or adoption of a child, to care for a seriously ill family member, or while the worker is ill. The Act also requires that the employers continue to provide group health insurance to workers while they are on family and medical leave. Employee Retirement Income Security Act (ERISA): The terms of ERISA take precedence over any state laws that regulate employee benefit plans. An employ employer er that that sponso sponsorr welfa welfare re benefi benefitt plans plans (medi (medical cal,, surgic surgical, al, hospi hospital tal,, disabi disabili lity, ty, death, death, unemployment benefits, etc.) must comply with this act. ERISA requires group plans to have a written plan document, to have a summary plan description, and to file an annual report with the IRS, and establishes standards of conduct for plan fiduciaries. Consolidated Omnibus Budget Reconciliation Act (COBRA): An employer having 20 or more employees must comply with this act. COBRA requires that certain persons whose group health coverage would otherwise terminate be allowed to continue the coverage at their own expense for a stated period following a qualifying event. 18 month period in case of job termination. 36 month period in in case of a death or divorce. 36 month period for a dependent child. The insurer can also add 2 percent of the actual premium as an administrative fee. Upon the occurrence of a qualifying period, plan administrator must notify the covered individuals of their rights under COBRA. The covered individuals have a specified time within which they can elect to continue. Health Insurance Portability and Accountability Act (HIPAA):


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This act imposes requirements on employer-sponsored group medical expense insurance plans (exception (exception:: accident accident only coverage, coverage, only disability disability income income coverage) coverage) and insurers insurers that issue individual medical expense insurance coverage. HIPAA does not preempt state insurance laws that are more favorable to the insureds. HIPAA requires the guaranteed availability of individual medical expense coverage to certain individuals who have had group medical coverage. The insurers are exempt from this requirement if the state implements an alternative mechanism by which such eligible individuals may obtain coverage. Regulation of individual Medical Expense Policies: HIPAA imposes that insurers must renew or continue an individual policy in force at the option of the policyowner. However the insurer can disc discon onti tinu nuee the the cove covera rage ge in case case of nonp nonpay ayme ment nt of prem premiu ium, m, frau fraud d or inte intent ntio iona nall misrepresentation, complying with statutory requirements, insured no longer resides or works in the network’s geographic (in case of a network health care plan) or no longer an association member (in case coverage available thru an association). Regulation of Group Medical Expense Policies: HIPAA imposes a number of requirements on group medical plans including indemnity plans and managed care plans: HIPAA places limits on the pre-existing condition exclusion. These limits are designed to allow group insureds that have a pre-existing condition to change the job without losing coverage for the coverage. The maximum look-back period under HIPPA for pre-existing condition is six months. HIPAA requires a group health benefits plan to provide a special enrollment period for specified individuals who declined the coverage first time. HIPAA prohibits group health benefits plans from establishing eligibility rules for group health coverage based on health status, medical condition, claims experience, genetic information, and disability. Insurers that offer group health coverages must renew such coverage at the option of the group policyholder. Although HIPAA permits insurers to increase the premium rates charged for such renewal charges. •

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Mental Health Parity Act: This Act imposes that if the plan is offering the mental health plan then it may not set an annual or lifetime maximum mental benefits limit that is lower than any such limits for medical and surgical benefits. And if it does not set a limit on medical benefits may not impose such a limit on mental health benefits. Newborns’ and Mothers’ Health Protection Act of 1996: This law does not require policies to provide benefits for maternity and newborn care but it imposes specific requirements on plan that do provide such benefits. Such policies must provide coverage for at least 48-hour hospital stay following a normal delivery and 96 hours for a cesarean section. Women’s Health and Cancer Rights Act of 1998: According to this act, insureds who receive benefits in connection with a mastectomy and who elect to have breast reconstruction following the mastectomy are entitled to receive benefits for the reconstruction. Health Maintenance Organization (HMO) Act of 1973: Federally qualified HMOs and employers that have 25 or more employees and that make contributions to an employee health care care plan plan must must comply comply with this this act. act. The HMO act encourag encouraged ed the estab establis lishme hment nt and development of HMOs by providing grants and low-interest loans to start up HMOs that met


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federal federal qualificat qualification ion requiremen requirements. ts. These These requiremen requirements ts include include standards standards concerning concerning plan solvency, plan design and benefits, and plan administration. Taxation: In most most cases, cases, the employ employer’ er’ss contri contribu butio tions ns are not consid considere ered d taxabl taxablee incom incomee to the emp employe loyee. e. But But in case case of a self self-f -fun unde ded d grou group p heal health th plan plan,, if it fail failss to meet meet the the nondiscrimination requirements of the federal tax laws then the part of the benefits that highly compensated employees receive are considered taxable income to those employees. Medical expense benefits that employees receive are not considered taxable except disability income benefits. Disability income benefits are not taxable income when received under an individual disability income policy purchased by the insured.

Regulation in the Canada Federal Regulation of Health Insurance:

The federal Canada health Act establishes the following criteria that provincial hospital and medical expense plans must meet in order to qualify for federal financial assistance: • •

• • •

The plan must be administered on a nonprofit basis by the province or a provincial agency. The plan must be comprehensive, covering specified health services provided by hospitals, medical practitioners, and dentists. The plan must provide universal coverage (cover all residents of province). Plan benefits must be portable. The plan must provide insured services on a nondiscriminatory basis.

In order to encourage the continuance of private disability income plans, the Unemployment Insurance Act allows employers to register qualified, private disability income plans with Human Resources Development Canada. In order to qualify for registration, a private plan must meet the following criteria: Benefits must begin no later than the 15 th day of disability and must continue for at least • 15 weeks. The benefit level must be at least 60 percent of insurable earnings. Employees must become eligible for benefits after completing no more than three months of continuation service. • •

Provincial Regulation of Health Insurance

Provin Provincia ciall Insura Insurance nce Laws: Laws: In most most respec respect, t, the regul regulati ation on of health health insur insuranc ancee is simila similar r throughout Canada since they have adopted the Uniform Accident and Sickness Insurance Act (Uniform A&S Act) developed by CCIR. The provincial insurance laws contain requirements relating to several provisions that are typically included in health insurance policies: Incontestability Provision: 2 years for misrepresentation, anytime in case of a fraudulent misrepresentation Pre-existing Condition: 2 years Continuation of coverage when a group policy terminates How disability income benefits must be paid when an insured person is overinsured. A number of provisions that insurers typically not required by provincial insurance laws to include in the policies like, reinstatement provision, grace period provision, conversion provision. •

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CLHIA Guidelines:

The CLHIA has issued: Guidelines Governing Individual Accident and Sickness Insurance: addresses matters such as the renewal provision in an individual health insurance policy. Coordination of Benefits (COB) Guidelines: to ensure that the COB provisions included in group health insurance policies throughout Canada are consistent. Group Life and Group Health Insurance Guidelines: provide a minimum standard for group insurance policies. The CLHIA group guidelines, for example, include a number of provisions designed to protect group members when the policyholder has changed insurers. Taxation: Province of Quebec treats contributions an employer pays on behalf of an employee under a private health insurance plan as taxable income to the employee. Otherwise it is non-taxable everywhere. In case of a disability benefits, the taxable amount part is the one for which the employer (and not the taxpayer) has paid the premium.


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Life Insurance Ccp Notes.....

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