Life & Health Risks- Financial Impact of:o Premature Death : unexpected death when you have financial responsibilities to others; low frequency (once).o Poor Health : Tie between health and education. If you’re well educated, you’re more likely to be healthy.o Disability : Injured or incapacitated for more than 3 months.o Long Life : Do you have enough money saved up? Are you outliving your assets? Insurance ↑- Financial Impact of Premature Death of a:o Wage Earning Adult : Married – financial impact is higher Single with dependents Single with no dependents Factors affecting how much you’re worth:- Education Level- Income/Expenses- Debt/Assets/Liabilitieso Non-wage Earning Adult : Married Single with dependents Single with independentso Child : Funeral expenses, burial- Approaches for Valuing Life1. Income Approach : PV of future earnings.2. Needs Approach : financial needs of dependents going forward.3. Capital Protection : assets you protect for dependents.- Financial Impact of Poor Health:o Ability to earn income may decrease or cease.o Living expenses may continue or increase.o Evaluate same exposures as premature death.- Financial Impact of Disability:o Ability to earn income may cease or decrease.o Living expenses may continue or increase.o Evaluate same exposure (wage-earning, non-child).- 3 Sources of Risk Management SolutionsManaging ExposuresIndividual Employer/Group Gov’t/Social ProgramPremature Death Life Insurance Group Life Social SecurityPoor Health Healthcare Long-term Care Medicare/MedicaidLong Life Annuities/IRA Pensions/401k/IRA Social SecurityDisability Short-term Disability/Long-term DisabilityAflac/Supplemental Social Security/WorkersCompensation- Employee Benefits :o Purpose is to attract and retain good employees in competitive job markets.o Employer contributions are a deductible business expense for “qualified” plans.o “Qualified” status related to compliance with ERISA requirements.o Benefits not taxable to employees.o Non-contributory benefits are employer pay-all. Contributory programs involve employee contributions.- Group Insurance :o Basic Characteristics:1. Master Contract: Contract between employer and insurance company. Individual contracts for employees/group members.2. Cost Savings: Marketing savings to groups instead of individuals. Groups have, generally, fewer losses (loss ratio). Employer contributions.3. No Evidence of Insurability: No physical needed, health questions, etc.4. Experience Rating: Employers get feedback from insurance companies.- Example: Employers offering gym membership.- Principles of Underwriting :o Main Purpose of Group Insurance: Flow of participants – members of the group are changing through time. Actual determination of benefits – formula applied to set benefits. Minimum participation – want to avoid adverse selection by having a substantialnumber of participants. Administrative Efficiency.Social Insurance- Why? Programs1. Safety Net (Economic Security) A. Social Security2. Social Problem B. Medicare3. Lack of Private Market C. Workers Compo Basic Characteristics :1. Compulsory: If you work, you contribute to social security.2. Floor Benefits: Not designed to be only source of income. Designed to be a minimum benefit.3. Social Adequacy ≠ Individual Equity: Is it fair to me? Who cares.4. Benefits Tied to Earnings5. Benefits Prescribed by Law: Age requirement, etc.6. No Means Testing: don’t have to be below poverty level for Medicare.7. Funding? Fully?: Current workers pay for current retirees, but soon there will be more retirees than workers.- Social Security (OASDHI) :o Most employment situations covered.o Payroll tax withholding required.o Participants accumulate “credits” based on Minimum Earned Income. 2013, $1,160 per credit/$4,640 for maximum 4 credits Once you reach 40 credits, you are fully insured under Social Security.o Financing on “pay-as-you-go”o Employee pays payroll tax.o 6.2% OASDHIo 1.45% Medicareo Employer matches contribution.o Minimum $113,700 taxable for Social Security.o No limit for Medicare.o Fully Insured: =40 TOTAL Credits Retirement benefit eligibility- can apply earlier for decreased benefit. Medicare eligibility – must wait till 65.o Currently Insured: 6 of last 13 quarters (Part-time) Survivors’ benefits eligibility.o Disability Insured: 10 of last 20 quarters Disability benefit eligibility. Modified for younger workers (<31).- Benefits :o Amounts Based on Primary Insurance Amount (PIA): Covered earnings averaged. Adjusted for inflation.o Loss of Benefits Possible: Disqualifying income (must be earned). Loss of eligible status (children, widows).o Retirement Benefit (Deferred Annuity): PIA benefit payable to retiree. ½ PIA payable to spouse if the amount is higher than what spouse would get.o Survivors’ Benefit (Life Insurance) ($255): Payable to spouse. Payable to children.o Disability Benefit: Payable to disabled employee.- Medicare : health insurance provided to retirees no longer receiving insurance through employers (65 and older).o Even if you still work, you qualify.o Part A – Hospital Expense Insurance (Automatic) : Automatic, no fee, once you hit 65 everybody gets it Covers:- Hospital Services (up to 90 days per occurrence) – you are responsible for the first $1,184 (deductible).- Some nursing home stays depending on various factors.- After 60 days, what Medicare pays begins to go down.- On day 61, you begin paying $296/day until day 90.o This is an example of a Graduate Cost Sharing mechanism.o Part B – Physicians’ Services (Voluntary) Requires monthly premium. Includes cost sharing: deductibles, co-insurance, and co-pays.o Part C – Medicare + Choice (Optional) Private insurance sold by private, for profit, insurance companies to those 65 and older (HMO or other managed plan). Benefits must be equal to or greater than the traditional coverages in Part A andB. REPLACES Part A and B. May pay extra benefits (i.e. prescription drugs). Removes need for “Medigap” policy; policy supplementing A and B.o Part D – Prescription Drugs ( Voluntary) Wide choice of plans where costs and covered medications differ. “Doughnut hole” plan design where you pay the first $200-$300 as deductible for prescriptions, insurance then kicks in and you
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