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FSU RMI 3011 - Life & Health Risks

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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/Workers Compensation• 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 substantial number 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 and B. 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


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