Life Health Risks Financial Impact of o Premature Death others low frequency once o Poor Health more likely to be healthy unexpected death when you have financial responsibilities to Tie between health and education If you re well educated you re o Disability Injured or incapacitated for more than 3 months o Long Life Insurance Do you have enough money saved up Are you outliving your assets 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 Liabilities o Non wage Earning Adult Married Single with dependents Single with independents o Child Funeral expenses burial Approaches for Valuing Life 1 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 Solutions Managing Exposures Individual Employer Group Gov t Social Program Premature Death Life Insurance Group Life Social Security Poor Health Healthcare Long term Care Medicare Medicaid Long Life Annuities IRA Pensions 401k IRA Social Security Disability Aflac Supplemental Short term Disability Long term Disability 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 Programs 1 Safety Net Economic Security A Social Security 2 Social Problem B Medicare 3 Lack of Private Market C Workers Comp o 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 Earnings 5 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 OASDHI Retirement benefit eligibility can apply earlier for decreased benefit o 1 45 Medicare o Employer matches contribution o Minimum 113 700 taxable for Social Security o No limit for Medicare o Fully Insured 40 TOTAL Credits 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 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 employers 65 and older health insurance provided to retirees no longer receiving insurance through 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 prescriptions insurance then kicks in and you pay a co pay up to 2 970 coverage then stops until your total drug expenses exceed 4 700 where it kicks back in Requires monthly premium Problem 101 o Pay less per procedure OR do less procedures Worker s Compensation Principles o State program o Negligence NOT a factor absolute liability for employer o The cost is made a cost of doing business and production which is passed to the consumers Example Pharmaceutical company inflates drug prices to reflect workers compensation claims o Gives
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