RMIN 4000 Risk Management and Insurance Pottier Exam 3 Lecture Notes Review
RMIN 4000 Risk Management and Insurance Pottier Exam 3 Lecture Notes Review RMIN 4000
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Date Created: 10/03/16
RMIN 4000 Lecture Notes Exam 3 Example – important Employee retirement plans, health insurance, auto insurance 3/15/16 Employee benefits: Retirement Plans, ch 17 • 60% or so of 65+ people have a retirement benefit that they earned from their employer • A company does not have to cover ALL of their employees, but there are rules about who HAS to be covered • 2 major categories o Defined Benefits (DB) plans (usually just the employer contributing $) § Traditional Defined Benefit—fixed monthly retirement income for as long as retired employee lives • no cost of living adjustment, very unusual in all private benefit plans § Cash Balance Plan—retirement income not fixed (not guaranteed) • Began in mid 1980’s • “usually not as good” • employer puts some % of your salary into the market, and promises a certain rate of return on that $ until you get to the NRA o Ex. every year we put in 5% of your salary, and every year we will guarantee a rate of 6% return on that account up until you reach NRA—guaranteed a total lump sum amount you will have at the end, and that’s all you get • You have a choice to transfer to IRA or buy annuity plan or move $ to your new employer’s retirement plan —consider the taxes to pay or not pay when withdrawing § Employee does not get to chose how this money is invested o Defined Contribution (DC) plans (usually you and employer puts in same amount of $) § Money Purchase—employer must make fixed contributions annually § Profit Sharing—employer is not required to make fixed contributions every year • 401(k), 403(b), 457(b) (profit sharing) plans—employee contributes, employer sometimes contributes § Keogh Plans—for self-employed people § Others—SIMPLE plans and simplified employee pension plans § Employee gets to chose how this money is invested based on options that the employer gives you • Defined Benefit Plans —Traditional o Fixed monthly retirement benefit starting at plan’s normal retirement age § Normal maximum retirement age for private plans is 65 (can be earlier) o Employer bears investment risk and longev ity risk—guaranteeing $ no matter how long you live or what happens in the market means you’re assuming the risk o Retirement income typically based on years of service, % credit and “final average salary” § ONLY considers time/salary at THAT company § “final average salary” will be defined in th e retirement plan paper work, it is typically your highest 3-5 year’s average (maximum of 5 years, 3 years is most common) 1 § % credit/year will also be defined in paperwork, typically 1 -2% § Years of service x final average salary x % credit/year = annual retirement income • Ex. Say you worked for GA Power for 20 years , had final average salary of $60,000, with a 2% credit…you get $24,000 retirement income per year o Expensive for employers—becoming less and less popular § By around the 1990’s on, majority of private plans are defined contribution plans • Defined Contribution Plans o Most common retirement plan is a 401(k) o Money Purchase Plan § Fixed employer contribution § Investment return not guaranteed by employer § Lump sum balance or annuity purchase option at end o Profit Sharing Plan § Employer contributions not required every year (not fixed!) § Investment return not guaranteed by employer § Lump sum account balance at retirement § Most defined contribution plans in this category § Just because a company makes a profit doesn’t mean they have to contribute • Retirement Plans—Qualified Plans o Employee Retirement Income Security Act (ERISA) § Rules for qualified retirement plans, such as eligibility, vesting and reporting • Vesting: what happens to $ an e mployer put into a retirement account for you and you leave the company o Pension Benefit Guarantee Corporation (PBGC) § Federal government insurance for DB plans § $60,136 annual pension (single life annuity) at age 65 • Retirement Plans—Provisions o Eligibility § Age 21 and one year of service (1,000 hours/yr = 1 yr of service) o Retirement Ages § Normal retirement age (NRA) • Typically, defined contribution plans do not have an NRA (if you collect early, amount is reduced) • Max NRA is 65 years old § Early retirement age § Late retirement § Mandatory retirement age illegal o Form of payment of retirement benefit § Annuity payment • Payment of X amount every month § Lump sum • Here is your lump sum, you can move it to an IRA or leave it in the 401(k), but this is all you get 3/17/16—Exam 2 2 3/22/16 • Employers are not required to offer benefit plans, only required to participate in social security • Benefit at normal retirement age: formula using years of service x % credit per year blah blah blah • Private defined benefit plans do not make adjustments for inflation after you retire like social security does • $$ limits on contributions change pretty often for inflation • Retirement Plans—Provisions (cont) o Limits § $53,000 annual limit on contributions ( Defined Contribution Plans ) • limit applies to employee + employer contributions • employee’s contributions are tax deductible • employer’s contributions are tax deductible • contributions are limited because they limit tax revenue for the government • $ coming out of a defined contribution pl an is subject to income taxes • when you get to 70 ½ you must start withdrawing money annually from 401(k)s so you can’t delay taxes forever § Inflation Protection • Private employer plans generally do not increase benefit for inflation after employee retires § Vesting—right to employer contributions • “vested” = employee keeps that % of employer contributions to DC plan account • What happens to $$ that your company puts into a retirement account for you after you leave? Vesting is the way of figuring out how much of that $ you get to keep • Cliff—100% at 5 years, zero before then • Graded—3-7 years o 20% (3 years), 40% (4 years), 60% (5 years), 80% (6 years), 100% (7 years) • Other Retirement Plans o 401(k) plans § Before-tax employee contributions—reduces the amount of taxable income, therefore lowering the income taxes you/a business may owe § most popular private DC plan § employers may (but are not required) match employee contributions § private employers & private tax exempt o rganizations o Roth 401(k) plans § After-tax employee contributions § Distributions are income -tax free if account was held for 5 yrs and you are at least age 59 ½ § No income limit to contribute (unlike Roth IRA) § NOTHING is taxable—not even the interest your con tributions built o 403(b) & Roth 403(b) plans (like 401(k)/Roth 401(k) § public schools/colleges & private tax exempt organizations • schools, universities, hospitals, charitable/religious organizations 3 o $18,000 max annual before-tax employee contribution on the above plans together o Biggest difference between these plans is who uses them, the rules are pretty much the same o 457(b) (not on slides) § done by state and local governments • ex. Athens City government employee • Investment Company Institute—retirement assets total $24 trillion in second quarter 2014 o Don’t need to know numbers o Out of $24, biggest single category is $ in IRAs § Keep in mind a lot of this started out in a 401(k) and was transferred into an IRA when the employee left the company or retired • WSJ A Pension before Age 40: are military benefits too rich? o 20 yrs of service o 50% most of life o retire as early as age 37 Healthcare • US spends more on healthcare than any other country —$9,0086 pp/yr o Switzerland is second highest —$6,325 pp/yr Group & Individual Health Insurance • Reasons for employee benefits o Employee relations—competition, attract and retain the best employees, increase productivity o Income tax advantages § Employer allowed to deduct premium for health insurance § Cost (premium) paid by employer partia lly or totally free to employee • You don’t have to pay anything for it, you don’t have to report it as taxable income § Claim payments may be partly or totally tax free to beneficiary (employee or dependents) • You don’t have to pay anything if your employer pa ys your hospital bill § Tax on investment earnings deferred or avoided • You put $ into investment accounts which delays you paying income taxes on the $, which you often are in a lower tax bracket when you retire so you pay less taxes on it anyways than you w ould’ve paid on the $ before you put it into the investment account • ***know tax treatment of each option • Obama care only applies to group health —not life or disability • Distinguishing features of Group Insurance (insurance through employer) o Typically does not cover long term care o Underwriting unit is a group, not individuals § Underwriting—assessing the risk, making the plan and rates § Not based on health of an individual; evidence of insurability not required if you enroll when first eligible § Group risk characteristics, not individual risk characteristics • Ex. age distribution of the group , type of job (lumberjack, pilot etc) o Cannot consider your gender by law 4 • An employee with below average health won’t pay a higher premium than people with good health on a group insurance plan o Lower administrative, underwriting and marketing costs on average (per person covered) than individual insurance o Experience rating—future rates adjusted based on past claims o Eligibility—which employees are covered? o Probationary period—how long you must be employed before you are covered? When are you covered? o Contributory/noncontributory —how employee and employer share costs (premiums or contributions) § Noncontributory: the employer pays 100% of the premium § Employee typically pays 25% of premium • Group Medical Insurance o Contributory vs noncontributory § Employee paid premiums are usually fu lly deductible for income tax purposes § Employer paid premiums usually not taxable income for employee § Group medical is almost always contributory § Very common for employee to cover copayments and deductibles o Coordination of benefits —other insurance, such as covered by your employer and spouse’s employer § To preserve indemnity principle o Continuation of group coverage —COBRA (law—not optional) § 18 months—employee quits or is fired § 36 months—death, divorce, child loses eligibility § does not apply to individual medical insurance § once you lose eligibility, you can stay on the plan for a little while, but you have to pay 100% of the premiums • Health insurers—managed care plans—can be used alongside any HDHP o Managed care combines financing and delivery of care; each type (HMO, POS PPO) involves network of healthcare providers, reimbursement for services by network providers agrees upon before services are provided o Health Maintenance Organizations (HMO) § Primary care physician § No coverage outside HMO provider network, except for emergencies o Point-of-Service Plans (POS) § Primary care physician § Patient may use non-network providers, but then patient bust pay the higher share of cost o Preferred Provider Organizations (PPO) § Non any primary care physician § Outside network means lower reimbursement (patient pays more) o Any of these 3 plans can be part of HDHP (high deductible health plan) § HDHP—high deductibles mean lower premiums 3/29/16 • “Health insurance” “healthcare spending” “healthcare expenditures” o Medical insurance o Dental insurance o Disability insurance 5 o Long-term care insurance • HSA—health savings account o To be able to put money into a health savings account you need t o be covered under an HDHP o If you have a HDHP, you do not have to have a HAS o You can be employed, unemployed or self -employed and participate in an HAS o Main purpose: set aside $ of a before tax basis, which lowers your taxable income § If you take money out to pay medical bills you don’t pay any income taxes on it o Exhibit F § HDHP enrollment has grown significantly since 2006 § Of employees who have medical insurance through their employer, most are enrolled in an HDHP o Exhibit H—percentage of firms (not % of the labor force) offering health benefits by firm size and overall § 50% of ALL firms offer medical insurance to their employees § 97% of firms with 100+ employees offer medical insurance to employees • Health Savings Account (HSA ) o Family vs Single coverage § Ex. Say a married couple both has insurance through their employer —he gets single and she gets family—he is covered also under her plan o Family coverage premium does not change depending on # of people in family § Who is covered under family coverage depends on what options the employer gives you and what you chose o Changing from HDHP to regular plans § Ex. 2014—Joe has a HDHP & HAS 2015—Joe no longer has HDHP (can’t have HAS) Joe can take money out during 2015 that was put in during 2014, and it is still not taxable as long as it goes to medical bills o Employers, self-employed, or individuals can establish o Employer and/or employee contributions (limit: $3,350 single/6,650 family) o Distributions for unreimbursed out-of-pocket qualified medical expenses are not taxable o Distributions for nonqualified expenses taxable o Must be part of a High Deductible Health Plan & cannot have another medical expense plan o Some preventive care benefits may be covered be fore deductible is met o Employee contributions are tax deductible o Balance in HSA earns interest o What you contribute is tax deductible, what employer contributes is not o Employers are not required to contribute o There is a limit to how much can be contributed in a calendar year—know the $numbers on this slide o You can leave $ in an HAS as long as you want o Portable—$ goes with you § If you change employers, you get to keep what your old employer contributed • Group Disability Insurance (disability insurance through y our employer) o Sick leave plans—paid while off work due to an injury or illness o Short and long term disability insurance § Definition of disability 6 • Own occupation OR any occupation for which reasonably suited by education, training or experience o Ex. Your occupation is a nurse and you work in the hospital, but some insurance insurance companies will hire nurses to help evaluate risk for insurance plans, and after some time, insurance will say “ok you can’t work in a hospital anymore but is there anything else your education/training will allow you to do?” § Elimination periods (waiting, time deductible) § Benefit levels § Contributory and noncontributory plans available • Employees who pay ALL of their disability premium don’t get to deduct it for income tax purposes, BUT if you start collecting $ that YOU p aid the premium on, you DON’T have to pay income taxes on the benefit • If the employer paid some of the premium, the % that the employer paid the premiums of IS subject to income taxes • “I’m just going to tell you some general things” o Short term disability insurance —more likely that the employer will contribute o Long term disability insurance —less likely that the employer will contribute § Higher premiums st o Short term insurance pays for 1 year you’re out of work, after that, long term insurance starts paying premium—they don’t overlap o An employee may qualify for disability insurance through your employer, but not meet the requirements for SS disability because the definitions are different o Private disability insurance will often lower the monthly benefit they will pay you if you are also getting social security disability benefits under the idea that we don’t want people to be better off than they were before • Affordable Care Act (2010) o Required most U.S. citizens and legal residents to have qualifying health insurance coverage by 2014 o Create health insurance exchanges (market) through which individuals can purchase coverage o Create an essential health benefits package that provides a comp rehensive set of services o Require employers to pay penalties for employees who receive tax credits for health insurance through an exchange o New regulations on health plans o Changes to private insurance, Medicare & Medicaid o Passed in 2010, didn’t really get implemented until 2014 o Two major elements 1. Expansion of employer coverage • Certain employers must provide insurance or pay a fine which gives the uninsured employer a tax credit to use to purchase insurance through the insurance exchanges 2. Expand Medicare expansion (ACA) o Created health insurance marketplaces with standardized policies to make choices simpler 7 o Required most people to get insurance • Affordable Care Act—Medicaid Expansion o Making Medicare available to adults who are not disabled, who are not eldery and who do not have children with incomes up to 133% of Federal Poverty Level o Increase in taxes on high income Medicare beneficiaries o To finance the coverage of newly eligible individuals, the government is paying 100% of the cost from 2014-2016, gradually falling to 20% in 2020 and later § This is so the financial burden of expansion didn’t fall on the states • Affordable Care Act—Financial Aspects o Increased Medicaid Part A tax from 1.45% to 2.35% on earnings over $200,000 for individuals and $250,000 for married people who file jointly • Affordable Care Act—Changes to private insurance o Kids can stay on parent’s plan until 26 years old if not covered by an employer o Health plans now required to spend 85% of premiums on clinical services o Certain routine/preventative services are now required to have no out -of-pocket expense for patient • Affordable Care Act—Changes to private insurance (cont.) o Preexisting conditstns—insurance didn’t have to cover any preexisting condition expenses for the 1 12 months o No longer allowed to place a lifetime or annual limit on dollar value of coverage o All new policies must fit into one of the 4 benefit categories —bronze, silver, gold, platinum o All waiting periods for coverage are now limited to 90 days 3/31/16 Auto Insurance • National association insurance commission (NAIC) assumes that all insured vehicles carry liability coverage but not necessarily collision or comprehensive • The average cost to own and operate an average sedan was $8,698 in 2014. • National Average annu al premium for auto insurance was about $841.23 in 2013. - some people don’t buy insurance for own car, they just buy liability —more expensive to have coverage on yourself • GA average premium is about $800, NJ is the highest at $1254, California is only $783 • Private passenger auto insurance is 30% of all property insurance nd o 2 biggest is homeowners • State farm is the biggest personal auto insurance company in the U.S. —$36 billion nd rd th o Geico is 2 , Allstate is 3 , Progressive is 4 • Almost 200 million personal cars insured in U.S. (300 million people in the U.S.) 4 parts of auto insurance policy • Part A—Liability o Only part that covers people not in vehicle o Covers other car, persons injured in other car, property damaged in other car (i.e. MacBook) • Part B—Medical Payment o There is a dollar limit—usually $5,000-$10,000 o Covers you if you are a pedestrian and get hit o Can be used if you or the other driver is reckless 8 o Doesn’t cover pain and suffering • Part C—Uninsured Motorist o Covers damage to car, medical bills, lost i ncome, and pain & suffering o Situation where other person causes wreck, but they don’t have liability insurance o Can collect from own insurance • Part D—Physical Damage to your Automobile (collusion and other than collision) o Hitting a deer, flood damage, stol en car, fire damage, hitting a sofa in the road, hitting a tree o Only covers damage to car, doesn’t pay for property in car or medical expenses o Covers when you are the one who is reckless Handout/worksheet 4/5/16 — Auto Insurance • Do worksheets • “Covered Auto” o Any vehicle on declarations page o A newly acquired vehicle you insure within 14 days after becoming an owner o A temporary substitute vehicle • “You” o Named insured and spouse (if resident of same household) • “Family member” o Relative of named insured, who is a resident of your household—not relatives who are visiting temporarily • Normal personal auto insurance policies are not for motorcycles —you have to get a separate policy for that • Personal Auto Policy (PAP)—Basic Components o Part A—Liability § Covers negligence, covers a friend who you have loaned your car to § Most important to have, legally required o Part B—Medical Payments § Doesn’t matter what car you’re riding in (your car, your friend’s car, a taxi, a rental etc.), or if you are a pedestrian —this covers any injuries to do with an automobile accident § Also covers injuries to a passenger in your car o Part C—Uninsured Motorist § Substitute for the lack of liability insurance on the part of a negligent driver causing you/your family members bodily or property damage in an automobile accident o Part D—Physical Damage to Your Auto o Part E—Duties after an Accident or Loss o Part F—General Provisions 4/7/16 • Part A—Liability Insurance o Insuring agreement § Bodily injury and property damage claims for which any “insured” is legally liable 9 • “legally liable” = you were negligent • Named insured, spouse, family members, any person using your covered auto, your employer when you use your auto for business activities o Supplementary Payments § Legal defense costs & $200 daily lost earnin gs while at hearing (trial) at insurer’s request o Exclusions § Intentional losses § Damage to property owned, rented or transported § BI to employee (that is, an employee of you or family members) § Use as a taxi (carpools are ok) § Other business vehicles (except pr ivate passenger auto, pickup or van) § Insured using vehicle without reasonable belief of permission • Note: family member has permission to use your vehicle § Vehicle with fewer than 4 wheels • Ex. Motorcycles § Vehicle (other than your covered auto) owned by, or made available for the named insured’s and spouse’s regular use § Vehicle (other than your covered auto) owned by, or made available for the regular use of any family member § MAY be able to get punitive damages • Part B—Medical Payments o Insuring agreement § Does not cover lost income or pain & suffering § Covers medical expenses incurred by an “ insured” caused by an auto accident • “insured”—named insured, spouse and family members, pedestrians when struck by vehicle for use on public roads, occupants of your covered auto § Exclusions • Occupying or struck by a vehicle owned by you or furnished for regular use (other than your covered auto), family member in vehicle they own or furnished for regular use, occupying a vehicle without reasonable belief that insured is entitl ed to do so o i.e. if you get in an accident in a car that you own but is not listed on your medical payment policy • If you get hit by a bulldozer, not covered • If you get hit by a train walking down train tracks, not covered • If you are using your vehicle as a place of residence, your medical expenses are not covered § Limits • Per person in an accident • Part C—Uninsured Motorists o Insuring agreement § Bodily injury (and in some states, property damage) caused by negligent, uninsured motorist 10 § “Uninsured” – no insurance or not enough, hit and run, insurer of negligent driver is insolvent (not a vehicle owned by or furnished for regular use of you or a family member) § Named insured, spouse and family members in any auto or as pedestrians, any other person occupying your co vered auto § Covers economic and noneconomic damages o Exclusions § Punitive damages § Using a vehicle you do not have reasonable belief that you’re entitled to use o Underinsured motorist Coverage § When a negligent driver carries insurance that meets legal minimums but the limits are less than the insureds underinsured motorist limits • Part D—Physical Damage to Your Auto o Insuring agreement § Covered auto and non-owned autos § Collision: with another car or object, including pedestrians § Other than collision: fire, theft, e xplosion, wind, hail, water, flood, earthquake, vandalism, riot, contact with bird or animal, glass breakage • Collision/non collision have different deductibles, collision is usually more expensive o Exclusions § Electronic equipment not permanently installed, tapes, CDs, wear & tear, freezing, mechanical/electrical breakdown due to poor maintenance , owned trailer not listed on declarations page, camper, or motor home not shown in declarations, loss to non -owned auto used without reasonable belief of permission, radar equipment, custom furnishings (Ex. shag carpet in 60s van ), racing vehicle, using a taxi o Limit of Liability § Lower of the Actual Cash Value or amount necessary to repair or replace 4/12/16 • Approaches to Compensating Auto Accident Victims o Financial Responsibility Laws § After first accident without liability insurance, must obtain and maintain liability insurance o Compulsory Insurance Laws § Minimum amount of liability insurance required before vehicle can be licensed or registered § GA requires $25,000/$50,000/$25,000 • BI per person/BI per accident/PD per accident (minimum limits) o Uninsured/underinsured Motorist Coverage • No-fault Auto Insurance (personal injury protection) o What is no-fault? § First party benefit that covers economic damages only o Purpose of no-fault o Types of no-fault § Pure—each person’s auto insurance pays PD to his/her car and economic losses only of BI, cannot sue negligent party —you cannot sue for pain & suffering 11 • Income loss, property damage etc. § Modified—can sue for economic & noneconomic damages (you can sue sometimes, but not all the time, depends on how serious it is) • Verbal threshold o If you get paralyzed, you can sue for pain & suffering • Monetary threshold o If economic losses exceed a certain amount, you can sue • “I don’t really ask you about the “Arguments for & against no -fault auto insurance” slide on exam • Rating Factors o Primary—age, gender, marital status, territory (where you live), use of auto (how many miles you drive) o Secondary—type of car, number of insured vehicles, driving record • Articles in emails o Drive Time—Jessica Anderson, Hanging up the Car Keys § 80 years old+ have the highest of fatal crashes per mile driven § Illinois is the only state that requires you retake the driving test o Who knew? 5 Things that can hike your premium? § Low credit scores § Horsepower Review for exam 4/12/16 • Know definition of covered auto • Only liability is required —if you loan your car out to a friend, your friend is protected under your policy • Know what eat type covers • Employer Health Benefits article—“one question” o Mentioned some graphs in class o % of people covered under employer plans • Healthcare spending o US spends largest % of GDP per person on healthcare • “I wont ask you specific numbers from these articles” • The way taxes work for each type of health insurance plan o Deduct medical insurance premiums for taxes • Group insurance—you don’t have to provide proof of insurability/health • Noncontributory vs contributory o Noncontributory—employee pays 0% o Contributory—shared, employee and employer split the premium or employee pays whole premium • COBRA—one question o The difference in time you can stay on a policy depends on the reason you lose your job • HDHP has to have a minimum of $2600 deductible o Must have HDHP to have a HSA, but don’t have to contribute to HSA—HSA’s decrease your (contributions are pre-tax) taxable income, and withdrawals (for medical bills) are not taxable • Know HMO (in network, except emergencies), PPO (can go out of network, insurance pays less) and POS (can go out of network, insurance pays less) managed health care plans • Defined benefit vs define contribution plans 12 o Traditional vs cash balance § Traditional: monthly income for the rest of your life § Cash balance: lump sum at end • Vesting schedules—does it meet the legal requirements? **one question 13
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