Contracts, Policy's, Plans, and Related Scenarios

includes calculation, variables, and examples

Stop-Loss Contract

protects the employer from unexpectedly high claims or catastrophic financial loss, by limiting the total liability from proving reimbursement for claims that exceed a predetermined dollar threshold. Expressed as L, where the insurer covers the portion of claims that surpass as >L .

Self-Funded Health Plan

the employer assumes the financial risk of providing health benefits to employees

COBRA

Consolidated, Omnibus, Budget Reconciliation Act

PPO’S

Preferred Provider Organizations, are a private insurance arrangement, designed to incentivize the use of their network of healthcare providers. If chosen to receive service outside of the network, the coverage benefits are reduced and the out of pocket costs are increased. Ex. : higher deductibles or coinsurance percentages

HMOs

Health Maintenance Organizations, often require a primary care physician, operate on a prepaid - capitated basis.

Capitated

a predetermined fixed amount usually on a monthly basis, determined from health care, contract, or plan. Created for cost control, incentivized preventative care, and unlimited use of service.

Warranty

A statement guaranteed to be absolutely true in every respect, where any minor, unintentional error could potentially void the policy.

Representation

A statement made on an application that the applicant believes to be true to the best of their knowledge.

Who pays when an employee leaves and continues their group health insurance under COBRA?

The premiums to keep the policy are to be paid in full by that individual, which, can include the portion previously paid by the employer plus an additional administrative fee of up to double the total cost

What other benefits do PPOs provide?

It allows member to see out of network providers; agents, but at a higher cost. The plan is available to individuals and groups.

Waiting Period

referred to as an eligibility period or probationary, is the duration of time that must pass after an individual joins a group before they can enroll in the plan.

How long can polices postpone coverage for a certain illness and when is that timeframe active?

30 days is the usual amount set starting at the policy’s effective date, not inception. This is to prevent adverse selection.

Elimination Period

duration at the beginning of a disability or long-term care claim during which the insured must be disabled before benefit payments commence. Represented as t(elimination) where t is the number of days the insured must self-insure.

Grace Period

the timeframe following the premium due date where the policy remains in force even if the premium has not been paid, usually lasting 30 or 31 days

What’s a term not usually used as industry standard for postponing coverage?

Postponement Period

What is entailed in a noncontributory group health plan?

the employer pays the entire premium, insurance company requires 100% participation from all eligible employees, and must consist of healthy + less than ideal conditions of people

Why does a noncontributory group health plan include all people that can qualify except for sever conditions?

mitigates the risk of adverse selection rather than being for those who anticipate needing medical care

What is another name for Straight Life Annuity?

Life Only or Pure Life annuity

What is included in a Straight Life Annuity?

provides periodic income payments to the recipient, designed to provide the max monthly benefit based on the clients life expectancy, doesn’t have a survivor benefit or death benefit, and the contract is fulfilled when the annuitant dies.

What is a stipulation of Straight Life Annuity?

the insurance company isn’t required to make any further payments to a beneficiary or the estate, regardless of how much or how little the principle amount; like 100k +, has been recovered through monthly payments

Key Employee Disability Income Insurance

protects a business against the financial loss that occurs when a vital member of it is injured or dies, like an executive or someone of specialized/unique skills

What is not considered a specialized asset for Key Employee Disability Insurance?

secretary, hourly based personel, or common shareholder

Time Of Payment of Claims Provision

a part of individual health insurance, an insurer is required to pay benefits immediately upon receipt of written proof of loss such as general medical expense claims

Disability Income Policy

benefits paid depends on the insured’s wages or earned income, made to replace a portion of the individual’s lost income; 60 - 80% of gross income when the insured was working, in case they’re injured or sick.

Why does a disability benefit pay 60 - 80% of gross income of when the insured was working?

intended to be an incentive to return to work

Certain Period Life Annuity

provides the annuitant with a guaranteed income for rest of their life, which includes a specific time frame or period where payments are warranted to continue. If the person dies before the agreed duration ends; ex. 20 yrs, then the remaining pay is distributed to the designated beneficiary until it’s complete. If the annuitant lives beyond 20yrs., then pay continues for the rest of their life and ceases upon death.

How is Life Annuity with Period Certain Expressed?

P = periodic payment amount, t = time of death, T = period certain(20yrs), max(t or T) = the total guaranteed if the beneficiary is involved

Incontestability Clause

generally mandates that after a policy has been in force for 2 yrs., the insurer cannot contest the validity of it or deny a claim based on the misstatements made by the insured in the initial application. Exception of fraudulent misrepresentation in some jurisdictions. Made to give policy holders security once active for said duration; t = 2yrs.

When do payment to the annuitant begin?

they don’t start until the agreed future date, not immediately upon purchase of the contract. This indicates a deferred fixed annuity being that it will pay ex: 1500 per month; t = 15yrs., P = principal, r = set interest rate

What is a Variable Annuity?

payout changes based on the performance of an underlying investment portfolio expressed as: FV; fixed variable, = P(1 + r)^t, which risk depends on the market

Guaranteed Renewable Health Insurance Policy

the insurer may cancel the policy for nonpayment only, contractually obligated to renew coverage only when premiums are paid on time, the insurer cannot require proof of insurability to continue policy, can’t refuse to renew the coverage based on the insured’s health status or claims history, may increase premiums for an entire class of insureds, won’t decrease on time premiums, and not permitted to single out an individual by increased premiums.

What is the payout sum from a 50k amount of an Accidental Death and Dismemberment Policy?

25k will be what the insured is entitled to, 50% of the agreed coverage

What is the assignment of benefits in a health policy?

legal process where the policyowner transfers the right to receive insurance payments directly to a third party, such as a healthcare provider or hospital. The policyowner authorizes the insurance company to pay the service provider directly rather than reimbursing the policyowner after the fact, thus, simplifying and ensuring the billing process

How will an insurer handle a claim that resulted in total disability 5 yrs. prior before the application was taken due to chronic neck pain?

the claim will be paid and coverage will remain in force, which depends if it has been active for 2 or 3 yrs, indicating the incontestable period; the condition where an insurer can’t deny a claim based on info not disclosed at the time of application

Business Overhead Expense; BOE, Policy

designed to protect a business in the event that it’s owner becomes disabled, covering ongoing expenses such as rent, utilities, employee salaries, and any other fixed costs; the main difference of disability income from insurance.

Contributary Policy

both the employer and employee share the cost, doesn’t address specific financial risk of business survival during disability of either of the two

What are other conditions of a group health insurance plan?

The employer or sponsoring organization is given a master contract, individual members aren’t given their own policies, employees receive a certificate that details their coverage and benefits. Has reduced: administrative costs, spread of risk across large pool of people, and premiums are frequently adjusted based on the specific claims experience of the group

Accidental Death Benefit

is considered an option rider; add on, or additional coverage feature rather than a mandatory provision required by law for group life insurance contract to be valid.

What are mandatory requirement of group life insurance?

grace period for premium payments, an incontestable period to limit the time the insurer can deny the validity of the policy, and a conversion privilege that allows an employee to convert their group coverage into an individual policy if they leave the group

Business Disability Buyout Plan

made to provide the necessary funds for a business entity; corporation, or the remaining shareholders to purchase the interest of a disabled business owner. Ensures there can be a buy-sell agreement, smooth transition of ownership, and provides the disabled owner the agreed-upon value of their share in the company.

What are standard disability income policies limited to do?

can only provide salary replacement for an individual, not the shareholder, employees, or other entities

Illegal Occupation or Activity Exclusion

clause that mandates that the insurer is not liable for any loss to which a contributing cause was the insured’s commission of; the scenario of it happening like car jacking, or attempt to commit a felony or their participation in an illegal activity. Claims related will be denied, and the policy to the individual won’t be terminated unless the policy says specifically the commission of a felony results in immediate cancellation

What factors are considered in determining the value of disability income insurance?

risk profile; consumption habits like smoking, drinking, and any health conditions, gross income, occupation and job duties, medical history, and does not have to include the info of the spouse

What is the purpose of the Probationary Period?

the specified timeframe beginning on the policy’s effective date during which coverage for illnesses is not yet active, protects the insurer against adverse selection such as individual purchasing coverage only after they have already experienced illness symptoms.

What are other conditions of Probationary Period?

accidents within the first day of the policy and any sickness that may happen after starting are covered usually the first 15 to 30 days, and is excluded from coverage. This is the main difference from incontestable period, which the insurer has the right to void coverage due to misstatements, and costs recovered from a third party

Recurrent Disability

a provision made to protect the insured when a disability reoccurs after a brief recovery period. If the insured returns to work and relapses usually within 6 months specified, the insurer considers it a continuation of the original claim. In turn, the insured is not required to satisfy a new elimination or waiting period, and benefits are resumed as if the original disability never ended

How is Initial Disability Period expressed?

initial disability period = t1, relapse that occurs = t2, such that t2 - t1leqDeltat = the defined recovery interval, and the insurer treats the duration of disability as D = D1 + D2 without resetting the clock for the waiting period; W

Entire Contract Provision

documents and any attached riders, endorsements, and the application submitted by the applicant builds the complete agreement between the insured and the insurer. This ensure that all statements of the applicant are officially part of the legal contract, preventing the inclusion of any outside documents or oral agreements that aren’t explicitly stated withing the policy itself

Residual Disability

referred to as partial disability insurance policy, providing benefits to those who have returned to work after a period of total disability but is unable to perform all of their previous job duties or work the same number of hrs. The policy pays a portion of the total disability benefit to make up for the loss of income calculated based on the loss of earnings often expressed as percentage of the pre-disability income such as: Benefit = (loss of earnings/prior earnings) times total disability benefit

Blanket Accident Policy

type of insurance designed to cover a group of people who are exposed to the same specific hazard, such as passengers on a commercial airline, students at a school, or members of a sports team. Issued to the entity responsible for the group and provides accidental death and dismemberment benefits to the individuals covered under the policy without requiring them to be named individually. Applied to flights, the coverage provides protection to all related passengers.

What are the conditions of Claims Forms according to standard insurance policy provisions?

if an insurer fails to provide the necessary forms for filing a claim within a specified period after receiving notice of loss, the insured is deemed to have complied with the requirements of the policy as long as they submit a written statement covering the occurrence. This includes the character of the loss, extent of loss, and ensures that the claims process is not stalled by the insurer’s failure to provide administrative paperwork.

What are the insurance contract types?

Unilateral, Aleatory, Adhesion, and Bilateral

Unilateral Contract

one party, the insurer, makes a legally enforceable promise to pay for covered losses, and the insured pays premiums on the condition that the contract remains in force.

Aleatory Contract

unequal exchange of value, where the outcome depends on an uncertain future event

Adhesion Contract

prepared by one party, the insurer, and accepted or rejected by the other party, the insured, without negotiation, which, often results in ambiguity being interpreted in favor of the insured

Bilateral Contract

requires both parties to make legally enforceable promises to perform specific actions, which, doesn’t include the insured not being legally required to pay premiums or continue the contract

Irrevocable Beneficiary Designation

the policyowner gives up certain rights regarding the policy, where as the insured can’t change policy conditions like switching the beneficiary, taking out a policy loan, or surrendering it without the express written consent of the irrevocable beneficiary

Revocable Designation

allows the policyowner to change the beneficiary at any time without the beneficiary’s permission

Business Disability Buy-Sell Policy

created to provide funds to a business owner who has become permanently disabled, allowing the remaining owners to maintain control, keep the company going, and provides liquidity of the owners share; V, required to facilitate the the transfer of ownership at the predetermined value

What’s another transfer of ownership policy?

General business insolvency planning

What is the formula of calculating Disability Buy-Sell policy?

P = V times I, where V represents the total business value and I represents the partner’s ownership percentage

Level Premium

fixed for the entire duration of the contract, doesn’t increase as the insured ages or risk of mortality increases, and is achieved by overpaying in the earlier years of the policy to build a reserve. This offsets the higher costs of coverage in the later years

Reduced Paid Up Option

a nonforfeiture option made to protect the policyowner’s equity, from accumulated cash value if the owner stops paying the premiums. Will use the existing funds to purchase a fully paid-up policy, but with a reduced benefit amount lasting until the insured’s death or maturity

Inflation Option

typically a rider created to increase coverage amounts to keep pace with cost-of-living adjustments

Guaranteed Insurability Option

allows for the purchase of additional coverage without evidence of insurability

Conversion Policy Option

allows for the change of a term policy to a permanent policy

How is the reduced paid up policy calculated?

Death Benefit = cash value times net single premium factor

Consideration Clause

represents the value exchanged between parties; policyholder and insurer, make the contract legally binding consisting of statements made in the application, the payment of the initial premium by the inured, and frequency of those payments. The insurance company promises to pay for covered losses as outlined during policy signing.

Child Term Rider

provides coverage for children under a parents life insurance policy that can be converted to a permanent policy once they reach a specified age like 18 or 21, without requiring evidence of insurability

Payor Benefit Rider

waives premiums if the policyowner becomes disabled or dies

Accelerated Benefit Rider

allows for the early payment of a portion of the death benefit if the insured is diagnosed with a terminal illness 1

Assignment Provision

relates to the transfer of policy ownership right rather than providing insurance coverage for dependents

What kind of premium does a whole life policy have?

whole life insurance

Probationary Period

is a specified timeframe that begins on the effective date of the policy, coverage for certain illnesses or conditions is excluded to prevent adverse selection; an individual purchasing insurance only after they have already become aware of a health issue. This policy goes into effect at the moment of it’s inception

Guaranteed Renewable

is best described as a policy that must be renewed and premium rate increases can only be applied if for an entire class of insureds

What is the expression of Unilateral Contract

O(lower case p) = 0, because the insurer is the only party that can take legal action if a premium isn’t paid and the insured has already paid the premium

When can a company contest the info in an accident and health application?

they may do so only from when the insurer dates the policy

What is required for an HRA; health reimbursement arrangement?

the employer must initiate

What are the conditions of an HRA?

provides tax-advantaged reimbursements for qualified medical expenses incurred by employees, have no salary reduction contributions permitted from the employee, and limit prescription drugs

Long-Term Care Insurance

are permitted to consider an applicant’s pre-existing conditions for a maximum of 6 months prior to the effective date of coverage

Life Income

is classified as a settlement option; method for distributing the policy proceeds to a beneficiary or policyowner rather than a nonforfeiture option

Cash Surrender

the policyowner receives the policy’s cash value in a lump sum, but the coverage terminates

Extended Term

policyowner uses the cash value to purchase term insurance with the same face amount as the original policy for as long a period as the cash value will provide

Fair Credit Reporting Act

federal law enacting the accuracy, fairness, and privacy of consumer info contained in the files of consumer reporting agencies, which, are required to notify applicants in writing that an investigative consumer report includes: applicant character, general rep., personal info, and mode of living as part of the underwriting process. This gives the right to request a disclosure of the nature and scope of investigation.

How do you calculate the total out of pocket responsibility?

1) subtract the deductible from the total bill to determine the amount subject to coinsurance

2) use the remaining amount and multiply by 20% or .20

3) add the deductible to the previous value to get the final amount

Life Settlement Contract

allows a policyowner to sell a life insurance policy for more than it’s cash value

Universal Life Insurance

permanent type that combines a death benefit with a savings component, often referred to as the cash value, allows to earn interest on the cash value portion, and can be used to pay premiums or be withdrawn under certain conditions

What are other term life condition types and their conditions?

Decreasing, Increasing, and Graded: provide coverage for a defined period of time without a cash value accumulation or investment use, subject to change, premiums are calculated based on the risk profile death benefit amount; B(t), where B represents the benefit amount and t = time elapsed in the policy term

Payor Benefit Clause

usually found in juvenile life insurance policies, ensuring that if the adult who is paying the premiums; parent or guardian, dies or becomes disabled before the child reaches a specific age, the premiums on the policy will be waived

What are the characteristics of an IRA; Individual Retirement Account

it’s not limited to the dollar amount, upon moving funds from a qualified retirement plan through a direct rollover or 60 day indirect one, the total amount transferred is not subject to the annual contribution limits that apply to regular annual IRA contributions. These aren’t subject to ordinary income tax or capital gains tax as long as the funds be deposited into the new account withing the specified timeframe, per IRS regulation

Conditional Receipt

provides coverage will be effective the date the application or of medical examination; whichever occurs later, provided that the insurer determines the applicant to be an acceptable risk under it’s underwriting standards.

How are social security benefits primarily funded?

through payroll taxes collected under the FICA and SECA, from 3 main sources employers, employees, and self employed, who all contribute a specific percentage of earnings toward the program; dedicated trust funds supported by these contributions

Credit Life Insurance

doesn’t build cash value, coverage amount typically decreases over time equally with the declining balance of the loan, and made to pay off a borrower’s debt in the event of their death; issued as a form of term life insurance

Family Deductible

if individual family members satisfy their won individual deductibles, the cumulative amount paid by the family will eventually reach a set limit. Once reached, the insurance company waives any remaining deductibles for all other family members for the remainder of the policy year; a cap on their out-of-pocket costs

What if an insured age is misstated on the application and dies before it completes or takes effect?

the insurance company will most likely adjust the death benefit to reflect what the premiums paid would have purchased at the insured’s correct age. If the insured was older than stated, the company would have required higher premiums for the same level of coverage

How do you calculate the benefit amount after misstatement of age?

DB; death benefit(adj.) = DB(face) times P(lowercase p for premium paid) times P(actual premium)

Ambiguities

vague, undefined terms in a policy that are reasonably susceptible to more than one interpretation

Errors and Omissions Insurance; E & O

protects against professional liability, covers: defense costs, administrative errors, premium calculation mistakes, coverage misstatements, failure to recommend coverage, pays damages if negligent, and excludes: criminal acts, intentional harm, dishonest acts, and illegal activities

Tort Law Basics

private wrongs independent of contracts, different from criminal law, handled in civic courts, and provides compensation for harm

Types of Negligence

Simple type: failure to act reasonably like forgetting to submit an application and Gross type: reckless disregard; never maintaining records

Willful/Wanton: knowing harm will occur and will not be covered by insurance