Risk Management / Insurance

Types of LTC in order

Nursing home (24 hr) —> Assisted Living—> Adult Day Health Care—> Home health aide services—>Homemaker Services

Medicare provision for ‘skilled nursing care’

Limited time following hospitalization.

Days 1-20: $0 per day

Days 21-100: $204 per day

Days 101 on: Patient pays all

Elimination Period in LTC

Waiting period before benefits become payable. 0-365 days range

Daily Benefit in LTC

Maximum amount that a policy will reimburse for daily LTC

Policy lifetime maximum benefit in LTC

Daily benefit x Benefit Period

Pool of Money Structure in LTC

If cost of care is less than max daily benefit, could last longer

Riders in LTC

Add-on features. Inflation protection most important

Renewability for qualified LTC?

Must be guaranteed renewable

Requirement for qualified LTC for expenses covered by medicare

Cannot reimburse expenses already under medicare

Requirement for qualified LTC cash surrender value

Cannot have a cash surrender value

Requirement for qualified LTC handling of policy dividends

Must be used to reduce future premiums or increase future benefits

Requirement for qualified LTC - limitations and exclusions

Prohibited unless pre-existing within 6 months of application

Requirement for qualified LTC - skilled nursing care

Cannot provide for skilled nursing care only OR require a prior hospitalization

Requirement for qualified LTC -clause for misrepresentation

Contract must have 2 year incontestable clause for misrepresentation

Triggers for LTC benefits

2 of 6 ADLS expected to last at least 90 days OR Substantial cognitive impairment

Acronym for LTC Benefits triggers

BED COT

B in BED COT

Bathing

E in BED COT

EatingD

D in BED COT

Dressing

C in BED COT

Continence

O in BED COT

On/Off Toilet

T in BED COT

Transferring (place to place)

Partnership LTCi

Between states and companies for qualified LTCi

Provides additional asset protection

Protects amount paid under LTCi by adding to medicaid spend-down limit

Any-Occupation — Disability Definitions

Benefits only payable if they can’t engage in any occupation

Own-Occupation — Disability Definitions

Payable if they cannot perform their own occupation

Modified Own-Occupation— Disability Definitions

Common hybrid approach—definition follows favorable own-occ, switches to any-occ after period

Social Security Disability

Toughest to satisfy; Any-Occ, Must be expected to last 12 months or more or result in death, 5 month elimination period

Taxation of Disability Income if Employer Paid Premiums

Benefit received are taxable is employer paid

Employee Paid Premiums taxability

Nontaxable benefits.

Also nontaxable if employer paid BUT included in taxable wages

If pre-tax dollars, it is taxable

Term life insurance

Lowest premium; no cash value; may have dividends; may be renewable; may be convertible to permanent

Level Term

Part of term life; Death benefits remain level over term, premiums increase after initial term

Decreasing term

Part of term life; associated with loans, level premiums over term

Permanent life insurance

Includes whole and universal life; builds cash value, may have dividends

Universal Life Option A

Death benefit remains level; cash value decreases amount at risk / cost

Universal life option B

Death benefit is face amount plus cash value; higher cost, greater death benefit

Whole life

Guaranteed death benefit and premiums, fixed

Fixed UL

Cash value not in stock market

Variable UL

Cash value “sub accounts” give owners investment choices, not subject to creditors of company

Indexed UL

Cash value is tied to SP500 index but not invested directly, limiting gains and losses to cap

Second to die (survivorship) life insurance

Pays death benefit only after second insured person dies

Graded Premium WL

premiums gradually increase and level out

Modified WL

Premiums increase one-time after initial period

Limited pay WL

Premiums compressed into shorter period, coverage continues for life

Guaranteed Issue WL

No medical exams/questions, small death benefit and higher premiums

Life Insurance Termination Non-Forfeiture Payout - Cash Surrender Value

Pays the cash value out and contract ends

Life Insurance Termination Non-Forfeiture Payout - Extended-Term Option

Uses remaining cash value to pay for Term Life Premiums, same death benefit

Life Insurance Termination Non-Forfeiture Payout - Reduced Paid-Up Insurance

Cash value purchases paid-up policy of same type, reduced death benefit but cash value grows

Life Insurance Termination Non-Forfeiture Payout - Single premium annuity (sometimes)

Pays owner over life based on cash value

Life Insurance Termination Non-Forfeiture Payout - automatic premium loan

Make a loan against cash value to pay overdue premiums

Taxability of cash surrender value

Dividends reduce basis, return of premium; outstanding loans included

Participating life insurance dividends

CRAPO

C in CRAPO

Can be paid in Cash

R in CRAPO

Can reduce the premium payable

A in CRAPO

Accumulate at interest

P in CRAPO

Can be Paid up additions for greater death benefit

O in CRAPO

Can buy a One-year term policy

Modified Endowment Contracts (MECs)

Cash value life insurance that fails 7-pay test and changes tax treatment of cash distributions while insured is alive

7-pay test is applied.. for MEC

At policy inception and when material change (change in death benefit or addition of flexible payment)

MEC tax treatment of GAINS

LIFO regardless of policy age for distributions and loans (not death benefit)

MEC policy penalty pre 59.5

10%

Viatical Settlement

Terminally ill person can get cash for portion of death benefit

Terminally Ill (for Viatical Settlement)

Certified illness reasonably expect result in death within 24 months

Chronically ill (also works for viatical settlement)

Person cannot perform two activities of daily living for at least 90 days

Tax consequences of Viatical settlement to insured

Excluded from gross income. If only chronically ill, excluded to the extent used for LTC

Tax consequences of Viatical settlement to settlement company

Cash settlement paid to insured is basis. Excess taxed

Risk avoidance

Catastrophic potential, cannot be reduced, so just avoid activity

Risk reduction

Techniques to reduce likelihood, alarm system ex

Risk transfer

Shift to third party; insurance

High frequency of negative outcome, High severity

Avoidance and/or reduction

High frequency, low severity

Retention and reduction

Low frequency, high severity

Transfer (insurance)

Low frequency, low severity

Risk retention

Last-month rule HSA

If eligible under HDHP on first day of last month, can fund entire year

HSA penalty

Prior to 65, 20% penalty + tax

COBRA

If 20 or more employees, must give employees & family option to extend after qualifying event

Qualifying event COBRA

Death, termination (besides gross misconduct), child ineligible

Cost under COBRA

Max 102% of TOTAL premiums

COBRA coverage time after termination

18 months

COBRA Coverage time after other

36 months

Cross purchase plan

Completely transfer business interests among partners using life insurance held on the other. Agree to buy and sell respective interests upon death, disability, retirement

Amount of policies needed with cross purchase plan

n x (n-1)

Entity purchase plan

business purchases life insurance policies on owners. No increase in cost basis to surviving owners.

Number of policies in entity purchase plan

the # of owners

Buy-sell wait and see agreement

Method to transfer business interests with more flexibility. Can be configured as partners or business paying premiums.

Step 1: business has first option to purchase

Step 2: Surviving partners have option (if waived or if less than half purchased by business)

Step 3: Business required to purchase

Fixed annuity

Guaranteed interest; minimum and current

Equity indexed annuity

Linked to SP500, capped

Variable annuity

Sub accounts not subject to insurance creditors; in mutual funds

Annuity surrender charges

Lean towards not recommending replacement of contract because of them

Single Life annuity

Provides highest monthly payout - Once person dies its over

Period certain annuity

If they die before period is up, beneficiary gets payments

Refund certain annuity

Beneficiary guaranteed to receive original investment minus payments received

Annuities Distribution tax treatment

Basis / expected payout total with life expectancy = tax-free portion of payment

Annuities withdrawal tax treatment

LIFO (after 1982), 10% penalty before 59.5

Taxation if payments go beyond life expectancy

ALL taxable income

1035 Exchange of annuity contracts

Can go from Life Insurance —> endowment —> annuity —> qualified LTCi (Life eats all Quinn) (loved elizabeth as queen)

1035 exchange objective for life insurance

Defer recognition of gain in policy where surrender value > basis

HO-02 policy

basic homeowners

HO-03 policy

Better homeowners

HO-04

For tenants/renters, contents only

HO-05

Comprehensive, best homeowners