Life Insurance, Annuities and Health Insurance

INFORM+INSPIRE

The Griffith Insurance Education Foundation

Life Insurance, Annuities and Health Insurance

David T. Russell, Ph.D.Director, CSUN Center for Risk and Insurance

March 14-15, 2013

Agenda Overview of Life/Annuity/Health Market Overview of Life Insurance Products Overview of Annuity Products Overview of Health Ins Products Regulation Of Health Insurance Review of PPACA


Life/Annuity/Health Insurance US Life/Health/Annuity Market: $1.24t CA Life/Health/Annuity Market: $166b Life Insurance Market Has Zero Growth Annuity Market Growing Nicely Life Insurers Continue to Gather Assets Being ID’d as “Systemically Important?” Health Insurance Market in Flux


The Players in CA (2011 Prems)

1. Anthem Blue Cross 2. John Hancock 3. Met Life Investors (Annuities) 4. Prudential 5. Met Life 6. Lincoln National


Why Buy Life Insurance? Cover Risk of Premature Death Protect Survivors’ Lifestyle Fund Plans After Death (Ex: College) Guarantee Debts and Settlements Protect Knowledge/Skills of Key People Investment Features Tax Benefits (Always Under Review)


Life Insurance Products Whole Life Insurance Term Life Insurance (No Cash Value) Universal Life Insurance Variable Life Insurance Variable Universal Life Insurance Other


Term vs. Cash Value Term: “Renting” Insurance

Protects Only for Term of Policy Must Be Renewed, If Needed

Cash Value: “Owning” Insurance Provides Permanent Protection Usually Accumulates Cash Value Higher Premiums Earlier in Life


8

Term Life Versus Whole Life: Premiums

Age

$

overpayment

underpaymentLevel

Prem (Whole)

mortality curve (~term)

120x


Term Life Insurance Carries Low Prems that Rise Over Time Builds No Cash Value Favored by Most “Experts” Must Be Renewed at Increasing Rates Employer-Provided Ins is Group Term


Whole Life Insurance High, Level Premiums for Life Permanent Coverage-No Need to Renew Builds Cash Value Earns Interest/Dividends Tax Deferred Allows Policy Loans or Policy Surrender* Variable Life Allows Investment Choices *If cash value exceeds surrender charges.


Universal Life Combination of Whole and Term Ins Permanent Protection Premiums are Flexible Can Build Cash Value if Prems Paid Carries Higher Fees Variable UL Allows Investment Choices


Life Insurance Pricing Driven by Interest Rates Driven by Mortality Factors

Age Gender Smoking Family History Health (Medical Records, Medical Exam) Other (Hobbies, Mkt Competition)


Life Insurance Contract Terms Incontestible Clause Suicide Clause Reinstatement Grace Period Convertible


Current Life Insurance Issues Policy Replacements Twisting & Churning Sales of Unsuitable Products Characterizing Life Ins as “Savings” Life Insurance “Settlements” Tax Benefit Under Attack (Again)


Annuities Annuity = Stream of Regular Payments Life Annuity: Stream Lasts for Life Cannot Outlive a Life Annuity Second-to-Die/Joint Annuity: Two Lives Social Security is a Joint Annuity Annuities Primarily Used for Retirement Annuities Often Purchased with 401(k) $


Types of Annuities Fixed Annuities

Provides Fixed Return (Guarantees) Inflation Adjustment Available, at a Cost

Indexed and Variable Annuities Returns Depend on Performance of Stocks

Life Annuities vs. Period Certain Option Life Annuities End at Death; Period Certain

Options Protect Family if Death


Annuity Pricing Sensitive to Two Main Factors

Interest Rates Mortality (Age and Gender) Expenses and Commissions

Closer to Death Means More per Month Premiums Often Funded w/401(k) Premiums Can Exceed $1 million


Why Regulate Annuities? Most Annuities are Deferred Insurer Gets $ Up Front and Invests Payout May Last for Decades Buyers Uninformed, Life Savings at Risk Large Upfront Commissions May Result

in Unsuitable Sales Annuity Assets Exceed $1 trillion


Annuity Facts Regulation: Fixed vs. Indexed vs. Variable

Fixed & Indexed Regulated by State Variable Annuities Regulated by SEC Indexed Annuities May Transition to SEC

Suitability—Some Sales Not Advisable Sell an Annuity to a 76 yo Cancer Survivor?

Adverse Selection with Annuities


CA Health Ins Regulation Most CA Health Plans Are Overseen by

Department of Managed Health Care Legislative Oversight by Assembly

Committee on Health Some Plans Sold by Life Insurers Remain

Under DOI Jurisdiction Rates Must Be Filed for Public Comment,

but Rate Changes Need Not Be Approved


Health Insurance Plans Preferred Provider Organization (PPO)

Contracts w/Certain Providers who Discount Health Maintenance Org (HMO)

Total Control of Member Health Point of Service Plan (POS)

Elements of HMO (Some Choice of Provider) Fee For Service (Major Medical)

Allows Most Choice of Provider


Group Health Insurance Most People Receive Group Health Ins

Through Employers’ Plans Benefit of Scale/Expense Savings No Adverse Selection-Everyone Covered

Low Risks Cannot Opt Out Usually Employer Subsidized For Now, Group Ins Not Taxable


Other Sources of Health Insurance Social Security (Medicare)

Part A (Hospital); Payroll Tax (1.45% + Match) No Additional Premium if 40 Quarters of Work

Part B (Medical) $104.90* Monthly Prem in 2013 Part D (Rx) Premium (average $40*month 2013)

Medicaid (Medi-Cal) State-Run, Federally-Subsidized Ins for the Poor

Medicare Supplement (“Medigap”) Private Plans that Fill in Gaps in Medicare


PPACA Key Provisions Patient Protection & Affordable Care Act Expansion of Medicaid: Cover Individuals < age 65

with AGI up to 133% of Poverty Level (~$14,200 Individual, $29,300 Family of 4) Effective 1/14

Individual Mandate: Must Carry Health Ins 2014 or Pay Penalty $695 - $2,085, Based on Income (1/14)

Employer Mandate: Employers of 50+ Workers Pay $2,000 Penalty for No Health Ins (1/14)

Medical Loss Ratio: 80% of Premiums (85% for Large Group Plans) Must Be Spent on Claims and Quality Improvements; Rebate the Excess to Consumers


PPACA Key Provisions State Health Exchanges: Individuals and Businesses

< 100 Employees Can Access Exchange Market (1/14) Federal Support for Creation of the Exchanges

Premium Subsidies For People with Incomes Up to 400% of the poverty level ($44k Individual, $92k Family of 4) and No Employer Plan

Subsidy for Insurance Purchased through Exchange This Will Reduce Adverse Selection Concerns

Premium Tax Credit for Small Businesses Who Buy Ins


PPACA Key Provisions Coverage Requirements

Children Covered to Age 19 Despite Preexisting C. No Annual or Lifetime Limits on Coverage Children Covered to Age 26 on Parents Plan Must Include Well Care with No Copay/Deductibles

Premiums Limits Plan Increases, Compress Rate Differences

Prohibit Rescission for “Honest Mistake”


Health Exchange PlansBronze Plan

Silver Plan Gold Plan

Platinum Plan

Catastrophic Plan

% of coverage of benefit costs of the plan

60% 70% 80% 90%

Only available in individual market for those up to age 30 or

exempt from mandate

Out of pocket limit

Equal to the Health Savings Account (HSA) limit $6,250 individuals, $12,500 families in 2013

Pricing Factors

Age: 3:1Smoking Status 1.5:1

Area within a stateFamily composition


Feel free to contact me:David T. Russell, Ph.D.California State University, Northridge(818) [email protected]

INFORM+INSPIRE


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Life Insurance, Annuities and Health Insurance